The Industry Insight-NER E Newsletter, December, 05, 2024

Financial management in an organization

Financial management means planning, organizing, directing and controlling of financial activities, such as procurement and usage of organization’s assets. Financial management applies the general management principles on the organization’s financial resources. Financial management includes:-

  • Investment decisions – investments in basic assets (capital) and investments in current assets – working capital,
  • Financial decisions – decisions relating the increase of funds from different sources, time of financing, costs for the assets and the return of those assets,
  • Dividend decisions – allocation of net profit in two categories – dividends for shareholders and remaining profit. Generally, the financial management is related to procurement, allocation and control of financial resources.

The objective of financial management is regular and appropriate provision of funds to provide regular return to the shareholders, depending on the capacity of earning, market price of the shares and shareholders’ expectations, to provide optimal usage of the funds. Since the assets are provided, they should be used maximum with lowest costs, to provide investments security that is to invest assets in secure undertakings and thereby to provide appropriate rate of return, to plan the whole capital structure – to maintain balance between debts and capital value. The financial management has function to estimate the requirements for capital which the company needs. That depends on the expected costs and profit and future programs and policies. The capital estimation should be performed in a way that will increase the company’s earning capacities. Once the assessment is made, the capital structure in short-term and in long-term, as well as the borrowings and capital value should be determined. Then, it is followed by the selection of assets sources, which may be shares and bonds, bank loans, loans from financial institutions, public deposits in form of bonds. Financial management means to make decisions for allocation of the assets in profitable undertakings and in secure investments with regular return of investment. Financial management also includes making decision about cash management, payment of salaries, electricity costs, repayment of loans, maintaining inventory, procurement of raw materials. The last activity of financial management is financial control which may be realized through various techniques, such as relationship analysis, financial forecasting and cost and profit control.

Financial planning is the process of estimation of capital necessary for accomplishing the organization’s business activities. That is a process of formulation of financial policy in relation to provision of assets, investments and organization’s funds management. Financial planning is process of formulation of goals, policies, procedures, programs and budget that refer to organization’s financial activities. Financial planning means:-

  • Providing appropriate funds,
  • Providing appropriate balance between the incoming and outgoing funds,
  • Preparation of growing and development programs which ensure long-term sustainability of the organization,
  • Decrease of uncertainty regarding the market changes which the organization may face,
  • Decrease of the uncertainty which could affect the organization’s   growth,
  • Helping to provide stability and profitability
  • Financial planning means predicting, directing, synchronizing and premeditated distribution of the elements of organization’s finance function.

Financial planning primary refers to planning of cash flows and the organization’s financial structure. The financial planning includes the monetary expressed total activity of the organization, the amount and structure of the funds, the sources of financing and financial flows for certain time period. Actually, the financial planning represents concretization of the financial policy through financial plans in which the objective is put on value expression in time and space. The financial planning is being expressed as

  • Planning of sources of financial resources and their flows,
  • Organizations own financial planning. Actually, the financial planning represents concretization of the company’s financial policy. The objective of the financial policy, as policy of finance function, is to provide the organization financial power which is expressed as permanent ability for
  • Payment,
  • Funding,
  • Investment,
  • Increase of organization’s property,
  • Meeting the interests of managers, employees, suppliers, shareholders. Financial planning means definition of financial goals, development of financial plans and their implementation by realization of financial activities related to making decisions for necessary assets, loans, insurance, investment and property, then preparation of financial statements, evaluation of the results and control of plans realization. Financial planning is process of predicting and projecting of sales, incomes and assets in order to implement the planned operating of the organization, to realize the strategies and to determine the resources necessary for realization of the planned goals. Financial planning is comprised of the following elements
  • Aware planning activity in the field of finance according to organization’s goals,
  • Forecasting of inflow and outflow of funds which derive from organization’s business activities,
  • Perceiving of various alternatives in relation to optimal usage and provision of funds for payments.

Financial planning process: –

The financial planning process is a logical, six-step procedure:-

  • Determining the current financial situation,
  • Developing financial goals,
  • Identifying alternative courses of actions,
  • Evaluating alternatives,
  • Creating and implementing a financial action plan,
  • Re evaluating and revising the plan.

