Financial management

In the past, financial management was not a major concern for a business. A company used to establish relations with a local bank. The bank handled the financing and the company took care of producing and selling.

Today only a few firms operate in this way. Usually businesses have their own financial managers who work with the banks. They negotiate terms of financial transactions, compare rates among competing financial institutions. Financial management begins with the creation of a financial plan. The plan includes timing and amount of funds and the inflow and outflow of money.

The financial manager develops and controls the financial plan. He also forecasts the economic conditions, the company's revenues, expenses and profits.

The financial manager's job starts and ends with the company's objectives. He reviews them and determines the funding they require. The financial manager compares the expenses involved to the expected revenues. It helps him to predict cash flow. The available cash consists of beginning cash plus customer payments and funds from financing.

The financial manager plans a strategy to make the ending cash positive. If cash outflow exceeds cash inflow the company will run out of cash. The solution is to reduce outflows. The financial manager can trim expenses or ask the customers to pay faster.

The financial manager also chooses financing techniques. One of them is short-term financing. Another is long-term financing.

At the end of the fiscal year the financial manager reviews the company's financial status and plans the next year's financial strategy.

Basically, money or funds go into purchasing assets, paying operating expenses include the cost of materials and supplies. The manufacturer also must pay employee wages, rent or mortgage, insurance premiums and utility bills.

Some very small firms operate on a cash basis. They neither obtain credit nor borrow money. Other firms extend their resources through the use of credit. The owner of the firm invests some of his own money and has a lot more of other people's.

The business use money to buy assets like land, buildings and furnishings, and tools, machines, and equipment. The manufacturer sometimes buys them with mortgage loans which he secures by the building or the equipment itself. In other words, the bank or insurance company really owns the property until the manufacturer has paid the mortgage in full. The use of debt, or credit, increases both the assets and the income of the purchaser. The use of borrowed money to make more money is called leverage.

ВАРІАНТ III