Financial Management

Financial management refers to having a clear picture on the timing of cash inflows and outflows.

A business requires various forms capital to operate effectively. These forms of capital are classified according to use.

Forms of capital

  1. Start-up capital- funds and assets that an entrepreneur(s) requires to to start running a business venture.
  2. Asset capital- this refers to the capital contributed in form of property of any kind such as buildings, fridges, motor vehicles etc.  
  3. Working capital- this refers to the resources that are used by the business to carry out its day to day business.

 

Financing the business

  • Personal savings-most common source of funds that comes from savings from other income generating activities or other sources of income.
  • Business profits- entails proprietor setting aside profits to re-plough into the business.
  • Loans- funds borrowed from financial institutions that will attract interest payment.
  • trade credit- finance coming from suppliers through provision of goods and services on credit

Financial decisions that entrepreneurs make

From time to time, the financial management team makes crucial decisions to ensure that they stay in business and also that they realize the highest possible returns from their investments.

  • How much money should l bank into the business bank account
  • How much money should l commit to restocking
  • Where do l get money for special projects
  • How much money should go to personal drawings
  • How much money should go towards labour costs
  • What do l do with excess cash
  • Which bank do l bank with and what are its pros and cons
  • When and where do l apply for a loan
  • How much money do l set aside for incidental costs

Forms of cash in a business cycle:

  • Stocks
  • Fixed assets
  • Debtors
  • Solid/hard cash

It is important that at any given time the entrepreneur knows where his or her money is in the business cycle context.  This helps to manage funds in a way that keeps the business liquid enough to meet its financial obligations as they fall due and also carry out all daily business transactions that may need cash. On the other hand, money should not lie idle or result in overtrading.

Good financial management practices

  • Always make a cash requirement forecast for every period
  • Have a clear picture on the speculation of cash inflows and outflows
  • Don’t keep too much cash
  • Research on profitable income generating activities for reinvestment
  • Any excess funds should always be banked

A business budget

A budget is one way that can help ensure that good financial practices are being followed. A budget template below shows columns of different income and expenses elements.