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Role of Financial Management

Role of Financial Management

Author: James Howard

This lesson explains the role of financial management.

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Hello, and welcome to this tutorial on the role of financial management. Now as always with these tutorials, please feel free to fast forward, pause, or rewind as many times as you need in order to get the most out of the time that you'll spend here.

Well, let me ask you a question right off the bat. Do you have a budget? Hm. Well, why do you think, if you had a budget, would happen if you didn't follow it? Would you have enough money to do the things that you wanted to do?

Well, in business, these budgets, we're going to find-- we're going to find out are going to be very, very important.

So what are we going to talk about today? Well, we're going to look at the role of financial management. We're also going to look at budgets. And lastly, we're going to take a look at some financing options out there for business. Now, the key terms for this lesson are going to be short term financing, long term financing, and budget.

So let's go ahead and get started with the role of financial management. Now, the role of financial management is planning for an organization's current needs and also its future needs. That's the role, that's the basis, for what financial management does and what it is.

Now in smaller companies, typically this is going to be the owner's responsibility. If you remember way back to one of our earlier tutorials, we talked about that sole proprietor and all that workload that they have to take on. This is a big part of it, making sure that their financial management is sound. In larger organizations, they're going to have, typically, a financial department that is responsible for these things.

Businesses are there to sell goods or services at a profit, but the fact is, organizing money is going to be an ongoing need within that business. It's important that we're keeping up with this money and managing that money because debt can develop, and we want to make sure that we're monitoring this debt to make sure it's not going to be too much for the business to handle.

So next, we want to talk about budget. And budget's one of those key terms. The budget is a researched projection of what funds are needed for a specific period of time, say, a year or three months. Now the thing about budget is, a business has got to have a budget. You can't just spend money willy nilly. You have to make sure that you have a plan for those expected expenses.

Now, the finance manager is going to ensure that those results are in line with what we have planned for an organization. He's going to watch the budget and make sure that where we are and where we need to be are lining up along the way. And if not, we're going to have to make adjustments somehow to how we're managing our money.

Now, financial management is going to make decisions that are going to maximize value for the organization. And they'll also be making decisions about alternative sources of funding that are inside as well as outside the company, and proper financial management can help you ensure this. Now, proper financial management is going to look at things and make sure we're following up and financing priorities that are created to be complementary to the organizational goals.

Make sure that when we're managing the money and managing that finance, that we're doing it in a way that's complementary to where the business wants to go. If the money's going in one direction and the business wants to go in another direction, something's going to have to give, and typically, it's going to be the business, which basically means the money people are out of a job.

I'm also going to make sure we have sufficient financing available. We're going to make sure we have it available now and we put ourselves into position so if we need that extra financing later, it's available to us in the future.

We want to make sure we're spending effectively, and that that spending is planned and control. We're not just going out and spending money on things willy nilly with no plan on how we want to control that spending. Next, we want to make sure we're raising our organization's credit score so that it gets better and better as the organization grows.

So let's take a look at short term financing before we get too much deeper into the weeds. Now, short term financing is financing that is for one year or less, and this is for things that are short term needs. And financing managers are going to look at financing options for the company and they're going to make sure that they fit the needs of the business both now and later, as we mentioned before.

Now, short term financing is good for a variety of different things. For one, it's good for immediate cash flow issues. For instance, I can't pay my current needs. I may not have enough money on hand, or the organization doesn't have money at the time, it can't access the money that it has at that that time. I may need to make payroll or buy an order of something very, very quickly and I just don't have the money in the bank account at the time.

So in this case, I may want to look at short term financing to get over that hump. Another reason we'd want to use short term financing is current inventory purchases. Anything that you may buy to support the organization's day to day operations-- those physical goods that it takes to run the company. Also, monthly expenses-- things that-- everything from salary, to inventory, like we mentioned, paying suppliers, or utilities. Anything that happens on a monthly basis where we may be just a little short that one particular month.

We're also going to be using short term financing for short term promotional needs, things like running an immediate unplanned campaign. These are things I really need to get out there and get ahead of, so I need to have that short term financing because it isn't necessarily something that I planned for. And for speculative production to cover the time between when a product's made and when it's actually sold, or you actually get paid for the sale.

You see, companies don't always get paid right away in full for the things that they sell, so we want to make sure we have money to cover that gap between when the product sold to the customer and when the customer actually pays for it.

Now, long term financing is a little different. And long term financing is financing that is for more than one year. Now, long term financing is good for things like business start ups, all those costs that are associated with launching a new business.

Or maybe we want to merge with someone else, or we want to acquire another company or another product, and this is another reason why I would use long term financing to buy a company or a division to make my organization better.

Also, new product development, investing in research and testing of new products to make to bring that next big idea to market. These are not things I would be short term financing for. These are longer term goals that are going to be a lot more permanent.

And lastly, to buy new equipment. That new equipment that I need to do my job better or to replace something that has broken along the way. Again, these are big, big ticket items you can see, and they're things that are going to last the company a long while. So in that case, doing something long term with financing would probably be a good idea.

So what is it we learned today? Well, we looked at the role of financial management, and we also talked about budgets and why they're important to a business. We also looked at some financing options, those short term versus long term financing options.

So I want to thank you, as always, for spending some time with me today, and you folks have a great day.

  • Short Term Financing

    Financing that is for one year or less.

  • Long Term Financing

    Financing that is for more than one year.

  • Budget

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