The Importance of Financial Management When Running a Business

Abstract

One of the most important aspects in the case of starting a business as well as making it run in a smooth as well as a profitable manner is to make investigations and analysis into the finances that are available and how they can be increased by making calculations on the risks, profits and the losses that are associated with the business.

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Introduction

Financial management is the key concept that needs to be dealt with in an analytical manner when important terms in relation to the organizations are being dealt with. Financial management is in this case can be linked to two important terms as the corporate finance and managerial finance (Hens, and Pilgrim, 2002, p. 33).

Corporate finance is the branch of finance that deals with decisions in terms of the finances that the firms and corporations need to make using all the tools of analysis so as to make these decisions. It is a well known fact that the financial decisions are the ones that can decide the future that is related to the corporations in terms of their revenues and there financial standings thereby all the personnel in the financial sectors are the ones who are to be analytical in their decisions (Keown, Martin, and Petty, 2008, p. 44).

This is the branch that deals with discounted cash flow, capital investments, and the decisions made in relation to capital budgeting, calculation of the project value; risk analysis of the project as well as an analysis of flexibility associated with the project. Management of the cash as well as the inventory are the main concerns of corporate finance that deals with the management decisions. In this case, stock valuation has also been considered as the main focus as this has to deal with the income valuation in which the dividends, profits are analyzed, and these are dealt under the area of discounting of the profiles (Groppelli, and Nikbakht, 2006, p. 25).

Managerial finance deals with the ways in which finance is managed by the finance managers in various corporations. The managerial significance associated with the finances covers all aspects of the finances and its management that takes place within these corporations. The financial management deals with the comparisons that are made in terms of the other businesses performing better or worse than the concerned corporations. The profits and the losses are calculated in this case so as to estimate the performance and evaluate the performance strategy in terms of the finances. In this case the main areas that are taken into consideration by the finance managers are the profits, losses, expenses, as well as the payments being made by the firm so as to evaluate as well as analyze the level of success that is achieved (Bodie, and Merton, 2000, p. 54).

Background

Financial management is a managerial strategy by which the future of an organization can be decided in an analytical manner. Proper and analyzed financial management is the one that can ensure positive cash flow for an organization. Financial quantification is analyzed rather than assessed in financial management. All of the valuable data is to be analyzed and is looked upon by the financial manager so as to analyze the performance of the corporation in the business world. Identification as well as the management of the risks is done by the finance managers (Smart, and Megginson, 2008, p. 87).

All of the expenses that are needed to be made by the corporation are the ones that are tailored by the financial managers and this is done at an individual level. To make up for the investments that have been made in the taxes and inflation, it has been seen that the individuals who have the surplus cash make all the necessary calculations for making the profits.

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On the other hand, when financial management is the aspect being dealt on the organizational level, the financial management deals with financial planning and financial control. All of the financial resources that are available need to be quantified for the investments and the profits that are to be made and anticipated. Financial control in the specific terms deals with the ways in which the cash flow is analyzed and is being monitored (Fields, 2002, p. 44).

A company at a corporate level can have many goals that might be reflective of all the success oriented plans that the company has. These are the goals that are needed to be fulfilled and financial management deals with an estimation of the resources that the company has so as to fulfill all these goals.

Objectives of the research paper

The research paper shall be dealing with the key financial management concepts in accordance to the financial markets as well as the interest rates, the key financial statements as well as the cash flow statements as it is known that the cash flow statements are the ones that can measure the incoming and the outgoing cash within the corporations. The importance of the financial ratios shall be calculated so as to evaluate as well as analyze the financial strength and the health of a company.

An importance shall be estimated of the financial forecasting as well as budgeting. In addition to this, the main aspect that needs to be estimated is the value of the money with the associated importance of the stock for the organization. The major points that are to be dealt with in the paper include the measurement of the cash flow, calculation of the costs that are associated with the project. In addition to this the ways by which the corporate can determine the cost related to the internet financing and the dividend policy.

Literature review

There are two main levels of financial management and these are inclusive of an individual level and an organizational level. At an individual level, a business entity or an individual makes the calculations of the profits, losses and the costs of the projects that are associated so as to analyze the cash flow in the business (Emery, 1999, p. 22).

In the case of an organization financial management deals with the financial control that deals with overall cash flows and the risk analyses associated with the projects. The sizes and the time periods of the expenditures are the ones that need to be analyzed by the financial managers (Anandarajah, Anandarajah, Aseervatham, and Reid, 2001, p. 33).

The main aim behind managing the finance deals with achieving the goals and the aims that the businesses have and they need to calculate the losses and the profits that are being anticipated in association with a certain project (Anandarajah, Anandarajah, Aseervatham, Reid, and Aseervatham, 2004, p. 44).

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Financial markets have been considered as the mechanisms by which people are at ease to buy and sell the product. These are the products that are inclusive of the commodities at lower transaction costs. The most important position in the financial management has been gained by the interest rate. This is the rate at which the borrower pays for the use of money that is not owned by them. The firms and businesses borrow money from the banks in case they need it to expand the business or to make more profits (Crowther, 2004, p. 77).

