Question

Imagine that you have established a small consulting practice as a limited company employing three other engineers and a secretary/bookkeeper. You also employ other casual workers to assist during peak times.
What professional advice would you seek to establish a financial management system for the company?. Outline the functions and essential elements of such a system.

Answer 1

Answer:

Professional Advices:

• To ensure the regular and adequate supply of funds to the concern;
• To ensure adequate return to the shareholders which will depend upon the earning capacity, market price of share, expectation of shareholder;
• To ensure optimum fund utilisation;
• To ensure safety on investments, ie fund should be invested in ventures so as to get required rate of return;
• To plan sound capital structure.

Functions of Financial Management:

1. Estimstion of capital requirements
2. Determination of capital composition
3. Choice of sources of funds
4. Investment of funds
5. Management of cash
6. Disposal of surplus
7. Financial controls

Elements of Financial Management:

• Investment Decision:- it includes investment in fixed assest (called capital budgeting), investment in current assets inorder to esure proper management of working capital.
• Financing Decision:- this relates to raising of finance from various sources which depends on the decison of type of source, period of financing, cost of financing and return there by.
• Divident Decision:- the finance manager has to take decision with regard to net profit distribution. ie, net profit is generally divided into two;

(a) Dividend for shareholders- dividend and rate it has to be declared;

(b) Retained profits- amount of retained profit has to be finalized which will depends on expansion and diversification plans of the enterprise.