1. WHAT IS FINANCIAL
MANAGEMENT?
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FINANCIAL MANAGEMENT
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Financial management
represents one of the most critical functions
in any organization.
In simple terms,
Financial Management entails development,
implementation, and control of systems aimed
at securing the most efficient use of an organization's
material and financial resources.
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DON'T
GET CONFUSED ABOUT FINANCIAL MANAGEMENT
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Many business practitioners confuse
financial management with Accounting, Bookkeeping,
Budgeting, Tax Preparation, Cost Accounting,
Pricing, and Management Accounting.
Although all
these functions are interrelated, it is necessary
to understand how each function fits into the
total responsibility of the financial executive.
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IMPORTANCE
OF THE FINANCIAL MANAGEMENT PROCESS
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The most important task of the financial
executive is to initiate a Financial
Management Process and to develop
a Financial Department within
the organization. It is essential,
therefore, that you and your management
team pay serious attention to this function,
and develop, implement, and maintain
the financial management process.
Planning
and control of the financial management
process entails a number of steps outlined
below.
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2.
STEPS IN THE FINANCIAL MANAGEMENT PROCESS
A typical
Financial Management Process entails a number
of steps, as illustrated below.
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THE FINANCIAL MANAGEMENT PROCESS
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Step
1: Design, Implement, And Maintain A Bookkeeping
System (Manual Or Computerized).
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Journal
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Ledger
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Work
Sheet
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Step
2: Collaborate With Auditors In The Preparation
Of Financial Statements.
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Balance
Sheet
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Income
Statement
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Statement
Of Cash Flows
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Step
3: Conduct Financial Performance Evaluation.
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Current
Financial Analysis
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Comparative
Financial Analysis
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Financial
Ratio
Analysis
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Step
4: Design, Implement, And Maintain A Financial
Planning Or Budgeting System.
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Operating
Budget
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Capital
Expenditure
Budget
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Cash
Budget
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Step 5: Formulate
Tax Strategies.
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Step 6: Identify
And Arrange Sources Of Capital.
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Step 7: Design,
Implement, And Maintain Internal Control Systems.
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Step 8: Design,
Implement, And Maintain A Payroll Accounting
System.
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Step 9: Design,
Implement, And Maintain A Cost Accounting
System.
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Step 10: Design,
Implement, And Maintain A Management Accounting
System.
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Step 11: Collaborate
With Computer Experts In Developing, Implementing,
And Maintaining A Computerized Financial Management
System.
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3.
BOOKKEEPING
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A
BOOKKEEPING SYSTEM
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The financial management process
begins with the design and installation
of a suitable Bookkeeping System. The
prime purpose of a bookkeeping system
is to enable the company's bookkeeper
to record all financial transactions continuously
through means of a bookkeeping system.
The ordinary bookkeeping system may be
manual or computerized,
depending upon the degree of computer
literacy of the business owners and their
employees. Although many businesses today
use some kind of an accounting software
package, such as Quicken
®, Quick Books Pro ®, Clarisys
®, and Peach
Tree ®, both systems will be described.
Bookkeeping
is discussed in details later in Tutorial
3.
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TWO
TYPES OF BOOKKEEPING SYSTEMS
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A Manual
Bookkeeping System
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A
Computerized
Bookkeeping System
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A manual bookkeeping system consists
of two sets of books, namely journals
and ledgers. All transactions are
first recorded in the journals and
thereafter posted to appropriate ledger
accounts. Subsequently, all balance
from the ledger accounts are transferred
to a work sheet, and a trial balance
is prepared.
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A computerized bookkeeping system
is driven by a specific accounting
software program and offers a much
more time-efficient way of accomplishing
specific bookkeeping functions.
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4.
FINANCIAL STATEMENTS
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FINANCIAL STATEMENTS
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An orderly recording of all
business transactions pertinent to the
company's operations facilitates timely
compilation of Financial Statements.
