business 8 by TriAtmojo2012


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									Financial Management and Budgeting in Business

Importance of Financial Management

Finance is a key functional area of business management. This area is
commonly referred to as Financial Management. The term defines the
achievement of key financial objectives by making investment and
financial decisions. Essentially, it is the management of all the
processes associated with the efficient acquisition and deployment of
both short and long-term financial resources. Financial Management
assists an organisation's management to reach its financial objectives
such as the creation of wealth, solvency, liquidity, growth and return on
investment achieved through a process of financial planning, control and

Financial Control

Financial control consists of different strategies to manage finances
necessary to achieve the primary purpose of every business; which is to
earn profit. Budgets are the traditional financial control method and
provide a measuring basis which performance can be assessed. By engaging
in a yearly budgeting process a business can make plans and forecasts for
the year ahead. Control action should be taken when actual performance
appears not to be matching the outline of the budget. Therefore by
monthly monitoring of expenses, controlling methods can be put into place
when expenses becoming higher than figures stated in budget (such as
spending cut backs or extra working hours). And by determining the
reasons why figures do not match the yearly budget plan, a business can
therefore make necessary plans for this not to occur in the future.
Monthly monitoring of expenses is another example of a financial control.
Such data includes cash balance, total wages costs and hours worked key
sources of income, unusual or above budget expenditures.

Three Main Financial Statements

The 3 main financial statements necessary to analysis and improve on
finance viability:

1) Balance sheet - 'A statement of financial position that shows the
assets of a business and the claims on those assets'

2) Income Statement - 'A financial statement (also known as profit and
loss account) that measures and reports the profit (or loss) the business
has generated during a period.'

3) The cash flow statement - 'A statement that shows the sources and uses
of cash for a period'

By analysing these three financial statements on a regular basis a
business can proactively forecast problems or opportunities before they
arise. The 3 main financial statements are also considered as financial
controls as these statements are used to understand and interpret the
financial conditions of a business as a means of management and control.
The statements enable a business to set guidelines and policies that
enable growth and business success. An annual Profit and Loss statement
is considered the most important financial statement and UK businesses
are legally required to lodge a Profit & Loss Account with Companies
House. In regards to cash flow, cash inflows are payments for products or
services and interest on savings and investments. Cash outflows are a
combination of many things including purchasing stock, daily operating
expenses, fixed assets and government taxes. A business is also required
to produce a balance sheet annually for reporting purposes. It provides a
report of assets or liabilities.

Budgeting and Budgetary Control

A budget as a qualified statement, for a defined period of time, which
may include planned revenues, expenses, assets, liabilities and cash
flows. It is a short-term plan of working towards financial objectives.
There are several styles of budgeting, these styles include -

* Fixed - does not allow for variations

* Flexible - Adjusts or flexes

* Continuous or rolling - continually amended

* Zero-based - needs assessed

* Incremental - uses previous budget with increment

Budgets are necessary to provide a basis for control, helping identify
short-term problems and promote forward thinking. However, there is a
need for budgets to be adaptable if they become unrealistic due to sudden
changes in the business environment. This is known as 'Flexing the
Budget' (which simply means revising the budget).

A variance report is required to indicate whether performance is below or
above the budgeted level. It is the difference between the budgeted level
of costs and revenue and the actual levels of costs and revenues also
referred to as variance analysis. Budgets can also have a behavioural
effect motivating the management team and staff to achieve better
performance and help promote forward thinking.

Effective Business Planning

A business plan is made up of many elements but no business plan is
complete without this financial information. For business planning to be
effective, the budget and the three main financial statements (Profit &
Loss, Balance Sheet and the cash flow statement) must be taken into
consideration. A financial statement is the core of a business plan as
they are used to identify various business strategies. Financial planning
is interlinked with all elements of a business plan. Five key strategic
plans interlinked with a budget (plan); 1) establishing mission and
objectives, 2) undertaking a position analysis, 3) identifying and assess
the strategy options, 4) selecting strategic options, 5) perform, review
and control. By taking all of these elements into considering, a business
can create an effective business plan containing financial data and

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