Basic Concepts of Financial Management

The world of financial management is growing. This arena covers an increasing amount of financial issues that were formerly taken care of by the individual or business owner. To see the potential benefits of financial management, it is imperative to have a thorough understanding of what financial management is and is not.

What is Financial Management?

Financial management is the planning, organizing, and controlling of funds for an enterprise. Put simply, financial management is the application of management principles to financial resources. There are numerous objectives for financial management. These may include maintaining a regular and adequate supply of operational funding, to ensure optimal funds utilization, to pay dividends or investors, and to provide a balance between debt and equity capital.

Financial Management for Individuals

Individuals often hire financial managers to handle all of their affairs that pertain to money. This can include such areas as taxes, investments, and budgeting. Individuals commonly hire investment advisors, for example. An advisor can be considered a financial manager, as he or she is in charge of managing an individual’s investments. An insurance broker may be another form of a financial manager. A broker may provide an individual with numerous forms of insurance, including health, property, and auto.

Although a broker does not provide the actual insurance coverage themselves, they do put their clients into contact with top insurers that may provide their clients with the best overall values for their money. A tax advisor may provide yet another area of expertise. A tax advisor may be in charge of an individual’s taxes and reporting. This means that not only does the advisor complete and file the taxes due for their client, but they may also dictate what and how much the client puts away for future tax payments or liabilities. Most individuals may have several financial managers, each an expert in their own area of business. Some, however, may find a single person or entity that can handle all of the necessary responsibilities.

Small Business Financial Managers

The world of small business is getting larger. A small business owner has all of the financial responsibilities that an individual has and must also manage all of the responsibilities of the small business. Due to its structure and the potential for employees, a small business may have far more areas of finance to cover compared to an individual.

Business Operations

A small business has numerous financial operations that must be attended to. These include issues such as payment of employee wages, employee benefits, material or inventory, real estate, receivables, taxes, and more. Without a good and solid process in place for the payment and receipt of funds and the accounting associated with it, a small business could get lost, quickly. A small business has other areas to cover as well. A company that sells food, for example, may require all of the regular insurances to cover its properties, unemployment, and more, but may also require coverage specifically designed to cover it against claims brought as a result of its product, the food. The biggest goal of any business is expansion. How to facilitate this expansion can be a very tricky question, however. There are many issues that need to be considered. These issues may include cash flows, taxes, sales, and more. All of these will need to be accounted for when making any decisions about expanding the company. A small business owner may also want to do some legacy planning and will need s specialist to do so. Legacy planning may include what happens to the business upon the owner’s passing as well as who might take ownership or responsibility for the business. Whatever the case may be, the key is to have thorough plans in place beforehand to ensure a smooth transition.

Small Business Investments

A small business may look to actively invest profits on a monthly or consistent basis. The types of investments it may consider could be based on the company’s liquidity needs, cash flow, and total investment funding amount. Although a simple savings account is easy to set up and maintain, other forms of investments, from stocks and bonds to other paper obligations, may require far more research and time to develop and implement. A business that is looking to save money for the long-term may, for example, want to consider hiring a financial manager that deals with business investments. A business that is actively looking to expand may consider bringing on an individual or company with a shorter-term focus that knows and understands the nuances of short-term, liquid investments. Whatever the business is looking to do, there is a person or company out there that has expertise in financial management for the specific goals or objectives.

Taxes

Whether a business is a large, shareholder-owned C-corporation or a smaller, privately owned S-corporation or other types of entity, it may have to pay taxes if it makes money. Business taxes can become quite complicated, as there are many inputs that need consideration. These inputs can include cost of raw materials, labor costs, storage, and delivery costs, real estate, employee wages and benefits, and more. A small business owner with a relatively simple business may be able to effectively handle their taxes, while a larger corporation requires financial management of its taxes.

