The Significance of Financial Cost to a Firm - Research Paper Example

?Running head: Research Paper Research Paper Introduction One of the most challenging tasks for any business is to maintain steady growth while satisfying the need for reduction of costs. Every company seeks to grow in size through increased profits. The demand for cost reduction always haunts the firm in the production sector. The need to come up with a viable strategy that keeps the production cost at a minimum while simultaneously promoting growth requires an expert in business. In most cases, the person or committee in a firm that is responsible for drafting a financial cost reduction plan cuts down on the less efficient functions in the firm. He aims at reducing the liabilities to the firm while being cautious not to paralyze the production level. Financial cost reduction plans have to place the input and output factors of at equilibrium in order to maximize efficiency. This paper discuses the significance of financial cost to a firm, various cost reduction methods and the aspect of financial restructuring. Significance of Financial costs Financial costs are the expenses that a company incurs in all its activities in commodity production and delivery. These are all the costs that the company pays for in all its activities. They include the cost of raw materials, processing in the production level, transportation, administration expenses like rent, loans payment, salaries tax payments and insurance payments among many other liabilities. Keeping clear accounting records on the financial costs is very important for any given company since the costs are used to determine the profit margins. This is done through a series of accounting calculations that indicate the overall profit margins by subtracting the cost of the liabilities from the total production value (Codjia, 2012). Financial costs are also very important to a company because they can be referred to when determining the growth rate of a given company. This is done through a professional analysis of the relationship between the input cost and the subsequent output. A company may be investing huge amounts of capital and receiving low profits that influence a slow growth rate. Business analysts can help a business to rectify such an issue through financial restructuring plans. The plans aim at reducing the financial costs while increasing the profit margins. Such strategies strongly rely on the accounting records for the financial costs to pinpoint the loopholes in the company and the areas of insignificant competences that need to be eliminated (Codjia, 2012). During management accounting, the financial costs records are very important in drafting a cost effective strategy for a company. Most companies boost their capital with borrowings from banks and other financial agencies. These money borrowing agencies normally request for financial cost audits of the companies that seek loans from them in order to determine whether the companies are qualified for their loans. The relationship between management accounting and financial costs in a firm enable the analysts in the company to draw a feasible periodic business plan (Codjia, 2012). Financial costs are significant to a company in the process of budget making. Allocation of funds during the preparation of the annual budget of a company requires an analysis of the financial costs so that the right amounts are injected to the various processes in the company (Codjia, 2012). The financial costs also enable the planners to detect the deficits in the financial plan before they take loans. It gives an analysis of the total capital input. Financial costs also help in detecting the areas in the firm where the liabilities are accumulated. This may be helpful in the process of reducing production costs. The competitiveness of a company lies in its profitability level. Financial costs are used in the preparation of overall balance sheets and cash flow statements that are used to attract investors in companies. The investors compare the financial costs of a company with the returns margin to determine whether the company is a viable investment option. Most investors go for the companies with a balanced financial costs record since they are stable and less risky in terms of loss prevalence. It is, therefore, very important for a company to study and review its financial costs where need be, so that they can enhance their competitiveness in the market (Codjia, 2012). Small businesses that are looking to grow into big firms compare their financial costs with those of their dream companies. In business, the higher the financial costs, the faster the company grows if it does not suffer from diminishing return. Increasing the investment scope guarantees and increase in the rate of growth for small firms (Codjia, 2012). Evaluating the law of diminishing returns in a business requires a comprehensive record of the firm’s financial costs analysis. It helps the firm to prevent long term losses since early detection compels the management to employ a financial restructuring strategy to enhance the production efficiency. Reducing Financial Costs in a company Reducing the financial cost in a company is one of the most important moves that are aimed at increasing the profitability of the business. Drafting a financial cost reduction plan is very challenging since it may affect the growth rate of a company if the vital areas of production are negatively affected. The reduction process should be methodical and strategic to guarantee positive effects on the firm. Financial cost reduction should result to an increase in output for every unit of input (Lee, 2011). To reduce the financial cost in a company