Financial management refers to the maintenance of finances and the costs in order to meet the challenges that are to be met by the companies. Moreover the maintenance has also been linked with the projects that are being undertaken by the company or the firm. It has been seen that the main requirements that are to be fulfilled by the managers in the new business are that they should be able to interpret all the financial statements as the incomes statements, loss and profit and the anticipated margins as well as the cash flow statements and the balance sheets. These are all the key financial statements that can be helping the managers in interpreting the amount of the finances that are available in hand in order to manage the projects (Ehrhardt, Brigham, 2009, p. 87).

Cost forecasting, financial budgeting, revenues, and the costs are the main aspects that are in need to be anticipated by the managers. Funding options are the ones that have to be looked after by the managers, and these can help in managing the finances that are making ways into the business. Funding can be analyzed by the managers for the business expansions, and these are the expansions that can be of the long term basis as well as short-termed (Hens, and Pilgrim, 2002, p. 88).

The financial health of the business is to be reviewed by the managers and these are inclusive of the ratio analyses including the gearing ratio, profits that are generated on a per-employee basis as well as the weighted cost of the generated flowing capital (Bodie, and Merton, 2000, p. 33). The management in the financial departments are to make the calculations on the hurdle rates which are reflective of the minimum amount of return that can be anticipated from an investment. This is the value which is also known as the project appropriate discount rate, and this is very helpful in making calculations in the investments being made and the right decisions in order to make the investments (Groppelli, and Nikbakht, 2006, p. 101).

There are a number of the techniques that can be used in calculating the asset evaluation and in the calculation of risks and the profits that are being anticipated from a certain project. All of the losses and the profits are to be calculated by the financial managers prior to starting a certain project so as to have a clear idea of the project is going to be profitable supporting more cash inflow or will it be on a loss.

The financial decisions are the ones that are found to be the most critical part in the financial management decision making and these are the decisions that are to be taken with all the calculations and the analysis being made. These are the decisions that are to decide the fate of projects that are to be started in the near future. In case of all the businesses, the portfolios as well as the intangible fragile assets, the calculations and the investment decisions are the ones that are to be made in a critical manner (Crowther, 2004, p. 104).

Findings and analysis

One important aspect that has to be dealt with by the financial managers is that the cash flow management can be helpful in managing the cash flow of the company. Cash flow is the one that can help in determining the health of a business in many aspects as it can be said that if the cash flow is greater, than the profits and the revenues being generated are greater and are inflow in a constant manner. There are many advantages in case of the cash flow management, and it has been said that the proper management of the cash flow can help in investigating as to when the cash is required for the business and when the cash is to be spent for making important investments. Cash flow management can be helpful in estimating as to when the employees are to be hired, when the investments are to be made and when newer projects can be started. Any uncertainty that may be related to the investments and the finances in the business is eliminated if proper cash flow management can be taken into account.

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In the case of investment decisions, the main point that needs to be argued here is that the managers should be allocating the minimum amount of the resources to the projects and this has been referred to as capital budgeting.

Discounted cash flow valuation is an aspect by which the value of a project can be estimated. Net present value is the value that reflects the highest value that is associated with the project.

Conclusion

When the main aim of the managers in a firm is to manage all the financial resources, than the only tactical way is to plan the finances. All the strategies decisions that are made in the business are the ones that can have strong financial implications. Most important aspect of the financial planning is budgeting being planned with strategic planning, and this can make sure that the outcomes are profitable.

References

Anandarajah, Ana., Anandarajah, D., Aseervatham, Al., and Reid, Howard. (2001). Managing finance: setting and achieving budgets. 2nd Edition. Prentice-Hall.

Anandarajah, Ana., Anandarajah, D., Aseervatham, Al., Reid, Howard., and Aseervatham, Aloysius. (2004). Managing finance: prepare & manage budgets & financial plans. 3rd Edition. Pearson.

Bodie, Zvi., and Merton, C. Robert. (2000). Finance. Prentice-Hall.

Crowther, David. (2004). Managing finance: a socially responsible approach. Butterworth-Heinemann.

Ehrhardt, C. Michael., Brigham, F. Eugene. (2009). Corporate Finance: A Focused Approach. 3rd Edition 3. Cengage Learning.

Emery, W. Gary. (1999). Corporate finance: principles and practice: Addison-Wesley series in finance. Addison-Wesley.

Fields, Edward. (2002). The essentials of finance and accounting for nonfinancial managers. AMACOM Div American Mgmt Assn.

Groppelli, A. Angelico., and Nikbakht, Ehsan. (2006). Finance: Business review books: Barron’s Business Review Series. 5th Edition. Barron’s Educational Series.

Hens, Thorsten., and Pilgrim, Beate. (2002). General equilibrium foundations of finance: structure of incomplete markets models: Volume 33 of Theory and decision library. Series C, Game theory, mathematical programming and operations research: Volume 33 of Theory and decision library. Springer.

Keown, J. Arthur., Martin, D. John., and Petty, William, J. (2008). Foundations of finance: the logic and practice of financial management: MyFinanceLab Series. 6th edition. Pearson

Smart, B. Scott., and Megginson, L. William. (2008). Corporate Finance. Cengage Learning EMEA. Prentice-Hall.

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