We all know the main purpose of any corporation are profits, therefore it's extremely important to implement measures, tools and qualifiers to assess the efectiveness of the organization getting those profits, and keep them; Here's where financial management states it's importance; but what is financial management?
Every author will provide it's own definition, however all of them agree that in order to have an efective financial management we require to consider three items:
1. Maximize the usage of funds (money)
2. Utimate goal to achive the corporation objectives
3. Financial management resides on top management
"Financial management is the area of business management devoted to a judicious use of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals.” – J.F.Bradlery
“Financial management may be defined as that area or set of administrative function in an organization which relate with arrangement of cash and credit so that organization may have the means to carry out its objective as satisfactorily as possible." - Howard & Opton
As I always say, there is a thousand ways to peel a cat, so, there are several financial management measures and methods. the main generally accepted decisions we face as financial managers are:
Capital budgeting
Is the planning process used to determine whether an organizations long term investments such as new machinery , replacement machinery ,new plants new products and research development projects are worth the funding of cash through the firms capitalization structure (debt ,equity or retained earnings)
Capital structure
Is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings.
Cash flow management
Careful cash flow management allows a company to estimate the amount of cash that it will have on hand at any time, project trends in cash inflow and cash outflow, and evaluate whether a shortfall or surplus in cash could potentially occur.
The aforementioned items, have, as ultimate goal the improvement or increase of those profits but definitely we need to be able to qualify and quantify the effectiveness of financial management, and as I stated earlier, the whole intent is to increase profits and keep them, so whenever we make a decision, we aim to either minimize cost/expenses or increase market share; and financial management impact can be shown at several lines of the P&L may it be gross profit margin (sales-COGS divided by sales), operating profit or EBIT (several industries may use EBITDA or some adjusted version as EBITDAR) and naturally net income; the different industries have expectations over this lines that are related to it's core business.
Typically in order to reduce cost, companies implement controls to manage and/or reduce their business expenses. By identifying and evaluating all of the business' expenses, management can determine whether those costs are reasonable and affordable. Then, if necessary, they can look for ways to reduce costs through methods such as cutting back, moving to a less expensive plan or changing service providers. The cost-control process seeks to manage expenses ranging from phone, internet and utility bills to employee payroll and outside professional services.
To be profitable, companies must not only earn revenues, but also control costs. If costs are too high, profit margins will be too low, making it difficult for a company to succeed against its competitors. In the case of a public company, if costs are too high, the company may find that its share price is depressed and that will find difficult to attract investors.
When examining whether costs are reasonable or unreasonable, it's important to consider industry standards. Many firms examine their costs during the drafting of their annual budgets.
Increasing market share may sound a little tricky, because increase on revenues do not necessarily implies a market share growth, sometimes revenues may increase just because of external factors as inflation, market growth, etc. but definitely we want to gain ground against competitors; based on that, Market share is calculated by taking a company's sales over a given period and dividing it by the total sales of its industry over the same period. This metric provides a general idea of a company's size relative to its market and its competitors. Companies are always looking to expand their share of the market, in addition to trying to grow the size of the total market by appealing to larger demographics, lowering prices or through advertising. Market share increases can allow a company to achieve greater scale in its operations and improve profitability.
The size of a market is always in flux, but the rate of change depends on whether the market is growing or mature. Market share increases and decreases can be a sign of the relative competitiveness of the company's products or services. As the total market for a product or service grows, a company that is maintaining its market share is growing revenues at the same rate as the total market. A company that is growing its market share will be growing its revenues faster than its competitors. Technology companies often operate in a growth market, while consumer goods companies generally operate in a mature market.
New companies that are starting from scratch can experience fast gains in market share. Once a company achieves a large market share, however, it will have a more difficult time growing its sales because there aren't as many potential customers available.
On the next delivery I'll explore the do's and do not's of financial management I've faced all along my experience and will share a few rules of thumb over financial management.
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