Question

What are the critical factors to consider in a company ́s financial management?

Considering the following:

1. Key elements in accounting(specifice lements)
2. The relevance of accounting in businesses
3. Financial accounting's role in communicating business results

Instructions: Write an essay answering this question and considering the 3 points given.

Answer 1

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

1. Scope/Elements

1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions.
2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.
3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:
   1. Dividend for shareholders- Dividend and the rate of it has to be decided.
   2. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

2. Relevance of Accounting in Business Organization

A business organization involves an individual or a group of people who collaborate so as to achieve certain commercial goals.

Planning Budget
Budgeting is a core factor in every business. Planning budgets help business to make strategies, save money and noticing any expenditure exceeding the budgeted amount. To make a budget you need various previous records. In order for these documents to be available, they must be very well maintained through accounting since they are the basis of planning and making budgets.

Banks and lenders
In order to get any loan from the financial institution, you must be able to present your financial status in acceptable order. So in order to make it, you need to have proper accounting system so as to present various books of records such as profits recorded, assets and liabilities, taxes paid among others. Financial institutions will scrutinize them carefully before landing to a decision of awarding loan.

Keeping Records
Every business needs to keep records and act upon them in order to run smoothly. In this case, accounting plays a big role in keeping records. All records are collected, organized, and interpreted in order to be communicated to the end users, therefore helping in making an economically viable decision which will lead to the positive productivity of the business organization.

Decision Making
Any economic or any decision regarding the business organization is made depending on the financial statement of the organization. A financial statement is as a result of accounting. Without proper accounting in a business organization, the executives can’t make a sounding decision since they will be operating in blindness hence making it impossible to achieve organization objectives.

Information to Investors
Financial statements and accounts are used to represent the organization to the stakeholders such as debtors, creditors, government, and investors, customers and employees. Many investors will run away from your organization if you lack financial records and accounts to presents so as they can know the business progress.

Reporting Profits
The key objective of any business is to make profits. Every business, being a small or large organization, must maintain accounting system so as they can ascertain what they are making on their business transactions. This also enables interested parties to make the decision on the progress of the business productivity.

Managing and Monitoring Cash Flow
Proper accounting systems will take care of working capital and any other cash requirements within the business organization.

3. ROLE
Accounting plays an important and useful role by developing the information for providing answers to many questions faced by the users of accounting information :
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(1) How good or bad is the financial condition of the business?
(2) Has the business activity resulted in a profit or loss ?
(3) How well the different departments of the business have performed in the past?
(4) Which activities or products have been profitable?
(5) Out of the existing products which should be discontinued and the production of which commodities should be increased?
(6) Whether to buy a component from the market or to manufacture the same?
(7) Whether the cost of production is reasonable or excessive?
(8) What has been the impact of existing policies on the profitability of the business?
(9) What are the likely results of new policy decisions on future earning capacity of the business?
(10) In the light of past performance of the business how should it plan for future to ensure desired results?
Above mentioned are few examples of the types of questions faced
by the users of accounting information. These can be satisfactorily answered with the help of suitable and necessary information provided by accounting.