CASH FLOW, CREDIT AND BACKGROUND INVESTIGATION

Introduction to Finance Management

Lesson no. 1
FINANCIAL MANAGEMENT, DEFINED
Financial Management is a functional unit of a business organization that sets policies
towards organizing, planning, controlling, and directing the proper use and allocation of its
financial resources. It carries with it an interlocking coordination within the business structure
such as production, marketing, logistics and personnel functions.

Financial Management is considered to be one of the most significant responsibilities

within the business entity. Business activities related to operating, financing and investing
require considerable amount of decision making that will affect company’s financial condition,
structure, performance and profitability.

IMPORTANCE OF FINANCIALMANAGEMENT

Financial Management function focuses on the areas of (a) investment decision such as
capital budgeting or financial plan preparation; (b) financing decisions such as creating the best
financing mix or capital structure; and (c) operating decision such as cost control or strategies to
increase revenue.

As such, financial management decisions are interrelated among investing, financing and
operating activities. These decisions add value and set the directions of the company to
accomplish its business objectives. The use of various analytical tools help us in the analysis,
planning and control in terms of proper allocation and utilization of the company’s financial
resources.

The financial management function is important in business organization since it deals

with:
1. guarantee rational and attractive return on investment made in the business
2. examine business financial performance for growth and expansion
3. plan, direct and control the use of financial resources
4. ensure maximum and efficient flow of operation
5. create pleasant and amiable relations with company stakeholder
6. harmonize operations of different facets of the business
7. build up appropriate controls to secure proper use of financial resources

FUNDAMENTAL CONCEPTS OF FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT is in charge of efficient planning and control of funds inflow
and outflow.
1. The appropriate magnitude or volume of funds needed for efficient operations
(capitalisation);
2. The wise allocation of financial resources to particular resources;
 3. The short and long term fund raising activities

Businesses have many stages or phases of operations to manage and keep things
working smoothly. Finance is just one of these areas. Because finances impact virtually
everything in what the company does, it is probably the most important thing a manager must
address. However, there are both advantages and disadvantages to financial management in
business. Usually the pros outweigh the cons, but managers still must be prepared to face the
negative consequences of tracking the money of the business.

RESEARCH, TIME AND KNOWLEDGE

Businesses would require a significant amount of financial information. These

information take some time to collect and are product of past business transactions. Even if the
data are collected, it would undergo a process of analysis and interpretation so it can be used to
make economic decisions. Thus, an extensive amount of research, time and in depth knowledge
is needed to make this financial information relevant.

COST

Cost is one of the considerations in financial management. Since financial data would
require analysis and interpretation, the company would need experts or knowledgeable
professionals to do the job. As such, an appropriate cost is necessary to attract this type of
personnel.

REVISION AND ATTENTION

Internal and external factors surely affect the financial needs of a business. Thus,
constant study and undivided attention will be needed to identify these factors and make
adjustments on the company’s financial plans and objectives.

POWER

Financial managers are given the power to make judgment call specially when the
operations of the business will be affected. Not all financial decisions may be popular to
stakeholders and thus might lead to unpleasant situation or misunderstanding within the
company’s organizational structure.

MONEY AVAILABILITY AND PLANNING

Managing finances results to being able to identify the sources and uses of it. It gives
financial managers the edge of knowing when funds will be available. Given this knowledge,
financial managers may be able to predict money availability or possible shortage of it. As such,
appropriate measures can be made to avoid untoward situation that may affect company
operations.
ACCOUNTABILITY

Financial management focuses on various control procedures related to the use of

financial resources. It places a heavy burden on accountability as those involved need to
monitor and make sure compliance is done to every set of procedures and policies with regard
to the management of company’s financial resources.

CONFIDENCE

Financial Management adds value and develops more confidence in the business entity.
It adds value and confidence in the sense that this aspect of management puts strong emphasis
on efficient planning and control on the inflow and outflow of funds. As such, stakeholders can
be assured that proper procedures and policies are in place to safeguard company’s financial
resources.

ROLE OF THE FINANCIAL MANAGER

Business financial activities are considered as one of the most significant yet complicated
activities within the company. Given the complexities of financial activities, the company needs
to have a well-rounded financial manager who can take care of all the important financial
functions of an organization. The said person should be farsighted to ensure that the financial
resources are properly allocated and utilized in the most efficient manner. His actions directly
affect the financial condition and performance of the business entity. Among the most
important functions of the financial managers are:

1. Raise Needed Funds for the business operations

It is the role of the financial manager to ensure that the company meets the
obligation and required funds needed for the business. He needs to constantly monitor
company’s liquidity, solvency and profitability by way of establishing prudent financial
procedures and policies. The company can raise funds either thru equity and debt financing.
EQUITY FINANCING refers to the issuance of company stocks while debt financing would involve
loan or fund borrowing. The financial manager should decide on the type of financing the
company would opt to choose.

2. Proper Allocation of Financial Resources

The moment funds are raised, the financial manager should be able to make
proper allocation on where to use the said funds. The following needs are to be considered in
order to make proper allocation of funds:
a. The business entity size and its capacity for possible growth
b. Status of assets where the funds will be used; either for long-term or short-
term
c. Manner on which the funds are rasied

3. Profit Planning
 Being able to generate profit is one of the most desired outcomes of any
business organization. PROFIT is an inherent component to ensure business sustainability and
survival. As such, profit planning requires tremendous amount of rational forecasting of
revenues and management of cost and expenses.

Many factors would have an impact on business profit and this will include
factors such as product pricing, competition, economic status, demand and supply, product cost
and output. The financial manager should be able to keep a keen eye on all these factors in
order to make desirable and realistic financial plans to achieve the desired profit for the
company.

4. Knowledge of Capital Markets

The financial manager should be able to have an in-depth knowledge and a clear
understanding of capital market. CAPITAL MARKET is where securities or company shares are
traded and this would involve a high amount of risk. Therefore, a financial manager should be
able to make strong calculation and analysis of the various risks involved in the trading of shares
and securities.

Reference: BASIC FINANCIAL MANAGEMENT by Ariel Dizon Pineda, CPA, MBA