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Financial Management

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Financial Management > Understand the meaning of financial management > Know about the various aspects of financial management > Know about the different terms used in financial management > Learn about the importance of raising funds and fund allocation through budgeting Introduction Every organization, irrespective of its size or ownership pattern, has to manage its finances. The overall objectives of an organization cannot be achieved in the absence of financial management. Many organizations fail in their objectives because of financial mismanagement and this failure rate is quite high among the small business enterprises. Hence, financial management is vital for all types of organizations, profit making as well as non-profit making. In case of non-profit making organizations also the effectiveness and performance depends on their financial resources management. Financial Management When we attempt to analyze the financial functions of an organization we find that funds (capital) have to be: > Procured > Allocated for various activities > Used effectively > Monitored Further, the results of all these have to be recorded also. All this brings to fore a three dimensional financial process: > Financial management > Management Accounting > Financial Accounting > All these three are at the same time separate yet overlapping areas of thee financial functions of an organization. 1. Financial Accounting deals with the measurements and reports of the financial position of the organisation and providies this to external users such as the shareholders, creditors, government agencies, etc. ...read more.


The production policy Credit terms Expansion policy Delivery policy Managing Cash For any business it is essential to have proper estimation of cash requirements. It has been observed that many organizations, inspite of their profit earnings, become bankrupt in the absence of cash. On the contrary there are organizations with excessive cash, which is a waste of resources. The demand for cash is generally because of three behavioral motives: Transaction Motive i.e. holding cash for day to day business activities. Precautionary Motive i.e. cash needed to deal with unanticipated delays or other uncertainties. Speculative Motive i.e. cash needed to take advantage of bargain purchases or availing opportunities out of unexpected developments. Thus, every organization not only has to determine the optimum cash balance needed but this cash has to be managed also. Management of cash has the following aspects: Determining the appropriate cash balance Managing of the storage, collection and disbursement of cash balances Investments of temporarily idle cash in interest earning assets. Very often there are sharp fluctuations in cash requirements. A good financial manager should take appropriate defensive action to handle temporary surpluses or shortages. Some of the steps to be taken in this regard are: All cash collections should be deposited in one account, even if there are more than one-collection centers. This helps the organization in storing cash more effectively. One should attempt to reduce the time lag between the dispatch of the cheque by the customer and its crediting in the organization's account There should be constant follow ...read more.


It involves projection of future cash receipts and cash disbursements. It helps the management in determining the future cash needs, planning for financing of those needs and exercising control over cash and liquidity of the firm. 3. In terms of flexibility, we have two types of budgets i.e. fixed budget and flexible budget: a) A fixed budget is designed to remain unchanged irrespective of the level of activity and is prepared on the basis of a standard of fixed level of activity. b) A flexible budget is designed to change in accordance with the level of activity. In the case of hospitality organizations, a flexible budget is desirable because: * The nature of business and sales are largely unpredictable, * It is difficult to foresee the demand in case of new ventures, * The business is subject to nature variations. Budgetary Control The process of the comparison of actual performance with budgeted performance is called budgetary control. This is a crucial activity because every organisation has to evaluate whether the activities and operations are going in the right direction for achieving the organisational objectives. The actual performance has to be compared with the budgeted performance on the basis of actual level of activity. The actual performance of each area of responsibility is measured through general accounting system in financial terms. Financial managers also go in for periodical review of budgetary performance and then apply corrective measures to ensure that the future performance is as per the budgets. There are many other aspects related to financial management and it is suggested that an entrepreneur should utilize the services of a financial consultant. ...read more.

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