Financial statements are prepared
from the trial balance at least once
a year and include three types, as illustrated
below. Each statement contains important
information about the company's financial condition,
past performance, and flow of funds.
Financial Statements are discussed
in details later in Tutorial 3.
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THREE
TYPES OF FINANCIAL STATEMENTS
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Balance
Sheet
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Income
Statement
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Statement
Of Cash Flows
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5.
FINANCIAL PERFORMANCE EVALUATION
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FINANCIAL PERFORMANCE EVALUATION
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Financial statements are used
extensively by top management for evaluating
financial performance and for submitting
information to existing and potential
shareholders, the Internal Revenue Service
(IRS), and existing and potential creditors. Financial
Performance Evaluation represents,
therefore, an important managerial responsibility.
This evaluation includes three elements,
as illustrated below.
Financial Performance Evaluation
is discussed in details later in
Tutorial 3.
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THREE ELEMENTS OF THE FINANCIAL PERFORMANCE
EVALUATION
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Current Financial
Analysis
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Comparative
Financial
Analysis
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Financial
Ratio
Analysis
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Current financial analysis covers
the most recent fiscal period.
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Comparative financial analysis
covers the three preceding fiscal
period.
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Financial ratio analysis evaluates
relationships between various items
in financial statements.
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6.
OPERATING BUDGETS
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OPERATING BUDGETS
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Once the financial manager
completes the evaluation of the company's
present condition and results, performance
trends, and financial ratios, it is
necessary to initiate the financial
planning or budgeting process.
The financial planning process represents
an integral part of the overall planning
effort undertaken by top managers within
the organization. The prime purpose
of the financial planning process is
the development of Operating
Budgets aimed at guiding the company's
performance in the future.
Operating
Budgets are discussed in details
later in Tutorial 3.
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7.
THE MASTER BUDGET
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THE
MASTER BUDGET
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Operating budgeting represents
one of the most important responsibilities
of the financial manager. The central
element of this process is the Master
Budget, which is usually prepared
for one fiscal year.
The
master budget comprises three basic
financial plans, as illustrated below.
Each budget serves an important purpose
and is of a particular significance
to the organization.
The
Master Budget is discussed
in details later in Tutorial 3.
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THREE
MAIN ELEMENTS OF THE MASTER BUDGET
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Operating
Budget
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Capital
Expenditure
Budget
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Cash
Budget
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8.
TAX STRATEGIES
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TAX STRATEGIES
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Another aspect of financial
planning entails formulation of the
most effective Tax Strategies.
Since every business is expected to
produce profits, it is logical to assume
that the organization will be liable
to pay a certain portion of that profit
in the form of taxes to the federal,
state, and local authorities. Hence,
one of the prime responsibilities of
the financial manager is to plan the
company's activities in such a manner
that the tax liability will be minimized.
Tax
Strategies are discussed in
details in Tutorial 3.
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9.
SOURCES OF CAPITAL
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SOURCES OF CAPITAL
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Once the development of financial
plans is accomplished, it is necessary
to implement such plans by integrating
financial objectives with the overall
operating activities within the organization. This
process, however, cannot be accomplished
without identifying and developing appropriate
Sources Of Capital.
Hence, it is necessary to determine
how much capital is required to fund
the company's operations, over what
period, and how it will be used. In
addition, it is necessary to establish
when and how borrowed funds will be
repaid.
Sources
Of Capital are discussed in
details in Tutorial 3.
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10.
INTERNAL CONTROL AND CASH MANAGEMENT SYSTEMS
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INTERNAL CONTROL AND CASH MANAGEMENT
SYSTEMS
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The next stage of the financial
management process entails the design,
implementation, and maintenance of effective
Internal Control And Cash Management
Systems.
Main elements of the internal control
and cash management systems are illustrated
below. Each type of control plays an
important role in the overall operational
performance of the company and is essential
to ensure its long-term success.
