Understanding financial management for start-up

What is financial management?

Financial management is a process of making decisions for the deployment of assets in successful ventures and secure investments with a consistent return on investment (ROI). It covers cash management decisions, salary payments, electricity bills, loan repayment, inventory maintenance, and raw material purchase. Besides, this is also viewed as financial control, which can be accomplished by a variety of techniques such as relationship analysis, financial forecasting, and cost and profit control. 

Financial management specialists are in charge of allocating funds in an efficient manner to ensure the organization’s financial stability and growth. They are responsible for strategic planning, arranging, directing, and controlling a company’s or institute’s financial endeavors which cover cash management decisions, salary payment, electricity bills, loan repayment, inventory maintenance, and raw material purchase.

Financial Management Objectives

Besides, ensure adequate returns to shareholders, which will be determined by earning capability, the market price of the share, and shareholder expectations. Here are some more financial management goals.

  • Assessing capital requirements: Financial managers must consider issues such as the cost of current and fixed assets, the cost of marketing, the need for buffer capital, long-term operations, and human resource costs, among others. Successful companies have clearly defined short-term and long-term financial projections.

  • Resource optimization: Great financial managers can navigate many scenarios by making the most use of existing financial resources. This would minimize cash burn while increasing cash churn to maximize ROI.

  • Capital structure determination: A company’s capital structure is the framework that affects decisions such as debt-equity ratio in the short and long term.

  • Developing effective financial policies:  There is a need to develop effective financial policies that govern cash management, lending and borrowing, and so on.

Scope of financial management

Understanding the business requirements, planning and controlling all corporate transactions, maintaining firm assets such as cash, machinery, and land, tracking associated costs, and assuring the corporation’s profit are all part of the scope of financial management. Therefore, we’ve broken down the three most crucial aspects to consider while managing your company’s finances.

1. Financial Planning

Financial planning is the process of estimating the capital required to carry out the business activities of an organization. The planning process target to develop a comprehensive financial strategy to achieve long-term financial objectives. This is the process of developing financial policy in regard to the provision of assets, investments, and the administration of an organization’s funds. 

Below are important steps in financial planning that you should focus on:

a. Determining the present financial status means identifying the situation in terms of revenue, expenses, liabilities, loans, and receivables.

b. Creating financial goals helps in performing an analysis and determining how current income will be spent in order to provide funds for investments to secure future financial security. 

c. Identifying alternative courses of action involves the process of identifying the factors that will affect the continuation of actions, new courses of action, and consideration of possible alternative solutions that can lead to more effective decisions.

d. Evaluating options requires taking into account the conditions under which the business activities will be carried out, the organization’s values, and the existing economic situations in the environment. It must be examined where the assets will be spent, what sort of production costs will be made, as well as the risks, and which information will be used to make relevant decisions.

e. Developing and implementing a financial action plan include devising a strategy, i.e. deciding how to achieve financial objectives. All employees must follow the financial action plan in order to provide assets, invest, maintain inventories, and supply shares, bonds, or mutual funds.

f. Reevaluating and amending the strategy entails tracking the plan’s implementation in real time, examining financial decisions, and adjusting to new developments in personal, societal, and economic elements. The evaluation will help the organization to meet its financial objectives.

Source: European Journal of Business and Management

2. Financial budgetting

Budgeting and planning are two important methods used in financial management. Although they share many similarities, there are significant variances in how they operate. Opposite to planning, financial budgeting focuses on short-term processes which track weekly or monthly expenses. This method focuses on how you will allocate your financial resources to cover various expenses. By doing this, you will have a better understanding and awareness of your spending. Thus, unnecessary costs can be eliminated from your budget.

To make it clear, this is the difference between planning and budgeting

Financial planningFinancial budgeting 
Estimates the cost that the company will need to keep its cash flow positive and allocate funds for growth.Distributes the funds that are accessible to the organization to cover the costs of various expenses.
Financial strategy to achieve long-term financial objectivesFocussed on where the fund spent in the short-term process

3. Managing risk

Financial risk management strategies are plans of action or policies developed to address various types of financial risk. The methods are critical for any company or individual to manage the financial risks that come with functioning in the economy and financial system.

Risk can come in many forms such as;

  • Unemployment or income loss: this includes unemployment, underemployment, health concerns, disability, and untimely death.

  • Risk of greater or unexpected expenses: this involves incurring higher expenses than budgeted or dealing with unanticipated emergency expenses.

  • Risks associated with assets/investments include potential decreases in asset/investment value as well as asset damage and theft.

  • Debt or credit financing risks include not being able to service credit card debt, asset loans, mortgages, and so on.

How to manage your financial risk?

Risk management can assist lower losses while still ensuring that financial objectives are reached. Inadequate risk management, on the other hand, can have serious consequences for businesses, individuals, and the economy. Thus, risk management is really crucial, therefore, here’s a list of techniques that you can refer to when managing your business risk. 

  • Avoidance: The most obvious strategy to minimize risk is to avoid it entirely. Some investors make investing decisions by excluding volatility and risk entirely. This entails selecting assets with little to no risk.

  • Retention: This method means embracing whatever dangers that come your way and realizing that they are unavoidable.

  • Sharing: This strategy involves two or more persons sharing a portion of the risk. Reinsurers, for example, cover risks that insurance firms cannot handle on their own.

  • Loss Prevention and Reduction: Rather than eliminating the possibility of risk, this technique seeks to minimize losses by preventing them from spreading to other areas. Diversification could help investors decrease their losses.

  • Risks can be transferred from one party to another. For example, health insurance entails you passing on the risk of coverage to your insurer as long as you pay your payments on time.

Source: Investopedia

The bottom line is that financial management is critical to the success of any business. Many factors are involved, such as budgeting, planning, and risk management, all of which must be carefully handled for a business to attain its full potential. Companies that master these foundations will remain financially secure while expanding their business in a sustainable manner. Businesses have more influence over their success when they use good financial management practices. For more business tips, follow our media social on Facebook!

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