Capital Structure Analysis

Many small businesses start out needing capital from wealthy investors or even venture capital until they reach a breakeven point. As the business expends, it may still require additional monetary infusions to assist with expansion or other growth efforts. A financial manager can decide what might be the best route for the business to take, whether it be equity, debt, or a combination of both to acquire the necessary funding. Experts in this field can also advise on how much capital is required and when it is needed. The financial management arena casts a wide net, and modern businesses have the ability to get speciality and expert assistance at their fingertips for whatever their needs may be. Whether a financial manager is required depends on the business type, its objectives, and how much capital the business is already working with. A business owner can take an objective look at their business, however, and decide if outside help is needed.

FAQ

What does financing activities mean?

The importance of financial activities in every business is unavoidable, as it aims at maximizing and attaining revenue multiplication. And therefore, it is vital that each organization, regardless of its size, has timely, effective, accurate, appropriate, and concise information to make the right decisions. Financing activities means commercial transactions or events that affect long-term liabilities and equity. In other words, a financing activity is a transaction with creditors, investors, or investment activities that are indued to finance, support the operations and expansion of a business. Such operations include the transfer of currency and cash equivalents between the company and its financing sources. These activities are fund with the cash flow that the company took in, also called the cash inflow.

 What is business cash flow?

Into financial activity we can find cash flow is the money that has a constant fluctuation in a company, this money is regularly in and out of a business during a specific timeframe. In other words, cash flow is the net income of a company’s earns within a period of time, which is typically over an average one-month span. There are two ways of flow, first: cash comes into a company through clients that consume the service or from loans and interests that the company charges. This income statement helps the company to reach a positive cash flow. Second: money goes out in the purchase of the resources and the payment of administrative expenses; this can also be called the company’s dividend and it contributes to the ingrowth of negative cash flow.

What is the cash flow statement?

A cash flow statement is a type of financial data that establishes in a monthly report how income affects-cash, dividing the study into operating, production, and financing. Basically, it is a report of a financial account detailing all the cash inflow that business receives from its operating activity and its external investment sources like term loans. It also includes the report of the cash outflow that pays for staff salaries, the expense of owning an office, and the shareholders’ dividend. The cash flow statement is structured into sections that provide detailed knowledge about all cash transactions and all acquisition and finance operations, as well as aid in recognizing cash flow problems and where they can come from. 

What are the four areas of finance?

The appropriate methodology and organization of financial activities is the key to a successful impact in a company. The distribution of the four major areas of finance are an investment, financial institution, international finance, and corporate finance.

Investment: this section includes the investment activity of capital or resources for the purchase of financial instruments, or other assets. At once to obtain positive returns in the form of interest, profits, or value appreciation.

Financial Institution: in this area, the institution collects cash from the public and incorporates them into Intangible instruments, such as bank loans and shares, rather than physical assets. A bank may be an example of this financial activity. 

International finance: this branch oversees international relations, financially supervises, and deals with cash and macroeconomics of two or more countries. Here the financing activities section has divided responsibilities. As revealed by; examining the movements of world economies, the balance of interest payments, international monetary system, exchange rates, foreign investing activities and, how these movements relate to the trade that is taking place internationally.

Corporate Finance: here the financial activity deals with how companies deal with sources of financing, capital structuring, and investment decisions. Moreover, this area focuses on optimizing the share owner’s interest through short-term and long-term financing preparation. Also, the execution of different strategies. 

What is the meaning of balance sheet activities?

First of all, It is crucial company owners and accountants recognize how to read and analyze statements. This word means a financial statement of a corporation that contains assets, liabilities, equity, and net debt. The object of this document is to display the status of a company’s wealth as a financial report. This statement sheet shows what the corporation owns, how much it owns, but mostly how much has invested. In brief, financial activities, in this case, allow the existing and future fund managers to fully appreciate where their cash goes and how much they can anticipate gaining in the coming years. Traders support businesses with significant cash activity, and as this effectively means a company can and will rapidly expand and prosper.