Internal
Control And Cash Management Systems
are discussed in details in
Tutorial 3.
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MAIN
ELEMENTS OF THE INTERNAL CONTROL SYSTEMS
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Cash
Management And
Control
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Control Of
Purchases
And Disbursements
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Credit
Control
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Inventory
Management
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Capital
Assets Management
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11.
PAYROLL ACCOUNTING
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A
PAYROLL ACCOUNTING SYSTEM
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The financial management process
also entails development and installation
of a comprehensive Payroll Accounting
System. This system is concerned
with determining, recording, and controlling
salaries, wages, employees' withholdings,
and company contributions.
Moreover, an effective payroll accounting
system enables the company to meet its
obligations toward employees and to comply
with relevant regulations imposed by tax
authorities.
Payroll
Accounting is discussed in details
later in Tutorial 3.
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12.
COST ACCOUNTING
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A
COST ACCOUNTING SYSTEM
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Design, implementation, and maintenance
of a suitable Cost Accounting System
represents another important responsibility
of the financial manager.
The prime purpose of this system is to
ensure that the company recovers all its
costs and makes profits while manufacturing
and supplying products or rendering services
to customers. An effective cost accounting
system also facilitates the development
of sound pricing methods, which are subsequently
used throughout the cost estimating and
pricing procedures.
Cost
Accounting is discussed in details
later in Tutorial 3.
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13.
MANAGEMENT ACCOUNTING
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A
MANAGEMENT ACCOUNTING SYSTEM
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In order to ensure effective
control within the financial department
and to monitor the company's operational
performance, it is necessary to design,
implement, and maintain a comprehensive
Management Accounting System.
The prime purpose of this system is to
facilitate the collation of financial
data pertinent to the company's actual
performance and to compare such data with
corresponding budget projections. The
comparison between actual and projected
results enables the financial manager
to determine variances and to identify
whether the company meets its planned
objectives.
Management
Accounting is discussed in details
later in Tutorial 3.
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14.
COMPUTERIZED FINANCIAL MANAGEMENT
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A
COMPUTERIZED FINANCIAL MANAGEMENT SYSTEM
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Another very important aspect
of modern financial management relates
to the computerization of financial management
planning and control efforts by the company.
A Computerized Financial Management
System represents, therefore, an integral
part of a cost-effective financial management.
In today's environment there are a variety
of software programs available in the
marketplace specifically designed to address
a broad range of financial management
issues. It is essential, therefore, that
the company's financial management team
investigates the advantages and disadvantages
of various programs in light of the company's
specific operational requirements, and
selects the most appropriate software
program to serve its present and future
business needs.
Computerized Financial Management
is discussed in details at the end
of Tutorial 3.
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15.
WHO IS IN CHARGE IN THE FINANCIAL DEPARTMENT?
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FINANCIAL DEPARTMENT MANAGEMENT
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Once all elements of the financial management
process are identified, it is necessary
to develop the Financial Department.
The person
in charge of the financial department
in a small or medium-sized company holds
the title of Vice President, Finance,
or Financial Manager, or Controller.
This person is responsible for the development,
implementation, and maintenance of the
financial management system described
above. The execution of prime functions
within the financial department of larger
organizations may be allocated to two
managers, as illustrated below. (1)
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TWO
MAIN FUNCTIONS IN THE FINANCIAL DEPARTMENT
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The Controller
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The Treasurer
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16.
THE CONTROLLER
The
Controller is in charge of accounting services
and is usually responsible for a number of important
functions in the financial department, as outlined
below.
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FUNCTIONS
OF THE CONTROLLER
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No.
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Details
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1
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Design,
implementation, and maintenance of accounting
systems, including a computerized
system.
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2
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Collaboration
with auditors in preparing financial
statements for external users.
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3
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Evaluation
of the company's financial performance.
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4
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Design,
implementation, and maintenance of a
financial planning or budgeting system.
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