Financial Management and Budgeting - Assignment Example

Financial Management and Budgeting Q1. What are the values of evaluating both the roles of judgement and analysis in performing the financial management function? Ans. Managers are supposed to make strategic moves on the basis of both external and internal analysis. They have to control costs and manage money. This could be in the form of preparing or reviewing budgets, expense reports, or travel authorizations. It may be cash management or sales management. For financial management, markets and environments are assessed. Internally, operating and financial capabilities of the company/ organization are analyzed by using the hard facts, i.e. the financial statements, budgets etc. Accounting is the scorecard of business and finance management involves the interpretation of these accounting numbers for assessing the present performance and accordingly planning for future course. At the same time managers are supposed to take note of factors like time value of money and cost flows. For this reason managers try to evaluate alternatives logically and comparably. This is where the role of judgement comes into play. Financial management has the following main aspects; Reconciling traditional theoretical concepts of economics in relation to the actual business behaviour and conditions. Estimating economic relationships Predicting relevant economic quantities (like profit, demand etc.) Using economic quantities in decision making and forward planning Understanding siginificant external forces constituting the environment Today’s finance managers are supposed to have the ability to exercise good judgement in financial management. Individual manager has his own set of judgements on a range of issues besides analyzing the financial figures of the company. Managerial economics demands analysis of current and actual costs. In the cost-benefit analysis opportunity cost also emphasizes the role of judgement. Computerized calculation can be done while analyzing the financial details of one’s own company, but how do we analyze the competitor’s financial strength, the market situation, the environmental factors etc. To arrive at a final decision and to plan out a futuristic strategy all these factors play a crucial role. The judgement of concerned Manager/s becomes very crucial in all such matters. No management philosophy can provide a definitive step by step guide in dealing with all such cases. The value of judgement thus becomes very crucial. Management by exception is the practice of concentrating on areas not operating as anticipated, which is feasible only with a well thought out judgement of the manager. A significant characteristic of the condition in which business organizations work and take decisions is uncertainty. This fact of uncertainty makes the function of decision-making and futuristic planning little complicated. If knowledge of future were perfect, perfect plans could be formulated which would be error free and without any need for subsequent revision. The real world however is a shade different from this and the manager rarely gets complete information vis-à-vis future sales, costs, profits, capital conditions, etc. Hence decisions are made and plans formulated on the basis of past data, current information and the estimates about future ‘predicted’ as best as possible by the managerial judgements. As plans get implemented over time, more facts become known so now the ‘managerial instinct’ feels the need for revision of some of the plans and a difference course of action is adopted. Managers are therefore engaged in a continuous process of decision-making through an uncertain future and this entire process calls of ‘judgement’ as the deciding factor. Q2: Why is it important to monitor the cash flow of an organization? What can happen if this activity is not well established? Ans: For staying in business a company’s cash flow is required to be well understood and monitored regularly. Cash, the most liquid asset, is necessary to honour obligations and commitments. Cash balance includes cash in banks. With a geographical dispersal of business enterprises, cash management has acquired added significance as cash balances in regional offices are to be optimized. Many successful businesses organizations conduct periodic self-audits as a means of monitoring their financial status. In fact all businesses require cash to survive. Theoretically a business can survive without sales or profits for a limited period of time, but it cannot survive without cash. The company needs to pay suppliers and employees i.e. cash, which the company receives from customers. Need for cash keeps increasing as the business grows. It is therefore very crucial to be able to monitor the flow of cash from the customers to the company and subsequently from the company to the suppliers and employees. Some companies even monitor the cash flows on weekly basis with the foresight to avoid potential problems that could be detrimental to a companys financial fitness. This process gives a financial manager valuable knowledge to plan out the companys payment and collection schedule. Regular monitoring of cash flows also help in planning the payment schedules in stages which can help stretch a diminished cash reserve. Monitoring cash flow is therefore more than balancing a checkbook - it is about understanding where every dollar comes from and where it goes. Close monitoring of cash flows allows companies to pay more attention towards incoming funds and the payment patterns that are subsequently created. For example, if a slow pay period is approaching, the accounts receivable department can begin to pressure slow-paying clients sooner to get the outstanding funds on time. The following three are the primary reasons for holding cash: i. Transaction Motive: Cash is needed to meet the needs arising due to business activity. Since cash inflows and outflows are non-synchronized in nature, a cash balance is required to serve as buffer. ii. Precautionary Motive: This refers to the cash requirement necessary to meet the contingencies i.e. the unexpected requirements. iii. Speculative Motive: Many a times, cash is held to take advantage of the changes in the product pricing. Effective cash flow management optimizes the cash balances and reduces the uncertain time span. If this activity is not well established then; a. A situation may arise when the employees are left with no salary checks at the end of the month. b. There could be disparities in the payments to employees. c. Supply of raw material/ input to the company may get disrupted. d. Cash mismanagement may bring in disrepute to the company, which will effect its standing in the marketplace, amongst suppliers, customers etc. e. By neglecting to properly update financial records, a company could face bankruptcy for no reason other than failing to perform a simple weekly task. References: 1. Charles T. Horngren, et al. (2000), Cost Accounting – A Managerial Emphasis, Prentice-Hall, New Delhi (220-240, 747-760). 2. ‘Managing Cash Flow’, available online at http://www.morebusiness.com/running_your_business/management/d906062188.brc (Oct 25, 2006) 3. Lloyds TSB, Business Guide, ‘Monitoring Cashflow’, available online at http://www.lloydstsbbusiness.com/media/lloydstsb2004/business/pdfs/SG00051.pdf (Oct 25, 2006) Read More