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Roberto Vona » 10.Financial management

Lesson contents

Learning outcomes

Enable students to understand the dynamcs of financial management, its basic elements and management tools.

Lesson contents

  • Decision-making processes for financial management.
  • Working Capital and the management areas that contribute to it: inventory, merchandise credit, supplier credit, liquidity.
  • Bank credit, terms and settlement.
  • Evaluations for deciding how to use financial resources in excess.
  • Objectives of cash flow management.
  • Relationship with banks and buyer-seller relations.
  • Financial lever and stock management.
  • Financial effects of competitive decisions.
  • The financial manager and the credit manager.
  • The monetary cycle.

The decision-making process

Intrinsic liquidity: liquid company assets and liabilities, and those that are liquidable within twelve months, are considered part of the working capital.

Functional liquidity: includes only those resources that are considered necessary for smooth running of operations (purchasing, processing, sale).

Current financial manegement

Areas that contribute to the value of the Working Capital:

  • Inventory;
  • Merchandise credit;
  • Supplier credit;
  • Liquidity.

Inventory management

Retail companies make many “speculative” purchases which causes a surplus of goods in stock. The justification for this is the chance of much higher than average returns on these goods, through inflationary or exceptional price increases.

ABC method

Three main classes of goods are identified. First class goods are ones that need constant and careful checking (20% of the total); for second and third class goods,  less sophisticated management techniques can be used.

Seasonal, “speculative” or recently referenced articles can be found in any of these classes and this makes it difficult to apply specific management techniques, especially if the analysis involves looking at sales over the year.

Current financial management (cont.)

Merchandise credit management

For effective credit management, the following steps need to be taken:

  • preliminary investigations regarding the credit worthiness of the applicant.
  • granting of the credit and negotiations on terms and methods of payment.
  • follow-up and collection of overdue credit.
  • collection of disputed debt (unsettled debt).

Bank loans

The credit worthiness investigation generally concludes as follows:

  • the client is refused credit if the risk seems too high;
  • credit is granted within the limits of maximum risk the company is willing to accept for that client;
  • unlimited credit is generally granted to public organisations and companies with a solid reputation and good financial standing.

Current financial management (cont.)

Supplier debt management

Correct and effective management of payment debt contracted with suppliers has a positive knock-on effect on financial management, as it reduces the need for cash to finance running costs, and on business management, because the company is then in a position to negotiate better purchasing deals or delivery times or to request promotional support.

Liquidity management

Retail companies often have liquid resources in excess and these can be used to: change their debt position, make easily-liquidable investiments, invest in “speculative” goods.

Support tools

Cash plan.

Treasury budget.

Current financial management (cont.)

Causes for low use of financial leverage

Borrowing is not very popular with retail companies, though it is increasing as competition tightens. Financial leverage is becoming more common  because it enables retailers to get cash discounts from suppliers. It gives rise to financial buyer-seller relationships downstream from the business transaction, improving revenue if they manage to negotiate better price deals than they get from suppliers.

Financial managers

The people, or function, responsible for formulating the plan for sources of income and spending and the effects of National budget. Financial managers are called on :

  • to assist general management in preparation of development plans;
  • to evaluate the feasability of operating budgets;
  • to suggest corrective measures;
  • to set limits to credit exposure.

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