The Introduction to financial
management
New
business leaders and managers have to develop at least basic skills in financial
management. Expecting others in the organization to manage finances is clearly
asking for trouble. Basic skills in financial management start in the critical
areas of cash management and bookkeeping, which should be done according to
certain financial controls to ensure integrity in the bookkeeping process. New
leaders and managers should soon go on to learn how to generate financial
statements (from bookkeeping journals) and analyze those statements to really
understand the financial condition of the business. Financial analysis shows the
"reality" of the situation of a business -- seen as such, financial management is one of the most important
practices in management. This module will help you understand basic practices in
financial management, and build the basic systems and practices needed in a
healthy business.
In
the case of a corporation, the board has final responsibility for the overall
financial health of the organization. Therefore, it's critical that new
corporations quickly build up the roles of the board treasurer and board finance
committee. The treasurer and finance committee can be wonderful assets to the
chief executive when managing the finances of the organization -- however, the
chief executive should never completely ignore the
finances by leaving them for the treasurer and other board members to manage.
The board's role in ongoing governance of finances can include ongoing review of
financial reports during board meetings, approving yearly budgets and financial
statements, approving a set of fiscal policies (guidelines for managing
finances), reviewing results of a yearly audit conducted by an outside auditor,
co-signing checks that are over certain limits, approving contracts,
etc.
The Importance of Cash
Management
Catherine's
business is growing and she's making a good profit. However, she never seems to
have enough money to pay her bills. This month she had to pay the business
insurance premium with her credit card. What is wrong with this picture?
Catherine
has what is known as a "cash flow problem. " That means
that the cash flowing into her business is out of synch with the cash moving
out. The result is that she is temporarily caught short when her bills come due.
Catherine needs to plan ahead so she will know whether or not she will have
enough cash available when she needs it.
How
many of you have had something similar happen to you? Business analysts report
that poor management is the major reason why most businesses fail. It would
probably be more accurate to say that business failure is due to poor
cash management. So how can you manage your cash situation better? In
this section we'll take a look at the cash flow process to find out.
WHAT IS CASH?
Cash
is ready money in the bank or in the business. It is not inventory, it is not
accounts receivable (what you are owed), and it is not property. These might be
converted to cash at some point in time, but it takes cash on hand or in the
bank to pay suppliers, to pay the rent, and to meet the payroll. Profit growth
does not necessarily mean more cash -- as we will see.
A
lesson that all entrepreneurs learn is the difference between profit and cash.
Profit is the amount of money you expect to make if all customers paid on time
and if your expenses were spread out evenly over the time period being measured.
However, it is not your day-to-day reality. Cash is what you must have to
keep the doors of your business open, while you are busy trying to make a
profit. Over time, a company's profits are of little value if they are
not accompanied by positive net cash flow. You can't spend profit; you
can only spend cash.
WHAT IS CASH
FLOW?
Cash
flow simply refers to the flow of cash into and out of a business over a period
of time. Watching the cash inflows and outflows is one of the major management
tasks of an owner. The outflow of cash is measured by those checks you will
write every month to pay salaries, suppliers, and creditors. The inflows are the
cash you receive from customers, lenders, and investors.
POSITIVE CASH
FLOW
If
the cash coming "in" to the business is more than the cash going "out" of the
business, the company has a positive cash flow. A positive cash flow is very
good and the only worry here is what to do with the excess cash. Like good
health, a positive cash flow is something you're most aware of if you don't have
it.
NEGATIVE CASH
FLOW
If
the cash going "out" of the business is more than the cash coming "in" to the
business, the company has a negative cash flow. A negative cash flow can be
caused by a number of reasons. For example: too much or obsolete inventory or
poor collections on your accounts receivable (what your customers owe you) can
cause you to be short of cash. If the company can't borrow additional cash at
this point, the company may be in serious trouble.
WHAT ARE THE COMPONENTS OF
CASH FLOW?
A
Cash Flow Statement is typically divided into three components so that you can
see and understand the sources and uses of cash. These components include
internal and external sources:
CASH FLOW STATEMENT
* oPERATIONG CASH FLOW (INTERNAL)
*INVESTING CASH FLOW (INTENAL)
*FINANCING CASH FLOW (EXTERNAL)