Why financial management is crucial for business success

For many of us starting up a business is an idea we have entertained at one time or the other and yet the truth is not all of us have a clear understanding of what really goes on in the financial boardrooms of the worlds successful corporations. The fact is managing a business is a complex undertaking that must be given adequate attention and expertise for it to yield any returns and for continuity to be guaranteed. We shall look at what activities define corporate finance. To successfully carry out business, entities need a variety of assets. Others are tangible such as buildings, machinery, others are intangible such as patents and trademarks, and others are financial such as shares, and investment in bonds. To obtain the necessary assets, the company needs to raise funds from owners, Banks, the stock exchange, Donations among others.

After raising the necessary funds and acquiring the required assets, the business needs on a continuous basis, short term resources such as cash to pay recurring expenses, stocks of consumables, etc. In addition, the company may give credit to its customers to encourage them to stay and it may also get credit from suppliers. All these short term resources need to be well planned and managed. At the end of every period, after meeting all expenses, management needs to decide whether the earnings made will be retained in business, for expansion or they should pay dividends to shareholders.

Thus in simple terms, we can define corporate financial management as part function in a corporation that is concerned with ensuring that the company has made the right investments in assets, that those investments are financed with the right sources of funds, and that the working capital of the business is properly managed to avoid over trading, and the earnings are well managed to balance the objectives of the owners and all other stake holders in the business.

Financial decisions are very crucial to the success of any company. Investments made today have long term effects on the company. For instance, if a company had forty million dollars on hand, the effect of investing the forty million dollars on a new site location is different from using the same amount to purchase new machines. Both are investments, but they expose the company to different risks altogether. The choice of financing could lead to the eventual bankruptcy of the company. And if working capital is not adequately planned, there will be production stock outs, striking suppliers, and arrangement of expensive short term overdrafts. Thus, the role of financial management therefore involves

Forecasting of future capital outlays:

A finance manager has to make estimation with regards to capital requirements of the company based on the planned strategies. For instance if the company intends to set up an ultra modern facility in Hongkong the corporate finance managers role is to forecast the cash outlays including the opportunity costs and cost savings if any of implementing this strategy.

Identification of the proper mix of capital:

Once the future capital requirements have been finalized, the capital mix has to be decided. This involves determining the proportions of short term and long term Debt, preference share capital and equity that the company shall employ over the strategic planning horizon.Normally, this decision will depend on the analysis of how heavily indebted a company already is and whether or not they qualify to issue equity. It is only after careful evaluation of these factors that the company can go ahead to get the capital mix.

Sourcing the funds:

The entity needs to evaluate all available avenues for sourcing funds in terms of flexibility, speed, cost and risk. Sources of funds many include but are not limited to Bank loans, Venture capital, stock exchange listings, and issue of bonds among others. With the advent of Globalization firms are no longer limited by geographical boundaries. Today companies are able to have shares listed across borders. Also additional sources of funding can be obtained through the internet provided the ideas the business stands for are well understood by potential investors.

Decisions on where to invest:

The Corporate finance manager has to decide on where any funds raised should be invested. Each investment needs to be evaluated in terms of risk, and return. Some investments could have high returns yet the possibility of loss could be equally very high. For example an American company setting up a water bottling plant in Iraq may have a potentially lucrative high returns business in its hands but factors such as extreme violence always mean the risk of someone blowing up the entire plant is always there and besides cost implications like security mean any profits are further affected. There is no point undertaking such an investment unless other factors that outweigh these risks have been considered.

Management of earnings obtained:

What happens to the net profit after all the expenses needed to run the business and taxes where applicable have been paid? Should management declare Dividends to share holders as a return for their investment or should all earnings be re invested by management to generate future returns? These decisions will depend on the dividend policy of the company which is also dependent on several other factors for example should dividends be paid out if there are tax management issuesto be sorted out.

Working Capital management:

Every entity requires short term resources for the day to day running of the business .They include cash, sufficient stocks, and a proper match between debtors and creditors. Cash is required for payment of wages and salaries, utility bills, creditors, ensuring that current liabilities are met when they fall due, having of enough inventory, procurement of raw materials, etc

Financial Analysis and controls:

When all the above finance decisions have been implemented, management needs to evaluate and also exercise control over company finances. This can be done through many techniques like ration analysis, financial forecasting, cost and profit control etc.Financial analysis will enable the business understand objectively where it is financially and guide future investment decisions that are backed up by solid facts. Commerce | Business


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