A BEGINNER’S GUIDE TO MANAGERIAL FINANCE

Managerial Finance is the branch concerned with the aspect of financial figures, instead of the statistics themselves. Rather than just calculating the revenue earned or costs incurred, the division analyzes the data, numbers, and values related to the business, it gauges the business’s performance and makes critical decisions based on them. 

Managerial Finance looks at financial figures related to different departments and products of the business to determine how well each one is doing. It assists with the implementation of business strategy and monitoring its effectiveness in achieving the company’s objectives. Managerial Finance aims to ensure the company’s finances are appropriately managed, and its resources are utilized in the best possible way.

There are multiple things which you must know about managerial Finance. In this article, we will discuss various critical features of managerial Finance.

1. Financial Reporting

This aspect of managerial Finance is about reporting the financial position and performance of a business to its management and stakeholders in a timely and easily understandable manner. Its objective is to analyze the financial statements of the business and provide detailed reports on the results to facilitate decision making. 

For instance, after the end of each fiscal year, the financial manager is often asked to provide detailed reports on the performance of the business. The reports note the business’s performance over the period by comparing it with past progress and the progress of its direct competitors. It allows the management to determine the real performance of a business. It assists in making decisions regarding how business strategy needs to be changed for the future. 

2. Working Capital Management

Working capital management is about managing the company’s cash, inventory accounts receivable, and accounts payable in a way that ensures sufficient liquidity at all times. Proper management of working capital is essential to the survival of the business and its financial stability in the short run. 

If the business does not have sufficient cash in hand to meet day-to-day expenses, its operations could come to an immediate halt. A financial manager prevents such situations by carefully managing its current assets and liabilities. For instance, if the business must offer credit to its customers to stay competitive, its cash inflows will be delayed as a result. The financial manager may overcome this problem by offering discounts for prompt payment and also negotiating good credit terms with the business’ suppliers to delay cash outflows. 

3. Forecasting

Financial forecasting involves predicting the future financial position of the business using several techniques. By analyzing past trends in performance, considering the current economic state of the industry as well as its plans for the future, the organization can create an estimated financial forecast. It helps businesses to plan how they will tackle any future financial problems or take advantage of any growth opportunities. 

If a business plans to expand, the forecast may show a shortfall of funds due to the increase in expenditure. The inability of the project to generate returns in its initial stages. Here, the finance manager can plan about how the shortfall will be met: such as through a loan or credit facility. 

4. Budgeting 

Another useful component of managerial Finance is budgeting. Like financial forecasts, budgets are also forward-looking, but instead of showing the expected future financial results, they represent what the business wants to achieve in the future. 

Budgets are useful because they provide a sense of direction for the business by setting out the financial outcomes it aims to achieve. They also act as a yardstick that measures the actual performance to ensure the company stays on track to achieve its goals. 

5. Investment Decisions

Every business is presented with new investment opportunities from time to time. However, before it chooses to invest in any of them, it must carry out an investment appraisal. The purpose of investment appraisal is to determine the attractiveness of any investment based on the financial value it generates for the business. Managerial finance professionals use a variety of techniques for this purpose, such as the Payback Period, Net Present Value, and Accounting Rate of Return. Their job is to suggest which investment decisions are worth taking based on the results of these techniques.

6. Performance Management

The performance management system measures and monitors performance across the organization. It looks at the performance of the organization as a whole and the products or departments as well.

The implementation of an effective performance management system tends to improve productivity and efficiency throughout the organization. It is because when employees know that they will be held accountable for their performance and rewarded when they meet targets. They are likely to put more considerable effort when personal goals are aligned with the organization’s overall objectives.

7. Funding Strategy

Every business has different funding options available to it (equity vs. debt), with each source coming with its pros and cons. A finance manager is required to provide the information to the management about each of these options. He evaluates these options and suggests the best one for the business’s needs as a means of assisting with the funding strategy. They must also decide the company’s debt to equity ratio and ensure to maintain the right balance between the two.

8. Business Valuation  

Business valuation involves determining the monetary value of a business unit or the business as a whole. Business valuation is needed in several circumstances, such as when arriving at a fair sales value to sell the business, merge the company with another one, or acquire an existing business. 

Managerial finance professionals use different techniques for business valuation, such as using book value, market capitalization, or earnings multiplier. 

9. Risk Management

Every business faces the risk of incurring losses due to factors such as changes in the price of raw materials, loss of significant contracts, and currency value fluctuations, to name a few. Finance professionals help manage the financial risk faced by the business by using various strategies. 

10. Dividend Policy

Financial management professionals are responsible for determining the magnitude of profits that should be paid out as dividends to shareholders and the proportion of profits to retain to be reinvested in the business. This decision is made after thorough consideration of different factors such as the earning trends of the company, the market price of shares, and the business’s funding needs for the future. 

Conclusion:

Managerial Finance forms an integral part of every business, regardless of its size and the industry it operates in. It deals with all the significant issues related to the financial management of a business. It is for this reason that a career in managerial Finance is always in demand. If you wish to have a career that involves financial planning and decision making, managerial Finance could be the ideal career option for you.

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