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Role of Financial Management

Role of Financial Management

Author: Jeff Carroll

Identify proper financial management and financing options.

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Source: Image abacus, report, curved arrow, man with report, table of people, hand with paper, dollar sign, images by Video Scribe, License held by Jeff Carroll.

Video Transcription

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Hi, I'm Jeff. And in this lesson, we'll discuss the role of financial management and discuss some of the financing options for organizations. So let's get started.

When an organization plans for their current and future needs and the financing they will need to accomplish its goals, that is the role of financial management. Financial management is making financial decisions to maximize the company's value and making decisions about alternative sources of funding, either inside or outside the company.

In a small company, it is usually the owner who is responsible for the financial management. In a larger organization, there might be a finance department to handle all the possible needs.

Though it's the goal of business to sell goods or services at a profit, the management of the finances is a complex and ongoing need also. The finances associated with success can be as challenging to manage as those associated with failure.

In order to operate, an organization needs financing, sometimes in the form of borrowed money. So debt can develop. And this needs to be closely monitored.

Due to this, every organization should have a budget, which is a researched projection of what funds are needed for a specific period of time. A finance manager for an organization is responsible for creating and monitoring this budget to ensure that the results of operations are in line with what was planned.

In addition, proper financial management should ensure that financing priorities are created to be complementary to the organizational goals, sufficient financing will be available now and in the future, spending is effectively planned and controlled, and the organization's credit rating is better.

Finance managers will also investigate and recommend financing options for an organization. Financing is often necessary for growth. There are two possible time frames for financing-- short-term and long-term financing.

Short-term financing is financing that is for one year or less. It can be used for immediate cash flow issues. Unexpected growth or sales can result in a sudden need for cash to handle the increased outflows. Short-term financing can help address this.

Current inventory purchases. Adjustments to the flow of inventory can also be handled. Monthly expenses, such as needs for salary, supplier payments, or monthly expenses such as utilities. Short-term promotional needs, such as financing and immediate unplanned campaign, and speculative production. When there is a spread between the production of a good and the time the good is actually sold, or the time the good is actually paid For

If financing is needed beyond the short-term, then a finance manager will recommend long-term financing options. Long-term financing is financing that is for more than one year.

This can be used for business startups. This includes all costs associated with the launch of a new business.

Mergers and acquisitions, otherwise known as buying another company or division.

New product development. When an organization invests in the research and testing of a new product, it often extends beyond one year. So it relies on long-term financing.

And new equipment. There are tax advantages to financing new equipment past one year. So long-term financing is a good option here.

Well done. In this lesson, we learned about the role of financial management in the operation x a business. We talked about the need for a budget in an organization. And we discussed the various financing options available for the short-term and long-term. Thanks for your time, and have a great day.

Terms to Know

A researched projection of what funds are needed for a specific period of time.

Long Term Financing

Financing that is for more than one year.

Short Term Financing

Financing that is for one year or less.