Understanding Financial Management

This report provides an understanding of finance within the context of an organization. It discusses the sources of finance, the range of financial stakeholders, the importance of cash flow forecasting and management, and the assessment of business performance. It also explains the purpose of main financial documents used within the organization. The report highlights the role of financial performance indicators in monitoring the achievement of objectives and the value of recording financial management information. The subject is financial management and the course code is B10821.

B10821
Understanding financial
management

Table of Contents
INTRODUCTION...........................................................................................................................3
1. Understand finance within the context of an organization.......................................................4
1.1 Describe the organization’s sources of finance.................................................................4
1.2 Analyze the range of financial stakeholders and explain their various expectations of the
organization.................................................................................................................................6
1.3 Explain the importance of cash flow forecasting and cash flow management to the
organization.................................................................................................................................8
1.4 Provide a general assessment of business/organizational performance using appropriate
financial measures.....................................................................................................................10
2. Understand the value of recording financial management information.................................11
2.1 Explain the role of financial performance indicators in monitoring the achievement of
objectives...................................................................................................................................11
2.2 Explain the purpose of main financial documents used within the organization............11
3. Understand budgets for the management of own area of operation.......................................12
3.1 Explain the process of budget setting used in the organization......................................12
3.2 Explain how to use budgetary techniques to contribute to controlling cost in own area of
operation....................................................................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
The purpose of this report is to have better understanding of finance within the context of
organization. There are basically two types of resources debt and equity to raise fund for any
company. Financial stakeholders are those internal and external parties which have stake in the
business like managers, investors, banks and various others. Cash flow management is the part of
forecasting of future cash to be coming to the organization and can be measured by measuring
actual result with forecasted expectations. The project also discusses about budgetary techniques
and process of setting budget for an organization. Today finance is becoming the core activity for
every business besides statistics; as this accounting tools help business in making set up plan
through trend analyses, forecasting, demand forecasting and capital budgeting.

1. Understand finance within the context of an organization
1.1 Describe the organization’s sources of finance
Sources of finance are the alternatives available with organization to raise funds
required for business. These funds are usually for long-term or say non-current
liabilities for the organization. Finance can be raise through two sources; debt and
equity, where debt financing are the borrowings through issuing debentures, borrow
from bank or any other non-banking institutes. On the other hand; equity funding is
basically raising funds through issuing shares (Van Horne James, 2002). Funds can be
raised on three basis; period, ownership basis and generation of source:
Long term equity Medium term Short term
 Equity shares
 Retained
earnings
 Preference
shares
 Debentures
 Loan from
financial
institute
 Bank loan
 Public deposits
 Loan from
financial
institute.
 Trade credit
 Factoring
 Banks
 Commercial
paper
On the basis of Period

On the basis of ownership
Owners Fund Borrowed Funds
 Equity shares
 Retained
Earnings
 Debentures
 Loans from banks
 Loans from
financial
institutions
 Public deposits
 Lease financing
On the basis of generation of sources
Internal Sources External Sources
 Equity share
capital
 Retained
earnings
 Financial institutions
 Loan from banks
 Preference shares
 Public deposits
 Debenture
 Lease financing
 Commercial papers
 Trade credit
 Factoring

1.2 Analyze the range of financial stakeholders and explain their various
expectations of the organization
Stakeholders: They are the person having personal or business interest in company
because any change in organization has direct impact on them. The common thing in all
stakeholders is they are well-wisher of organizations and always want growth of
company and business.
Stakeholder analysis: It is a process of determining those people having interest in
organization before the project begins and grouping them according to various levels of
their participation (Higgins and Reimers, 1995).
Financial stakeholders: These are the persons or parties having direct impact on their
profit with the firm’s decisions and earnings. In other word; their profit and loss
occurrence is dependent on organizations performance. Financial stakeholders show
their presence in the form of Internal and External stakeholders. Some of the financial
stakeholders are discussed below:
Here the organization taken for stakeholder analysis is based on financial institutions
Internal Stakeholders:
1. Directors: They are responsible for taking sensitive decisions for the company and
have direct impact; as poor performance could result in cutting in salary or
sometimes loss of job.
Expectations: They expect a good structure of commission from company and also
decision power; and more ownership within organization.
2. Business owner: Also called first stakeholder of any company. Major impact on
owner is seen of any organization.
Expectations: They have expectation that organization will grow at constant rate
and become number one service provider and get large exposure among customers.

3. Employees: These are the workers or live assets of the company. They get direct
impact of organization’s performance on their salary. For instance; in boom period
they get incentives, bonuses and hike in salary and in recession period their salaries
get halved.
Expectations: They expect job security, good incentives for their performance and
reward for their big achievement. Besides this; they also expect protection on site
and get medical benefit on time (Madura, 2020).
External Stakeholders:
1. Creditors: These are the suppliers who deliver raw material to company on
debt basis. If company has good performance than they will get more orders
and hence gets more revenue.
Expectations: They usually have expectation that company will place large
order for longer period of time and payback the amount on time.
2. Investors: These are the parties who have invested in company either through
purchasing some proportion of ownership or having partnership with business
owner of the organization. Any profit and loss occurrence can directly impact
the earnings of this stakeholder (Cornett and Saunders, 2003).
Expectations: They expect high growth more return on investments and
participation in decision making. Additional to this; they also expects mild risk
taken by the company not to compromise with solvency.
3. Financial institutions: These stakeholders are the money lenders to
organizations for startup of any new project. They receive monthly installment
from the company for the money owned.
Expectations: They expect more growth for lending more money for new
projects and timely payment. They don’t expect any insolvency from client
especially organization.
4. Shareholders: These stakeholders are the equity or preference holders of the
company and have direct impact on their earning through organizations better
performance.
Expectations: They expect more dividend or high market price for their shares.

