WHAT IS FINANCIAL MANAGEMENT?
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Учебник: Агабекян И.П.
А23 Английский язык для менеджеров/ И.П. Агабекян, —- Mосква: «Проспект», 2019 — 352 с (Высшее образование).
TEXT 1. WHAT IS FINANCIAL MANAGEMENT?
Financial management is the use of financial statements that reflect the financial condition of a business to identify its relative strengths and weaknesses. It enables to plan, using projections, future financial performance for capital, asset, and credit requirements to maximize the return on shareholders' investment. Successful financial management is the ability to effectively manage the financial resources of a business enterprise.
Financial management in a small firm is different from that of a large corporation. One difference is that small firms do not have the opportunity to publicly sell issues of stocks or bonds in order to raise funds like large corporations do. The owner-manager of a small firm must rely primarily on trade credit, bank financing, lease financing, and personal equity to finance the business.
On the other hand, many financial problems facing the small firm are very similar to those of larger corporations. For example, the analysis required for a long-term investment decision such as the purchase of heavy machinery or the evaluation of lease-back alternatives, is essentially the same regardless of the size of the firm.
The main task of financial managers in both small firms and large corporations is the effective management of working capital. Net working capital is defined as the difference between current assets and current liabilities and is often called the “circulating capital” of the business. Lack of control in this key area is a primary cause of business failure in both small and large firms.
The business manager must be attentive to changes in working capital accounts, they must understand the cause of these changes and the importance of these changes for the financial health of the company. Working capital has its major components:
1) Cash and Equivalents
This most liquid form of current assets is cash and cash equivalents (usually marketable securities or short-term certificate of deposit). To understand if the cash budgeting system is well-planned and maintained, key questions have to be answered:
1. Is the cash level adequate to meet current expenses as they come due?
2. What are the timing relationships between cash inflows and outflows?
3. When will peak cash needs take place?
4. What will be the magnitude of bank borrowings in case of cash shortfalls?
5. When will these borrowings be necessary and when may repayment be expected?
2) Accounts Receivable
Almost all businesses are required to extend credit to their customers. Key issues in this area include:
1. Is the amount of accounts receivable reasonable in relation to sales?
2. On the average, how rapidly are accounts receivable being collected?
3. Which customers are “slow payers?”
4. What action should be taken to speed collections where needed?
3) Inventories
Inventories often make up 50 percent or more of a firm's current assets and therefore, need close inspection. Key questions, which must be answered in this area, are:
1. Is the level of inventory reasonable in relation to sales and the operating characteristics of the business?
2. How rapidly is inventory turned over in relation to other companies in the same industry?
3. Is any capital invested in dead or slow moving stock?
4. Are sales being lost due to inadequate inventory levels?
5. If appropriate, what action should be taken to increase or decrease inventory?
4) Accounts Payable and Trade Notes Payable
In a business, trade credit often provides a major source of financing for the firm. Key questions to investigate in this category are:
1. Is the amount of money owed to suppliers reasonable in relation to purchases?
2. Is the firm's payment plan good enough for the firm's good credit rating?
3. If available, are discounts being taken?
4. What are the timing relationships between payments on accounts payable and collection on accounts receivable?
5) Notes Payable
Notes payable to banks or other lenders are a second major source of financing for the business. Important questions in this class are:
1. What is the amount of bank borrowings employed?
2. Is this debt amount reasonable in relation to the equity financing of the firm?
3. When will principal and interest payments fall due?
4. Will funds be available to meet these payments on time?
6) Accrued Expenses and Taxes Payable
Accrued expenses and taxes payable represent obligations of the firm on the date of balance sheet preparation. Accrued expenses represent such items as salaries payable, insurance premiums payable, and similar items. Of primary concern in this area, particularly with regard to taxes payable, is the magnitude, timing, and availability of funds for payment. Careful planning is required to insure that these obligations are met on time.
It is important that although the working capital accounts above are listed separately, they must also be viewed in total and from the point of view of their relationship to one another:
1. What is the overall trend in net working capital?
2. Is this a healthy trend?
3. Which individual accounts are responsible for the trend?
4. How does the firm’s working capital position relate to similar sized firms in the industry?
5. What can be done to correct the trend, if necessary?
Assignment. Answer the questions:
1. What is called financial management?
2. What does financial management enable to do?
3. What is successful financial management?
4. What is the main task of financial managers?
5. What is net working capital?
6. What are major components of working capital?
7. Give definitions to: a) cash and its equivalents, b) accounts receivable, c) inventories, d) accounts payable, e) notes payable, f) accrued expenses.