Determining the current financial situation means determination of the situation with regard to incomes, costs, liabilities, loans, receivables. Developing financial goals – firstly, an analysis should be performed and the needs for achieving what is wanted should be determined, and it is followed by specifying goals and determining how the current income will be spent in order to provide funds for investments for securing the future financial security. Identifying alternative courses of actions means determining the factors which will affect the continuity of actions, expansion of the current situation, new courses of actions, and the creativity in decision making and considering the possible alternative solutions which can lead to more effective decisions. Evaluating alternatives means taking into consideration the conditions in which the business activities will be performed, the values of the organization and current economic conditions in the environment. It needs to be evaluated where will the assets be invested, what kind of costs will be made for production, also to evaluate the risks, and which information will be used in order to make relevant decisions. Creating and implementing a financial action plan means to develop plan, i.e. to choose way to achieve the financial goals. The financial action plan needs to be implemented by all employees, to provide assets, to invest, to maintain inventory, to provide shares or bonds or mutual funds. Re-evaluating and revising the plan means dynamic following of the plan implementation, assessing the financial decisions and adapting to the new changes of personal, social and economic factors. The review of the implementation of the financial plan enables priority adjustments which will enable the organization to achieve its financial goals. Governance is the ability to make a certain idea work through people. Business entities are represented by business management. The most common definition of management is that management is the process of planning, organizing, managing and controlling the financial, physical, human and information resources of an enterprise in order to (with and through people) ensure the effective and efficient achievement of the company’s goals in a changing environment . Management processes in the company include:

  • Planning is the primary stage of the management process. The basic types of planning are strategic and operational planning
  • Organizing includes division of labour, micro structuring and macro structuring of enterprises, delegation of authority and coordination.
  • Leadership refers to ordering, motivating and communicating in order to achieve the goals of the company.
  • Control, which is the final stage of the management process, which enables monitoring of the realization of the goals, with a tendency to equalize the real and planned actions.

Control of results is an essential part of controlling the effectiveness of management. This hypothesis is proved by the fact that almost all areas of functioning of a particular enterprise as a whole, i.e. the profit and investment sector, are involved in the creation of enterprise management. In this situation, the instrument of evaluation of the results is imposed as a basic requirement of effective management. The interdependence of planning and control, as the basic functions of management, is reflected in finding the bases and criteria for evaluating the contribution of individual organizational parts in the overall result of the enterprise. In terms of the value expression of this contribution, the only functional area that contributes to the overall result of management effectiveness, through the value of sales, is in the functional domain of sales, while for other areas of enterprise functioning, the costs, that is, the amount of expenses, are a way of contributing to the said result. Also, the interdependence of planning and control can be reflected in defining the desired goals, that is, coming up with data on global and analytical deviation from these goals. Deviations are an important indicator of a change in the achieved result from the predicted ones

SYSTEM CONTROL OF BUSINESS AND FINANCIAL PROCESSES:-

Systematic control of business-financial processes in an enterprise encompasses a whole set of management activities that are related to the stages of the management process, which are observed in accounting literature and practice through

  • Planning, organizing, control,  communication and  motivation

Planning is a basic function of enterprise management, which defines the goals of the current business, as well as the development of a particular organization in the coming period. Planning also identifies alternative options for the realization of the defined goals, which provides the opportunity to choose the most efficient way to achieve them. The organizational structure of the company is created through the function of organization, which also divides the competencies and responsibilities, selects the executors and the instruments for performing activities, with the purpose of defining restrictions and responsibilities for the realization of the planned goals. The planned results are assured by the control function, which is also the last stage in the management process. Thus, the management of the company seeks to maintain a certain level of planned values, using the instrument of periodic comparison of the achieved and the goal defined results. Performing this activity presupposes that there are outcome measures and ways to correct any deviations that is, deviations from the plan. Control is a function of management, at all levels in the organization, from those at the top of its management to those at the bottom of its management pyramid. The first management line is that they all have to do the control work and they all have to do it in a similar way. Control is necessary to ensure that the available resources are used as rationally and efficiently as possible by monitoring deviations from planned costs and effects and eliminating the causes of these deviant phenomena in a timely manner The need for control would not become without managers being able to accurately predict the future, and consequently to set plans from which there would be no deviation in practice. There are several reasons that lead to these deviations (deviations of actual from planned-desired effects). First of all, what can influence the deviation from the planned results are changes in the environment in which the management operates. The second reason may exist on the basis of personal, i.e. Human limitations, while the third reason for deviating from the plans is the discrepancy between the goals of the organization and the goals of its individual members, and finally, the failure of the plans is their poor definition the isolation of control as a function of management does not exist. It is performed exclusively in close correlation with other management functions. Control, as such, is aimed at identifying and eliminating deviations from desired, predefined effects. It is essentially a process of comparing the effects achieved with the standards, identifying the differences between these effects, analyzing the causes of those differences, i.e. the degree of deviation and taking corrective action to eliminate them in the future. It consists of four interconnected and conditioned phases

  • Defining standards,
  • Defining the achieved result,
  • Comparison of achieved performance with standardized and ·elimination of irregularities.

Communication is a key function of management that has the task of distributing information along the vertical and horizontal links of the organizational structure of the enterprise. The key reasons for the importance of the existence of a management communication function are reflected in the successful operation of the company, which is possible only with the establishment of a system of information distribution. If there is a disruption of this system, or a part of it at any level, and for any reason, the management of the company will achieve negative effects, that is, the result of the business will be in a certain disproportion to the planned. With the help of motivation function, management influences the behaviour of parts of the company, its groups and individuals in order to identify their goals with the goals of the company, as well as to make decisions and act in accordance with those goals.

 

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