5. Government bodies: These stakeholders are the regulatory authority who
regulates rules and regulations for all industries.
Expectations: They expect proper following of rules from company and also
expect for growth rate to increase employment rate and better economy.
1.3 Explain the importance of cash flow forecasting and cash flow
management to the organization
Best practice for cash flow forecasting:
 Focusing on both short and medium term forecasting: Short term forecasting is
done mainly to cover 30 days, daily and weekly analysis, on the other hand;
medium term forecasting is done for the period of monthly to annually (Brigham,
1996).
 Automation tool installation: Some automation tool such as trend analysis, linear
regression method, moving average method and SAP tools helps organizations in
automatically calculate future cash flows on the basis of current data.
 Reviewing cash flow forecasting variances on regular basis: This is the best
practice; and should be done on regular basis to identify any big variances between
actual result and projected cash inflows and outflows to timely execute solutions
and improve the quality of forecasts.
 Creation of various scenarios: Scenarios are good to analyze future outcomes and
also to find independent variables which can directly impact the dependent
variables which is cash inflows and outflows.
Best practices for cash flow management:
 Selection of banking partners: Banks are now doing multiple functions like
automated process of payroll, accounts payable, electronic data interchange (EDI),
affordable outsourcing and data protection.

 Developing cash forecasting: With irregular cash inflows and higher association
of variance risks; it is preferred to do rolling budget forecasting; which involves
continuous evaluation of budgets to maintain accuracy of projected data.
 Improving Investment yields: Through effectively management of portfolio
within organization; company can improve investment yield by avoiding non-
moving assets and making fund idle (Brigham and Ehrhardt, 2013).
 Reviewing cash management: Making strategies and plans regarding cash
management is not enough; regular testing and removing bug and error can make it
more effective.
 Centralize infrastructure: Organizations having branches in more than one
country should adopt centralize handling of data and information’s or it should built
centralized server which is integrated to other branch’s server to get timely data and
provide full control over their cash transactions.
Importance of cash flow forecasting:
 Prepare in advance for any shortage of fund: Through cash flow forecasting any
company can meet funds required for new project or payment to creditors. Urgent
requirement of fund can only meet; when firm prepared for same and ready with
alternatives.
 Tells about opportunities and threats: Projected cash flow shows opportunities
and threats related with adopting new project. It also tells about any hurdle in long
term growth of the business.
 Shows projected growth of organization: How company will grow and at what
rate can only answer by cash flow forecasting.
 Establish control over unnecessary utilization of cash: Through cost volume
analyses; organization can track where the funds come from and where it is utilized
and what impact it falls on productivity of operations.
Importance of cash flow management:
 Better utilization of funds: By making proper portfolio; organization can better
utilize its idle funds for generating more cash inflows.

 Improves non-moving assets: Non-moving assets are those equipments and
prosperities which are not being utilized by business to convert into cash; through
proper management these assets can be minimized.
 Improves liquidity and solvency: Through avoiding wastage of resources and
selecting proper funding alternatives; organization can improve liquidity and
solvency (Fabozzi and Peterson, 2003).
 Minimize wastage of resources: Effective planning and controlling of resources
minimize the unnecessary consumption of funds.
1.4 Provide a general assessment of business/organizational performance
using appropriate financial measures
Business performance can be assess in three ways; by comparing actual results with
competitor having same industry and services, matching past data of company and by
measuring actual data with reference to budgeted one. Some of the useful assessment
tools helpful in determination of results are discussed below:
 Liquidity ratios: These ratios show the liquidity of company; as liquidity means
how easily organization can cover its current liabilities with available funds. Some
of the liquidity ratios tools are current ratio and quick / acid test ratio
 Efficiency ratios: These are effective tool to determine the performance of
collections, cash flow and operational results. Some of the tools of efficiency ratios
are inventory turnover ratio, average collection period and debtor’s turnover ratio.
 Profitability ratios: These ratios show how much proportion of earning is gained
by business with comparison to investment. Examples; net profit margin, gross
profit margin, return on investment and return on equity.
 Leverage ratios: It tells about long-term solvency of a company and tells about at
what extent long-term debt can be used to support organization. Examples of
leverage ratios are; Debt-to-equity and debt-to-asset (Block, Hirt and Danielsen,
1994).

