Processes of Financial Management

Planning and implementing

Financial planning is essential if a business is to achieve its goals. Financial planning determines how a business’s goals will be achieved.

The financial planning process begins with long-term or strategic financial plans. Long-term plans include a business’s planned capital expenditure and/or planned investments. Capital expenditure is what is spent on a business’s non-current or fixed assets. It is used to generate revenue and ultimately returns to owners and shareholders.

The long-term plans also cover planned sources of finance, spending on research and development, marketing and product development activities.

Planning processes involve the setting of goals and objectives, determining the strategies to achieve those goals and objectives, identifying and evaluating alternative courses of action and choosing the best alternative for the business.

Financial needs

To determine where a business is headed and how it will get there, it is important to know what its needs are. Important financial information needs to be collected before future plans can be made. This financial information includes balance sheets, income statements, cash flow statements, sales and price forecasts, budgets, bank statements, weekly reports from departments, break-even analysis, reports from financial ratio analysis and interpretation.

The financial needs of a business will be determined by:

the size of the business the current phase of the business cycle future plans for growth and development capacity to source finance — debt and/or equity management skills for assessing financial needs and planning.

Developing budgets

Budgets provide information in quantitative terms (that is, as facts and figures) about requirements to achieve a particular purpose. Budgets can be drawn up to show:

cash required for planned outlays for a particular period the cost of capital expenditure and associated expenses against earning capacity estimated use and cost of raw materials or inventory number and cost of labour hours required for production.
Budgets reflect the strategic planning decisions about how resources are to be used. They provide financial information for a business’s specific goals and are used in strategic, tactical and operational planning.

Operating budgets relate to the main activities of a business and may include budgets relating to sales, production, raw materials, direct labour, expenses and cost of goods sold.

Project budgets relate to capital expenditure, and research and development. Capital expenditure budgets in a business’s strategic plan include information about the purpose of the asset purchase, life span of the asset and the revenue that would be generated from the purchase.

Financial budgets relate to the financial data of a business. The predictions of the operating and project budgets are included in the budgeted financial statements.

Record systems

Record systems are the mechanisms employed by a business to ensure that data are recorded and the information provided by record systems is accurate, reliable, efficient and accessible.

Minimising errors in the recording process, and producing accurate and reliable financial statements are important aspects of maintaining record systems. The double entry system of accounting is an important control aspect. By recording all items twice, the entries can be seen to balance, and checks to find errors can be carried out quickly.

Financial risks

Financial risk is the risk to a business of being unable to cover its financial obligations, such as the debts that a business incurs through borrowings, both short term and longer term. If the business is unable to meet its financial obligations, bankruptcy will result.

Financial controls

Financial problems and losses prevent a business from achieving its goals. The most common causes of financial problems and losses are: theft fraud damage or loss of assets
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