and increase the profit margins simultaneously, a company requires to utilize the available resources efficiently. A company should eliminate certain liabilities that do not add value to the commodities they produce. The company needs to detect the reducible expenses in its activities. Such expenses may be detected in the transportation process, workforce employment, and unreliable assets among other areas in the firm. Eliminating the liabilities saves the company a lot of money that can be channeled to other profit making activities. The extra money can be used to invest in new projects that will generate more income (Lee, 2011). The most effective way of reducing costs in a company is through shifting to cheaper energy supplies. Most companies spend a lot of money in the purchase of energy units used in the production process. Energy bills account for large percentages of the liabilities list in most companies. Switching to cheaper energy providers or sources can reduce the financial cost and save large amounts of money for the company. Energy conservation in the company is also a viable cost reduction measure (Huntington, 2011). Switching off electrical appliances that are not frequently used saves energy and cost. Investing in the attest technology is a very efficient way of reducing costs. Technology makes work easier and it reduces the need for a large work force. A big percentage of a firm’s profit goes into paying salaries. Using advanced software in the firm makes work easy and fast. Technology helps in cutting down the human assets required in the various company departments; therefore, it reduces the salary financial cost. The initial installation of the technological devices is very expensive for a company but the long term effect is a reduction in the total financial costs (Lee, 2011). Reduction of waste is also an efficient way of reducing cost. Recycling of water in a company that uses a lot of water in its product manufacturing process reduces their water bills. Recycling of packaging material is also very effective. A company should ensure that its packaging material is easily recyclable to reduce the energy requirements for the process. Less packaging and use of paper within the company would also save on the overall cost. Using alternative methods of communication in the office other than papers saves some money (Lee, 2011). The cost of wages and salaries in a company can be reduced without necessarily cutting on the workforce. This can be done by eliminating fixed salaries and introducing commissions. This improves on the efficiency and productivity of the human assets since the employees earn as much as they work for. Reducing the cost of insurance in the company also reduces the overall financial cost. This can be done by introducing business programs that require the employees to indirectly pay a larger amount of their health insurance through their deductable income (Lewis, 2012). Financial restructuring Financial restructuring is the corporate changes in a company that are aimed at increasing the value of the company and creating a financial environment that is efficient and effective. Financial restructuring requires an expert’s assistance since it involves drastic changes in the way a company functions. It may involve a reorganization process of the company’s entire assets and liabilities in order to prevent losses in the future. The most significant aspects of financial restructuring are ensuring that the available production assets are utilized to the maximum and liabilities like debts are eliminated quickly enough. Financial restructuring can rescue a firm that is headed to bankruptcy to get back on its feet. It is also used by many companies to enhance their competitiveness in the market (Bergh, Johnson & Dewitt, 2008). Financial restructuring is normally incorporated with an entire organizational culture change whereby things are done differently. There could be a change in the management in the course of the change and some employees that are not significant to the company may find themselves losing their jobs since financial restructuring focuses on any method available to reduce the firm’s liabilities. The company may also relocate to other areas where the costs of production are cheaper (Bergh, Johnson & Dewitt, 2008). Conclusion Financial costs are one of the most important accounting data. The data is used for evaluating numerous aspects of the firm and it can be used to predict the financial performance of a company. Reduction of the financial costs increases the profitability of a company if it is strategically executed. A mistake in the reduction of costs can have adverse effects to the financial performance of a company; thus, reduction of costs requires an expert’s plan. If a company is faced with a financial crisis, financial restructuring is a viable way of dealing with the crisis. It changes the entire company’s operations and it can save it from bankruptcy. References Bergh, D.D, Johnson, R.A & Dewitt, R. (2008). Restructuring through spin-off or sell-off: transforming information asymmetries into financial gain. Strategic Management Journal, 29(2), 133-148. Codjia, M. (2012). Definition of Financial Cost & Management Accounting. eHow. Retrieved from: http://www.ehow.com/about_7263013_definition-financial-cost- management-accounting.html Huntington, H. (2011). The Policy Implications of Energy-Efficiency Cost Curves. Energy Journal, 32(1), 7-21. Lee, M. (2011) Reducing your Dept while Reinvesting in Long-Term Growth. Franchising world, 43(12), 26-27. Lewis, M. (2012). How to Reduce Labor Costs in Your Business. Money Crashers. Retrieved from: http://www.moneycrashers.com/reduce-labor-costs-business/ Read More