Financial management in a company is about money management, which is the lifeblood of any business. It is important for a company to have money because only in this way can it acquire goods and make investments.
This means that only if an entrepreneur has money can he buy production plants, equipment, vehicles, and all other goods necessary for carrying out the business.
When we say that an entrepreneur must have money to buy goods, we mean that the firm must have liquid money (also called " corporate liquidity "). Alternatively, the company must be able to obtain this money by going to some bank, finance company or other lender.
Let's see specifically what it is.
Financial management: cash flows within the company
If an entrepreneur wants to buy a machine and does not have cash, he can try to get a loan from banks or somewhere else. This is why it is so important for the entrepreneur to keep financial management under control; because it deals with making decisions regarding cash flows in and out.
In fact, the money available to a company is used to purchase machinery, plants, patents, equipment and other assets, which in turn generate money for the running of the business. Having financial management "under control" means checking the correct "operation" of the company. The financial aspect should not be considered "isolated" from the rest of the management. On the contrary, the management of corporate finance is connected to all the other aspects of management, starting for example, from production which deals with the development of goods and services to be placed on the market. This function is "money consuming" in its way.
Human resource management is also a "money consuming" function. In fact, the entrepreneur has to pay the wages every month and these payments "absorb" liquid resources, ie money. On the contrary, for example, the marketing activities carried out by a company to generate revenues are instead a "money-producing" function. In summary we can say that all the activities carried out within a company produce and consume money, that is liquidity. This is why it is important for the entrepreneur to understand what are the aspects in his company that influence the production and the need for money, that is liquidity.
Financial management: cash flows
So a determining factor for the success of a business is the entrepreneur's ability to manage cash inflows and outflows. It's about managing so-called cash flows .
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Cash flows vary over time and are affected by management decisions. To understand the dynamics of cash flows, let's take a few examples.
In the event that an entrepreneur starts a business and decides to invest 1,200 Dollar in his business, a financial situation of this type occurs:
The entrepreneur decides to manage and start the business entirely with cash (see cash) and using only his own capital of $ 1,200.
Subsequently, the entrepreneur begins to purchase the raw materials necessary to carry out his business. This decision affects the company's cash flows as follows:
Cash money is no longer there because it has been used by the entrepreneur to buy raw materials . In the face of this, the value of the warehouse given by the purchase of the same raw materials has increased.
During the course of the activity, the entrepreneur makes new orders to suppliers to supply additional quantities of raw materials; but this time he asks the suppliers for an extension of payment. From a financial management point of view, we find ourselves in this situation:
The value of the warehouse increased (from $ 1,200 to $ 1,700) due to the new purchases of materials; as a result of these purchases, the entrepreneur contracted debts with suppliers for $500. The red arrow on the graph indicates the increase in payables to suppliers and the corresponding increase in the value of the warehouse.
It is clear that when the sales of the products begin, the financial services of the company changes again in this way:
Financial management: the final stage of transformation
Because the value of the stock decreases (from $1,700 to $ 500) against sales which in turn generate an increase in cash on hand ($ 400) and an increase in loans granted to customers (for $ 2,000). Profit (given, for example, by the difference between revenues - costs) appears in financial management as "undistributed profit".
Financial management: conclusions
This simple example has been reported to simplify the concept of cash flows and financial management . As you yourself can check, the cash flow situation has changed several times during management. In fact, at the beginning (phase 1) the cash value increased by $ 1,200 with the contribution of money by the entrepreneur. Then return (phase 2) to a value of zero due to the purchase of raw materials; following of sales, the cash value increased again by $ 400. The value of the credits increased by $ 2,000.
The value of the warehouse from a value of $ 1,200 increased by a value of $ 1,700 due to new purchases of materials; to then drop to $ 500 following sales The value of the debts has also changed over time.
As is evident from the example we have reported, the cash flows relating to the normal production cycle of the company influence both the current assets , such as the warehouse and the receivables from customers, and the current liabilities i.e. the payables towards suppliers.
It is therefore important for a company to know how to manage the financial aspect and the cash flows deriving from the management as a whole.
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