Financial management in SMEs

Introduction

The financial management is in charge of two different functions as input to maximize the net present value of the investment of the owners of the company. On the one hand, it assumes responsibility for finances itself, the word finances can be understood as the fact of providing the means to meet payments. In this sense, finances cover financial planning, that is, the estimation of treasury income and expenses, the production of funds and the control and distribution of these funds.

Within the financial cycles of the company, there are entries and exits that are not regular currents (intermittent calls) and regular or continuous ones, which occur throughout the evolution of the company.

Maintaining adequate liquidity to pay debts or other commitments reduces risk for owners and perpetuates the life of the business. On the other hand, you must seek to obtain benefits by investing the cash in operations that promise an attractive present value. Maximizing the net present value of the owners' investment demands a proper balance between these two subsidiary objectives of liquidity and profit. For all this we can say that fundamentally, the double objective of financial management is to maximize the current value of wealth.

Abstract

Financial management is responsible for two distinct functions as an input to maximize the net present value of the investment of the owners of the company. On the one hand, is responsible for finance itself, the word finance can be understood as the act of providing the means to make the payments. Thus finance covering financial planning, ie the estimation of cash inflows and outflows, production and control of funds and distribution of these funds.

Within the financial cycles of the company, there are inputs and outputs that are not regular streams (called flashing) and regular or continue, that occur throughout the course of the company.

Maintaining adequate liquidity to pay the debts or other commitments reduces the risk of the owners and perpetuates the life of the company. Furthermore, you should seek profits by investing the cash in operations that promise a contemporary attractive value. The maximization of the net present value of the investment of the owners demand a proper balance between these two subsidiary objectives of liquidity and profit. Therefore we can say that fundamentally, the double objective of financial management is to maximize the present value of wealth.

Keywords

Perpetual: That lasts and remains forever.

Subsidiaries: Said of an action or of a responsibility: That supplies another principal.

Profit: Profit, benefit or benefit that is achieved in a matter or business.

Development

Financial planning and control

For the development of this function, the financial manager must obtain a broad and total vision of the company's operations. At a first level are long-term plans for plant expansions, machinery and equipment expansions or institutions, and other expenses involving exceptionally large cash outflows.

Cash management in cash and banks

At this point the dilemma between liquidity and profitability arises: the more cash we have available, the easier we can pay our bills.

The more effective we put to work effectively in the business, the greater our benefits will be, to such an extent that the loss of liquidity leads us to lose discounts for prompt payment or generate distrust in suppliers.

Control of cash inflows

One of the less interesting, but no less important aspects of financial management is the control of cash inflows to ensure that there are no deviations that lead the company to be a victim of fraud. Adequate control of collections is a particularly difficult problem for small and medium-sized companies, which cannot bear loss of funds in this way and, however, are not always trained to adopt the most elaborate precautions in order to prevent or detect this. type of fraud.

Consequences of funds

If the anticipated cash outflows exceed the income and available balances, the financial manager will be forced to obtain funds from sources outside the company. The financial manager's problem is to obtain the most appropriate combination that most closely matches the anticipated needs of a business.

The dynamics of the financial world has turned the entrepreneur into an expert in the use of resources, a true juggler.

Assistance

The young, agile, and dynamic company requires the assistance of financing entities for its development, and thus grow healthy and strong until reaching a mature consolidation.

Predictable discrepancies between cash inflows and outflows

A large part of cash balances are held in order to provide a buffer for those periodicals in which we know that our cash outflow will exceed our inflows.

Control of cash / bank outflows

Opportunities for fraud also arise when money leaves the business. Payments can be made to nonexistent suppliers, or for services or purchases not actually received.

Again we must speak of control by "opposition of interests."

Use of idle cash

If the treasury budget and the daily reports of the cash register indicate that we have excess funds, we must ask ourselves if this circumstance is one-off or has continuity characteristics. If funds are only in excess on a temporary basis, your investment should be guided toward a fundamental objective: capital security; we are in a commercial or industrial activity, not as spectacular capital.

Administration of collection accounts

Policies relating to the management of accounts receivable lead us back to the dilemma of liquidity versus productivity or profitability. To the extent that we grant credits on generous terms, we will have committed funds in accounts receivable and we will be compromised in our ability to meet our payments, or we will have additional financial costs to meet those payments.

Credit applicant investigation

When receiving an order from a new customer, we must consider how we can obtain enough information to judge their credit standing. There are two factors that limit the extent of our research: time and cost. We cannot take too long to investigate the client, because he would probably marry and the order would be canceled.

Analysis of the customer's credit value

Determining the extent to which a potential customer has the purchasing power enters a personal judgment scheme.

Control of customer collections

Ordinarily, the costs of any collection effort should not exceed the additional revenue that can be earned from that effort.

Controls to be carried out on customer balances

Once the credit policy of the company has been established, both in terms of its volume and in terms of payment terms.

Conclusions

This paper did not disclose how important the analysis of financial management and financial statements was. Insufficient working capital or poor management of it is a major cause of business failure.

According to each type of activity, companies allocate their resources, in different proportions, to inventories, fixed assets, accounts receivable and available.

Companies with high degrees of profitability are differentiated by the originality with which they create value during the cycle of contact with the customer, a company must exercise a discreet but effective control of the cash collection and payment system.

Cash used to acquire working capital is invested in the normal operation of the business.