IMPORTANT ELEMENTS OF MANAGERIAL FINANCE

Running a business or working in a big business venture sounds exciting and adventurous. It’s a common impression that working in such environments is inspiring, and life is easy, but this is often not the case. There is immense pressure that is not visible to the outer world. Also, the business world is continuously evolving with innovations, technologies, challenges, shifts, etc. and there is no such thing as one single template that can be followed or replicated. Therefore, every step forward can never be referenced from historical studies.

In such times, business owners or business managers need to deal with multiple decisions in various departments relating to productions, human resources, finance, sales revenues, administration, etc. It requires a lot of depth and scope to manage them effectively. However, finance is undoubtedly the king among all. Any turmoil or shift in the financial strategy of a business affects anyone and everyone within the industry. Similarly, unlike other departments, repercussions of financial decisions can reflect in the bottom-line of a company immediately. Therefore, without expertise, strict control, and practical financial management, many businesses will not be able to survive.

One additional element similar to managing one department of the business and managing the whole business altogether is that you need some people to keep an eye on the day to day operations and transactions. It includes human resources working towards achieving the financial stability of a business from a macro perspective. Financial managers provide and manage the financial strategy to meet the business objectives, and other employees focus on executing this strategy. No strategy is effective enough if not executed well, and similarly, no operations can bear fruit without a concrete plan in place.

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Therefore, it is crucial to have the owners or senior professionals focus on the managerial side of finance to get the bigger picture alongside the industry dynamics and virtues. Since it is highly crucial for the health of the business, people designated for it should receive extensive training. An online managerial course is available among many resources available to fulfill such requirements.

Since we have set quite a premise on the importance and critical nature of managerial finance, let’s explore some of the vital elements of it along with some practical examples.

  • FINANCIAL REPORTING:

No matter what kind of business you own, financial documentation and the presentation of it are crucial. If there are no reporting mechanisms in place, the overall progress of the company cannot be assured. Financial reporting fulfills two requirements for any business. Firstly, to share business results in a familiar and comfortable format (suggested by the relevant authorities) for everyone to understand. Secondly, to provide detailed analysis reports about the business for the various stakeholders, shareholders, and employees. Financial reporting is the epitome of future business decisions by key people in the board.

Let’s take a company, for example, called Company X, to understand this concept. Company X has been operating for one financial year and has achieved promising growth. Now, the CEO of the company wants to display its results to the shareholders and investors to gain additional capital for future expansion plans. Therefore, the CEO has the financial managers and analysts provide detailed statements and reports backed with insights attested with a comparative analysis, financial ratios, industry assessments, etc. Without financial reporting, he would not be able to convince shareholders and investors to invest more with the company as they will be unable to see the returns they can receive by doing so. This could prevent the company from growing further.

  • STRATEGY, PLAN, AND PREDICTION:

These are the core requirements of any managerial finance professional at work. Extensive strategy development and planning methodologies are required to predict and analyze future revenue streams, cost centers, profits, related capital expenditure, etc. Then it will be possible to suggest a plan of action to execute such programs and maneuver them accordingly as needed.

Remember Company X in the previous example? Now, Company X has performed significantly in their line of business and has decided to add another stream of income through new product categories. Financial managers may need to predict future revenues, market share, and the relevant impact on the income statement, balance sheet, and cash flow comments and provide suggestions to make sure that the plan is realistic and achievable. Financial managers typically use multiple frameworks and tools like market research, time regression analysis, DELPHI Model, etc. to determine desired outcomes.

  • CASH MANAGEMENT:

Effective cash management means that the business has enough cash at the bank and in hand to meet its short term financial obligations, and it won’t hurt its business activities. Cash management is a complex task for many businesses, and it is monitored closely by senior managers.

Using the example of company X, let’s say they usually offer 30 to 60-day credit to their customers. Although their business is doing quite well, their cash position is not favorable. They are not able to pay their financial obligations and find it hard to manage. Through consultation with their financial managers, they were given a suggestion to firstly introduce 1-2% discounts for early paying customers and factoring for low-paying customers to get the receivables sorted on an early basis. It will not only motivate customers to make their payments sooner, potentially increasing the constant income of cash, but it will also reduce the efforts for following up with customers who have not paid, thus reducing internal costs for human resources.

  • CAPITAL ALLOCATION:

Another crucial responsibility for professionals involved in managerial finance is understanding the financing needs of a business, such as acquiring assets for the company and maintaining a stable debt to equity ratio. Therefore, they need to strategize and provide plans to extract capital funds to allocate for the stated needs of the business.

Looking at our example with Company X again, let’s say they now require further capital for their new product development, and they are fully equity-based. It is the financial manager’s responsibility to understand and analyze the available debt options, the cost of debt financing, price comparison, and the recommendation for selection of the mode financing.

CONCLUSION

As we have seen already, having the right people as financial managers are as crucial as the business activities itself. Their competence and expertise are as relevant for the business like any other resource. A company’s progress and prosperity can easily be determined by the quality of financial professionals working in their team, as Jim Collins suggested in his book Good to Great, “Get the right people on the bus in the right seats.”

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