The goal of every business is to not only turn a profit, but to also stay competitive and have a sustainable business that continues to grow. Although it may seem like simple arithmetic when it comes to making money, savvy financial managers must understand all the complex factors, both externally and internally, that can affect their bottom line. Although financial management is a very complex and sophisticated endeavor, we will focus on many of the most important aspects of the discipline. For a handy review of all the different challenges involved in running a business check out our introduction to business class.
The Big Picture
If the recent recession has taught us anything about the world of corporate finance, it is that no company is too big to fail. Many businesses that were thought to be bell weather indicators of the strength of the economy were too slow to adjust to changing market conditions and went bankrupt or had to be bailed out. They include General Motors, Lehman Brothers, Mervyns, and Silicon Graphics, just to name a few.
Many executives at the top of the corporate ladder require their financial managers to focus on at least four broad areas of concerns including company investments, working capital, costs of funding and dividends. The money managers must analyze and anticipate factors involving any risks in order to maximize returns and increase shareholders’ equity. At its highest level, the objectives of financial management pulls together all their company’s operating areas to make sure each one is operating at maximum efficiency.
The final goal of sound money management is for the company to pay out dividends to keep their stockholders and Wall Street happy. Companies that routinely pay dividends attract more investors who want to own stock. However, some companies have a reputation for holding onto vast amounts of cash. For example, some analysts on Wall Street have criticized Apple for waiting for years before paying out dividends. Company executives counter the naysayers, pointing out that the company is aggressive with the money on capital spending and research and development of new products.
Besides keeping focused on the big picture, financial managers also use two different types of economic indicators to focus on all the interrelated parts of the company’s financial environment: macroeconomics and microeconomics.
Macroeconomics involves the overall economic conditions or sum total of all financial activities many of which are beyond the control of any single corporation or individual. This type of economics involves everything from the banking industry’s lending practices to consumer confidence. It can also take into account the effect of other global markets that can impact businesses here in the U.S. For example, a recession in Europe means there will less of a demand for many goods exported from this country and sold overseas.
Microeconomics, on the other hand, involves factors that have more effect on of the day to day operations of the business such as supply and demand, inventory control, sales and product pricing. Our own online class details more about these two areas.
Business Operating Areas
The sum total of the objectives of financial management requires managers to not only understand the broad scope of economics, but also all the different operating areas of their company. For example, financial managers are required to deal with budgeting, payroll costs, marketing, product production, sales and research and development.
One area that can often make or break a company is the cost of procurement. Some companies require specialized raw materials to help them create the products they put onto store shelves. Financial managers for those companies would need to factor in the risks associated with obtaining the materials in case there is a shortage.
Financial managers at some firms, especially those in high tech or consumer electronics, must factor in the risks involved in outsourcing the manufacture of their most popular brands. Almost all of the bestselling consumer electronics in the U.S. are assembled at factories in other countries and then shipped here. The earthquake and tsunami that hit Japan in 2011 shut down many of the major ports in the country, causing a delay in shipments of computer semiconductor materials.
Financial managers often keep track of each operating area to make sure each one all the resources and support needed to help contribute to the overall financial success. To learn about effective, overall business strategies look at our online course that contains useful business strategies.
Thanks to faster computers and more sophisticated software, managers can often get real time feedback on their financial management policies by checking on a wide variety of accounting reports. They include:
1) Balance sheet. It is the financial situation of the company at any given time. Lists the assets, liabilities and equity
2) Income statement. Basically lists income and expenses. Difference between the two will be the profit or loss for that quarter
3) Cash flow statement. Lists operating cash from sales, etc. Also lists any cash received from investments or spent on investments
4) Statement of changes in equity. Changes in the owner’s amount of equity in the business
Many financial managers have a background in accounting so that they understand what data goes into all these reports and how they affect the company’s overall financial picture. To get a good introduction to how the numbers work in business look at our introduction class on financial accounting basics.
The Ultimate Financial Management Payoff
Companies that understand all the different objectives of financial management are famous for being able to stockpile piles of cash. As I mentioned before, Apple is known for having more cash than almost any other American company. At one point the company had more than 100 billion dollars in the bank. Other tech companies that are known for having money to burn include Google and Cisco. Pharmaceuticals Merck and Johnson and Johnson also top the list their amount of cash. It is a situation any company would like to have.
Now that we have covered many of the concepts of financial management you can see why executives and managers who have a track record of success are in such high demand. Very often startups that get through the first round of VC funding will find a financial manager who to help lead the executive team and the company to a successful future.