2. Understand the value of recording financial management
information
2.1 Explain the role of financial performance indicators in monitoring the
achievement of objectives
1. Settlement of KPIs: Financial performance helps organization in setting key
performance indicators to match actual performance with objectives set by firm.
2. Setting up monitoring and measurement systems: Financial performance plays a
major role in setting monitoring and measurement systems through providing
effective tools of analyses of data.
3. Collecting and recording data: Financial indicators supports achieving objectives
through accurately collection of data and recording it without any error; which helps
company in setting proper objective.
4. Helps in data analysis: Through various tools such as profitability ratios,
comparative balance sheet, trend analysis, leverage ratios, etc. it helps organization
to properly interpret data with original results; to find any misleading factors and
observe it to further improvement of same (Rose and Hudgins, 2006).
5. Use of effective reporting: Financial performance indicators has a role to show
results with effective and simple to read reports; which helps management in
identifying reasons for growth and failure in achieving of goal.
2.2 Explain the purpose of main financial documents used within the
organization
Financial documents are also known as financial statements which are used for
reporting financial information like balance sheet, income statement and cash flow
statement. The purpose of main financial documents used within organization is
discussed below:
Income Statement: This financial document is helpful in showing total earnings of the
business at the end of the year. It also indicates various variables and non-variables

expenses and plays important role in identifying earning per share, distributable profit
and retained earnings of organizations.
Balance Sheet: It well known for showing financial position of the company. It
grouped assets and liabilities separately to show where the various sources of fund are
utilized to acquire current and non-current assets. It indicates financial strength of
organization (Stern, Stewart III and Chew, 1995).
Cash flow statement: It shows liquidity of a company through tracking; from where
cash is coming and where it is utilized. This statement has importance for internal
stakeholders like managers and directors to know how much cash business required in
future meeting working capital requirements.
3. Understand budgets for the management of own area of operation
3.1 Explain the process of budget setting used in the organization
1. Communication within executive management: The first step in making budget
process is to communicate the plan for budget to CEO, COO and CFO regarding
requirement of budget plan for next fiscal year.
2. Establishing objectives and goals: After successfully communicating needs for
preparing budget forecasting; setting up of goals and objectives which can be met by
organization within a year has done.
3. Developing detailed budget: On the basis of various financial documents such as
income statement, balance sheet and cash flow statement; a detailed distribution of
various costs done and also sources for achieving estimated revenue mentioned.
4. Compilation and revision of budget model: After go through above three steps;
the fourth step is to revised and test for error in budget model (Rosen and Granbois,
1983).
5. Budget committee review: Final budget is reviewed by board of directors and
committee to check the feasibility of budget and changes in revenue if implemented.

6. Approval of budget: Finally with no objection from budget committee; the
available budget is approved for implement under proper supervision and
monitoring and controlling variances.
3.2 Explain how to use budgetary techniques to contribute to controlling
cost in own area of operation
1. Communicating targets within whole company: Budgetary techniques can be
used to communicate forecasted mile stone as a target and clearly communicate it
within organizations and also take feedback for the queries and confusion within
staff to control excess costs spending by them.
2. Providing measurement tools: Through effective measurement tools like trend
analysis, regression model, scenario analyses and financial documents; budgetary
techniques used to match actual performance with budgeted one and supports to
control cost which raises the variation.
3. Set targets: Targets are set by company through budgetary technique use; targets
helps in controlling cost which generates difference gap between variations.
4. Cost volume analysis: This analyses categorized costs according to their volume
and later match with their value added to firm. This technique is used to determine
separately about efficient and non efficient cost and control it.
5. Co-ordination of various activities: As budget is made separately for every
department; budget technique is used to build co-ordination between various
activities; as all activities together integrated to impact final result. And proper co-
ordination can help company in minimizing and controlling their cost and expenses.

CONCLUSION
On the basis of report analysis it can be concluded that short and medium term forecasting would
help in more accuracy in results. Scenario also shows best and worst results on the basis of
modification in independent variables. These functions help in proper cash flow management of
organizations. This practice will help organization to identify future threats and take proper
remedies in advance to manage cash properly.

REFERENCES
Books and Journals
Block, S.B., Hirt, G.A. and Danielsen, B.R., 1994. Foundations of financial management. New York:
Irwin.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Brigham, E.F., 1996. Financial management theory and practice. Atlantic Publishers & Distri.
Cornett, M.M. and Saunders, A., 2003. Financial institutions management: A risk management approach.
McGraw-Hill/Irwin.
Fabozzi, F.J. and Peterson, P.P., 2003. Financial management and analysis (Vol. 132). John Wiley &
Sons.
Higgins, R.C. and Reimers, M., 1995. Analysis for financial management (No. s 53). Chicago: Irwin.
Madura, J., 2020. International financial management. Cengage Learning.
Rose, P. and Hudgins, S., 2006. Bank management and financial services. The McGraw− Hill.
Rosen, D.L. and Granbois, D.H., 1983. Determinants of role structure in family financial
management. Journal of Consumer Research, 10(2), pp.253-258.
Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. Wiley.
Stern, J.M., Stewart III, G.B. and Chew, D.H., 1995. The EVA® financial management system. Journal
of applied corporate finance, 8(2), pp.32-46.
Van Horne James, C., 2002. Financial Management & Policy, 12/E. Pearson Education India.