Q 2 Applications of Financial Management in Joint stock companies Financial Management:
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. Joint Stock Company:
An organization that falls between the definitions of a partnership and corporation. This type of company issues stock and allows for secondary market trading; however, stockholders are liable for company debts.
What Does Finance Management Involve?
All companies need to pay their bills and still have some money left over to improve the business. Furthermore, a key goal of any business is to increase the value to its owners (and other stakeholders) by making it grow. Maximizing the owner's wealth sounds simple enough: Just sell a good product for more than it costs to make. Before you can earn any revenue, however, you need money to get started. Once the business is off the ground, your need for money continues whether it's to buy new road repair equipment or to build a new warehouse. Planning for firm's current and future money needs is the foundation of financial management or finance. This area of concern involves making decisions about alternative sources and uses of funds with the goal of maximizing a company's value. To achieve this goal, financial managers develop and implement a firm's financial plan; monitor a firm's cash flow and decide how to create or use excess funds; budget for current and future expenditures; recommend specific investments; develop a plan to finance the enterprise for future growth; and interact with banks and capital markets.
Developing and Implementing a Financial Plan:
One way companies make sure they have enough money is by developing a financial plan. Normally in the form of a budget, a financial plan is a document that shows the funds a firm will need for a period of time, as well as the sources and uses of those funds. When you prepare a financial plan for a company, you have two objectives: achieving a positive cash flow and efficiently invest access cash flow to make your company grow. Financial planning requires looking beyond the four walls of the company to answer questions such as: Is the company introducing a new product in the near future or expanding its market? Is the industry growing? Is the national economy declining? Is inflation heating up? Would an investment in new technology improve productivity?
o Monitoring cash flow An under laying concept of any financial plan is that all money should be used productively. This concept is important because without cash a company cannot purchase the assets and supplies it needs to operate or pay dividends to its shareholders. In accounting, we focused on the net income of firm. Cash flows are generally related to net income; that is, companies with relatively high accounting profits generally have relatively high cash flows, but the relationship is not precise. That's because net income can be generated from a variety of accounting transactions that do not directly impact a firm's cash on hand.
One way financial managers improve a company's cash flow is by monitoring its working capital accounts: Cash, inventory, accounts receivable and accounts payable. They use commonsense procedures such as shrinking accounts receivable collection periods, dispatching bills on a timely basis without paying bills earlier than necessary, controlling the level of inventory, and investing access cash.
o Managing Accounts Receivable and Accounts Payable Keeping an eye on accounts receivable-the money owned to the firm by its costumers-is one way to manage cash flow effectively. The volume of receivables depends on the financial managers' decisions regarding several issues: who qualifies for credit and who does not; how long costumers have to pay their bills; and how...
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