Financial resources are always limited and must be allocated among competing opportunities. The firm will have both long-term and short-term goals; for this, a distinction is made between investment and working capital. Finance is concerned with the future, so financial management is focused on the long term. The investment decision involves allocating funds to fixed assets such as land, plant, and equipment and is a long-term decision. This text will not cover this as it is a financial management rather than an administration decision. The purpose of the finance allocated to fixed assets is to create buildings and equipment, which will, in turn, produce products that can be sold to increase profits. This shows how the ultimate aim of the investment decision is to increase future income. Office administration and financial management are both support activities whose area of concern is decision-making in other areas. By contrast, the motivation for an office administration decision is usually an attempt to solve a problem or relieve a problematic situation. So, finance decisions will have to be assessed in terms of their impact on plans or the solution to present issues to increase the quality of the decision.
An organization’s capacity to earn profit is circumscribed by its efficiency in managing its financial resources. Financial administration involves efficiently and effectively managing these resources to achieve the organization’s objectives. In an economic climate today characterized by turbulence and change, effective financial resource administration is thus an essential activity for all office managers.
Budgeting and Expense Management
Expense management includes implementing spending controls to reduce overconsumption and to align individual behaviors with cost-conscious thinking. Cost awareness, responsibility accounting, budget allocations, and participation in the budgeting process improve cost-effectiveness. Cost-effectiveness is achieved when a program or activity is performed at the lowest possible cost. Performance reports comparing the actual costs of resources with the budget are necessary to determine if resources were used efficiently and effectively. High-quality differential analysis is also used to examine the cost-benefit of various alternative strategies.
Budgeting to avoid government profligacy is provided for in the Constitution Act (1867) in Canada §54 and in the Legislative and Executive Finance Act (LAC)(Art I,§9) in the United States. High levels of debt in both countries are evidence that governments often fail to meet this duty. Managerial accountants play a crucial role in implying that public programs adhere to this allocation of resources to serve the public best.
Budgeting is a primary function of management accounting. To prepare a master budget, managers must first develop a sales budget, a budgeted income statement, and then a cash budget. These three operating budgets constitute the projected results portion of the master budget. Managerial accountants are also heavily involved in developing the last three components of the master budget—the financial budget—which consists of the budgeted balance sheet, the capital expenditures budget, and the cash budget. These budgets represent the desired ending position of the organization. The budgeted or pro forma financial statements and budgets are the predicted financial consequence of plans and strategies. By completing these budgets, management can compare the economic implications of an alternative approach.
Financial Reporting and Analysis
In the ordinary course of work, it is possible to be blinded by the sheer workload and not critically review the performance and health of the company. Analysis of the company’s financial performance and position allows managers to make critical decisions informedly. This involves regular income statements, balance sheet analysis, and ratio analysis of essential items on these statements. An understanding of what the ratio means for the company is required to conduct these ratios. An example would be a current ratio of 2. This means the company has 2 dollars of current assets for every dollar of current liability. Is this good? It is hard to say, but generally, higher ratios indicate good prospects, and lower ratios may show a need for urgent action to improve a lousy liquidity position. Ratios must be viewed in context with industry and company trends. Compared with a known successful year of trade, a declining trend of these ratios may indicate the company is slipping into old habits of high-risk trade, or it may represent regular cyclical changes in the company. If the company is familiar with regression analysis, this is an excellent predictive tool for future changes in the dependent variable concerning changes in independent variables. Testing hypotheses behind these changes is an involved process that is better suited to a finance professional. Finally, never underestimate the power of a well-informed question to the company accountant. A good accountant can explain what is happening financially in a company through well-developed stories from the numbers.
Risk Management and Compliance
Credit risk will exist for any counterparty that the company has debt finance or a cash deposit. The credit risk is that the counterparty will default, resulting in a financial loss for the company. Debt finance carries the burden of interest rate changes, which can affect company cash flow. To mitigate the risks of debt finance and to comply with general accounting principles, companies should prepare accounting reports for any debt or equity and use effective risk management techniques to ensure that the cost of funding is kept to a minimum.
Should a company incur debt finance, any cash raised will give rise to repayments, which usually must be met at future set dates. Failure to make a payment on a contractually agreed-upon date can result in a default. Debt finance statements and other long-term expected income can be disrupted by exchange rate fluctuation; thus, companies should control the risk by using derivative products.
Risk management plans involve identifying potential risks and creating plans to mitigate or manage these risks if they occur. They involve a continuous process of evaluating areas of the business for risk and deciding whether the risks are acceptable or require action. If necessary, alternative actions must be assessed, and the plan must be executed and monitored. This process is relevant to specific projects and a company’s day-to-day running.
Various risks are associated with financial loss, including opportunity loss or investments in projects that are not profitable and waste money that could be better invested elsewhere. When formulating a budget and making financial decisions, it is essential to have risk management plans in place to identify and mitigate any potential economic loss.
Risk management and compliance are integral to financial administration. They involve minimizing risks that lead to financial loss. Risk management also helps to identify and manage potential opportunities. Compliance involves conforming to laws and regulations set by statutory bodies. Failure to comply can lead to legal action.