What is Financial Administration

Aims of Financial Administration

In addition to these pillars, finance managers support their firms in several ways, including but not limited to:

Maximizing profits

Explain how the increased cost of raw materials could cause an increase in the selling price of products.

Continuity of liquidity and cash flow

Ensure the company has sufficient finances to meet its responsibilities.

Ensuring compliance

Maintain compliance with state, federal, and industry regulations.

Developing financial scenarios

They are based on the company’s real state in addition to forecasts that account for the possibility of a variety of outcomes based on market conditions.

Create associations

Being able to communicate effectively with investors and boards of directors.

In the end, it comes down to adapting the appropriate management methods to the financial structure of the firm.

Financial management consists of four primary components:

Planning

The financial analyst calculates the amount of cash the company will need to maintain positive cash flow, increase or develop new services or products, and deal with unforeseen events. This information is also shared with business associates.

The planning process could be segmented into categories such as capital costs, T&E, workforce, operational and indirect expenses, and T&E.

Budgeting

The financial manager allocates firm finances to fulfill expenses such as rentals or mortgages, salaries, raw materials, staff travel and entertainment, and other responsibilities. It is preferable to have some remaining funds for unforeseen expenses and prospective business initiatives.

Businesses typically have a master budget, with sub-documents covering topics such as cash flow and operations; budgets can be both dynamic and adaptable.

Dynamic and static Flexible Budgeting

Static

It remains unchanged despite of significant changes to the assumptions made during the planning process.

Flexible

Adapts to alterations in the planning process’s underlying assumptions.

The management and evaluation of risk

Line-of-business leaders rely on their financial managers to evaluate and apply compensatory controls to mitigate a number of risks, such as risk management and evaluation.

Risk of market

Influences the company’s investment and, for publicly traded firms, the reporting process and stock performance. Additionally, it may reflect industry-specific financial risks, such as a pandemic that affects restaurants or the move of retail to a direct-to-consumer model.

Probability of credit loss

Consequences include, for instance, clients not paying their bills on time and a lack of available finances to meet obligations. This can have a detrimental impact on creditworthiness and valuation, so affecting the ability to borrow at advantageous interest rates.

Risk of liquidation

Finance teams must monitor cash flow, anticipate future cash needs, and be prepared to discharge working capital when necessary.

Operational Danger

Certain finance teams are unfamiliar with the term “catch-all.” It can include, for example, the possibility of cyber-attacks and the need to purchase cybersecurity insurance, as well as what disaster recovery and business continuity plans are in place and what the most effective crisis management procedures are when a top executive is suspected of misconduct or fraud.

Procedures

The finance manager creates protocols for the finance department’s secure and accurate handling and distribution of financial data such as invoices, payments, and reports. These processes also outline who is responsible for making financial decisions for the business and who is authorized to sign off on such decisions.

There are policy and procedure templates available for different types of organizations, such as this one for non-profits, so businesses do not need to begin with a blank slate.

Functions of Financial Administration

In addition, a financial manager’s responsibilities in these areas revolve around expenditure planning, forecasting, and management.

The FP&A function comprises the production of P&L statements, the analysis of which product or service lines offer the highest profit margins or generate the most net profit, the maintenance of the budget, and the forecasting and scenario planning of future financial performance.

Cash flow management is vitally crucial. Financial managers are responsible for ensuring there is sufficient cash in the bank to finance day-to-day operations, such as recruiting employees and purchasing raw supplies. This involves monitoring the flow of cash within and out of the organization, often known as cash management.

In addition to cash management, financial management includes revenue recognition, which is the process of reporting the business’s revenue in accordance with generally accepted accounting principles. The balancing of turnover ratios in accounts receivable is a crucial component of strategic cash management and conservation. This may sound simple, but it is not always so for all businesses. Customers may pay for your service months after receiving it. What is the point at which you decide to consider the cash “yours”? Do you alert your investors of this good news?

Five Tips for Enhancing Your Accounts Receivable Conversion Rate

Invoice regularly and precisely. If invoices are not paid promptly, the money may not be received on time.
Always specify the payment arrangements. It is impossible to enforce policies that clients are unaware of. Make sure to notify policy changes if you make them.
Provide many options payment options. The B2B payment options are now en route. Have you considered the option of employing a payment gateway?
Establish follow-up reminders. Don’t wait until the client is delinquent before initiating the collection process. By sending reminders, ensure that you are proactive without being obnoxious.
Provide discounts for cash or advance payments. Cash(less) is king in retail and can reduce AR expenses by making it easier for customers to make prepayments as opposed to using your usual credit terms.
Find out more about optimizing your AR turnover ratio.
In addition, maintaining financial controls includes comparing the company’s financial performance to its budgets and plans. Utilizing financial ratios, the financial manager evaluates the line items in the company’s financial statements to do the analysis.

Strategic Vs. Tactical Financial Management

At a tactical level, financial management processes govern the administration of daily transactions, the monthly close of financials, the comparison of real to planned expenditures, and compliance with tax and audit regulations.

At a higher strategic level, financial management is an integral part of vital financial planning and analysis (financial analyses and planning) and visioning activities, in which finance managers utilize data to assist line-of-business colleagues in making future investments, identifying opportunities, and building strong companies.

Importance of Financial Administration

A sound financial management system serves as the foundation for the following three pillars of good fiscal governance:

Strategizing

The process of establishing what must be achieved for an organization to achieve its long-term and short-term goals. For scenario planning, leaders want knowledge into their existing financial performance.

Decision-making

Providing the most up-to-date financial data and information regarding pertinent KPIs in order to aid business executives in choosing the optimal strategy for implementing their goals.

Controlling that each department contributes to the strategy, works within the budget, and is in line with the strategy.

Through excellent financial management, everyone is aware of the company’s direction and has a clear view of its progression.

Three Types of Financial Management that Exist?

These functions can be categorized into three broad categories of financial management.

Capital budgeting

It involves establishing the financial actions that must be taken for the company to attain its short- and long-term goals. Where should capital be invested to stimulate economic growth?

Capital structure

Determine how expansion or operations will be financed. When interest rates are low, taking on debt may be the most efficient course of action. Additionally, the corporation could solicit capital from private equity firms. Consider selling real estate or, if suitable, selling equity.

Administration of working capital

As we’ve discussed, it’s ensuring that you have enough cash on hand to sustain day-to-day operations, such as recruiting employees and purchasing raw materials for production.