Financial Management
Financial
management consists of those activities that are concerned with
obtaining money and using it effectively. Short&-term
financing is money that will be used for one year or less.
Although there are many short&-term needs, cash flow and
inventory are two problems that deserve special attention. Long&-term
financing is money that will be used for more than one
year. Such financing may be required for starting a business, expansion,
new&-product development, or replacement of production
facilities. Proper financial management can ensure that money is
available when it is needed and that it is used efficiently, in
keeping with organizational goals.
A
financial plan begins with the organization's goals and
objectives. Next these goals and objectives are
"translated" into budgets that detail expected income
and expenses. From these budgets, which may be combined into an
overall cash budget, the financial manager determines what
funding will be needed and
where it may be obtained. The four principal sources of financing are
sales revenue, equity capital (derived from the sale of common
and preferred stock), debt capital, and proceeds from the sale
of assets. Once the needed funds have been obtained, the
financial manager is responsible for ensuring that they are
properly used This is accomplished through a system of
monitoring and evaluating the firm's financial activities.
Most
short&-term financing is unsecured. That is, no collateral
is required. Sources of unsecured short&-term financing
include trade credit, promissory notes issued to suppliers,
unsecured bank loans, commercial paper and commercial drafts.
Sources of secured short&-term financing include loans
secured by inventory or accounts receivable. It is also possible
to sell receivables to factors. Trade credit is the least
expensive source of short&-term financing; there is no
interest charge. The cost of financing through other sources
generally depends on the source and on the credit rating of the
firm that requires the financing. Factoring is
generally the most expensive approach.
Long&-term
financing may be obtained as equity capital or debt capital. For
a corporation, equity capital is obtained by selling either
common or preferred stock. Common stock is voting stock; holders
of common stock elect the corporation's directors and must
approve equity funding plans. Holders of preferred stock usually
do not vote on corporate matters, but they must be paid a
specified dividend before holders of common stock are paid any
dividends. Another source of equity funding is retained
earnings, which is the portion of a business's profits that is
reinvested in the corporation.
Sources
of long&-term debt financing are the sale of corporate
bonds and long&-term loans. Money realized from the sale of
bonds must be repaid when the bonds mature. In addition,
interest must be paid on that money from the time the bonds are
sold until maturity. Maturity dates for bonds generally range
from fifteen to forty years, but long&-term loans are
generally repaid in three to seven years. The rate of interest
for long&-term loans usually depends' on the financial
status of the borrower, the reason for borrowing, and the kind
of collateral pledged to back up the loan.
