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Wednesday, December 22, 2010

Key Areas in Financial Management That Businesses Should Focus on

BY ZAGROS LAM





Financial Management is the process of managing the financial resources, including accounting and financial reporting, budgeting, collecting accounts receivable, risk management, and insurance for a business.

In an organisation, the process of financial management is associated with financial planning and financial control. Financial planning seeks to quantify various financial resources available and plan the size and timing of expenditures. Financial control refers to cash flow monitoring. Inflow is the amount of money coming into a particular entity, while outflow is a record of the expenditure being made by the entity. Managing this movement of funds in relation to the budget is essential for the sustainability of the business.

From an organisation standpoint, the process of managing finances is to achieve the various goals set by the organisation at a given point of time. Businesses also seek to generate substantial amounts of profits, following a particular set of financial processes.

While a well-organised bookkeeping system is vital, it is even more critical on what the organisation does with it to establish its methods for financial management and control. With a good financial management system, the business owners will not only know how the business is doing financially, but why. The business owners will then be able to use it to make decisions to improve the operation of its business.

There are 6 critical areas that are involved in the operating activities of the organisation which forms part of a good financial management process. The ability to master and manage these 6 areas will greatly shape the financial vertical of the organisation:

·        Financial Planning - Identify what financial resources are needed to obtain and develop the resources to achieve the goals. Typically, financial planning results in very relevant and realistic budgets.
·        Financial Accounting - It clarifies records and interprets in monetary terms transactions and events of a financial nature. Financial accounting will involve maintaining records of transactions (book-keeping), preparing balance sheets and profit and loss accounts, preparing value added statements, managing cash, handling depreciation and inflation accounting. The accounts prepared by the organisation will be audited to ensure that they present a 'true and fair view' of its financial performance and position.
·     Budget Management - A budget depicts what the organisation expects to spend (expenses) and earn (revenue) over a time period. Amounts are categorised according to the type of business activities, or accounts (for example, telephone costs, sales of catalogs, etc.). Budgets are useful for planning the finances and then tracking if the organisation is operating according to plan. They are also useful for projecting how much money is required for a major initiative, for example, buying a facility, hiring a new employee, etc. There are yearly operating budgets, project budgets, cash budgets, etc.
·         Managing Cash Flow - The overall purpose of managing the organisation’s cash flow is to ensure that there is sufficient cash to pay current bills. Businesses can manage cash flow by examining a cash flow statement and cash flow projection. Cash flow statement includes total cash received minus total cash spent. It primarily looks at the actual cash transactions. It is a challenging task to be able to track and manage the cash flow of the organisation.
·        Managing Checking Account - The check register is a primary means to record and track cash. It is important to know how to manage the bank account of a business regardless of the organisation’s years of operation.
·      Credit and Collections - One of the biggest challenges in managing cash flow may be decisions about granting credit to customers or clients, and how to collect payment from them.
·     Budget Deviation Analysis - Budget deviation analysis regularly compares what is expected, or planned, to earn and spend with what is actually spent and earned. The budget deviation analysis can help greatly when detecting how well  the organisation is tracking its plans, how much to accurately budget in the future, where there may be upcoming problems in spending, etc. A budget deviation analysis report might include columns with titles:

Planned for Month
Actual for Month
Difference
(Planned minus actual)
% Deviation
(Difference x 100)

2 comments:

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  2. Thank you for sharing! This article is very informative and helpful. Good work!



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