The Concept of Efficient Management of Financial Resources - Essay Example

Financial Management during Economic Downturn 0 Introduction Efficient management of financial resources is undoubtedly an indispensable task for the success and survival of any firm, especially in the context of economic downturns. Financial management is concerned with the planning, organising and efficient utilisation of financial resources. It is to be noted in this context that the task of financial management cannot be confined merely to cash management. Rather, the scope of financial management includes all financial resources such as receivables and payables. Management of all financial resources assume great importance as it has rightly been coined as the life blood of business. However, during the period of economic downturn or recession, this task is little more difficult as financial decisions are not likely work out as planned by a financial manager. Planning is relatively a simple task as it basically needs only past data with information on how to relate them to future conditions. But, when it comes to realise that financial outcomes do not come out as planned, the firm's financial position gets affected adversely and eventually its existence. Keeping this in view the present paper attempts to discuss the problems that are faced by a financial manger during the period of economic downturn. The paper does not discuss the issue from the view point of any particular firm. Instead it presents the issue from a macroeconomic point of view taking all types of firms. 2.0 Economic downturn Economic downturn or recession is an economic situation wherein the general economic activities experience a slow down. When the general economic activities of a country get affected by a recession, the country's economic progress and growth will surely be affected leading to low GDP; spending; employment opportunities; capacity utilisation; and individual and household income (Roland 2007). In fact, these variables are necessary to the economic progress and prosperity of a country and its business activities. In short, economic slowdown affects the business activities by low demand for goods and services, poor cash flow from customers and low lending by financial institutions in the economy. This will eventually result in unavailability of finance (log term and short term), less collection from debtors, unavailability of factors of production for enterprises in the economy (The United States Department of Labor 2006). These cause serious financial implications such as low profitability and less growth to the shareholders, which threaten the smooth functioning of business operations. As a result, the individual financial manager should chalk out certain financial plans to revive his firm from economic slowdown. 3.0 Financial Manager's Role The financial manager's role is pivotal in a firm which runs through a tough economy leading to poor debt collection and credit availability. The responsibility of a financial manager in such a pathetic situation is to revive the firm to the earlier position. But it is a huge task and he needs to take and follow a proactive approach rather than reactive efforts. He should take initiatives right from financial planning and budgeting on the anticipation of economic slowdown at any time in future. Moreover, the plans and budgets are to be aligned to the actual happenings in such a way that there is no big gap between the two. The following sections will detail some of the important measures to be followed by a financial manager in times of general economic recession. 3.1 Cash flow Projections Liquid cash is an essential element for the smooth flow of routine business activities. Cash is needed for a number of activities right from purchasing stationery to payment of dividend to shareholders. Unless the firm has a level of cash enough to meet the daily needs, the business operations get affected and will adversely impact the flow of goods and services to the customers. This implies liquid cash is an essential asset, the absence of which will affect the normal operations and ultimately the business. Cash is normally collected from sale proceeds and collection from debtors. But in times of general economic slowdown, the collection from debtors and those of sale proceeds will become low owing to low demand for goods and services as a whole in the economy (Wang, 2006). This necessitates the need for a proper cash flow projection by a financial manger of his business during tough times. Cash flow projections in this context is similar to typical cash budgets with the exception the former takes into account the general economic slowdown in addition to mere future cash inflows and outflows. The period for which a cash flow projection should be prepared depends upon the variables such as collection period, credit period, and operating and working capital cycle. In the cash flow projection statements, the financial managers should give due consideration for the impact of economic slowdown on the account receivables, inventory holding period and accounts payable level. These three assume much importance as they form the major elements in the investment of cash in the short term assets of a firm. It is also necessary to assess the impact of changes of these elements on the cash position. 3.1.1 Inventories Financial manager should take extra care in reducing the investment in whatever form of inventory. It has been found in various studies that manufacturing firms deploy majority of the short term investment in inventory (Lyon, 1997). It is also advisable for firms to reduce inventory during the period of economic downturn as demand for the goods may have been tremendously affected of the negative impact. 3.1.2 Accounts Receivables Account receivables comprise of trade debtors and bills receivables. The collection from debtors and out of bills during economic slowdown is likely to be less than what was anticipated at the time of sale. This needs to be anticipated in advance so that cash can be arranged from somewhere and credit purchase can be adjusted appropriately. Every time the payment becomes due, it is better to send the debtors reminders so as to ensure that they make payment duly (Moyer, 2004). It is also necessary to have discussion with customers on the likely date of payment, if possible, so that proper projections can be made. Therefore, financial manager needs to take a proactive management and enhanced communication with customers to ensure any slowdown in the payment, which would enhance the receivables level. It is also the duty of the financial manager that he must ensure that the invoices are dispatched to customers on a timely basis. 3.1.3 Accounts Payable This is a regular source of cash out flow for any firm. Firms schedule payment to creditors on the basis of the credit period extended by them as well as collection period given to debtors. In times of mismatch between collection and payment period owing to slowdown, the firm would not be able to meet their promise in time. This is a major concern for a firm which relies heavily on creditors for inventories and short term finance. Therefore, the financial manager should always be alert that no mismatch between credit period and collection occur at any time. However, it is to be remembered that all economic downturn are not predictable. 3.2 Review all Costs In times of any economic decline, it is better to have a review all business costs ranging from manufacturing to administration. This is necessary because the knowledge of cost of business operations in detail will allow a financial manager to find the possibilities of reduction of costs that can reduce the overall cost and increase profit. The areas where costs can be reduced include administration overheads, factory overheads etc (Shim & Joel 2001). 3.3 Financial Arrangements Short term financial arrangements are always a boon to firms in time of financial crisis. Financial manager can try for short term financial arrangements such as overdraft with its bank. This will allow the firm to meet urgent cash needs. Conclusion Economic slowdown is a real phenomenon which will have serious implications upon the routine operations of any firm. However, finance department is the most affected area and it needs special care and attention from the firm and financial manager to tackle financial distress owing to the crisis. Financial manager should take initiatives right from financial planning and budgeting on the anticipation of economic slowdown at any time in future. Moreover, the plans and budgets are to be aligned to the actual happenings in such a way that there is no big gap between the two. A number of measures can be taken in advance in this respect. However, it is always better to prevent the distress than curing it. References Moyer, G. Stephen, 2004, Distressed debt analysis: strategies for speculative investors, illustrated, J. Ross Publishing Lyon, B. Andrew, 1997, Cracking the code: making sense of the corporate alternative minimum tax, Brookings Institution Press Roland Fox, Jeff Madura, 2007, International Financial Management, illustrated, Cengage Learning EMEA The United States Department of Labor, 2006, Compiled by The United States Department of Labor, illustrated, McGraw-Hill Professional Wang, XiaoHu, 2006, Financial management in the public sector: tools, applications, and cases, illustrated, M.E. Sharpe Shim, Jae K. and Joel G. Siegel, 2001, Handbook of financial analysis, forecasting, and modeling, 2, illustrated, CCH Incorporated Read More