MONEY BEGETS MONEY, ONLY WHEN IT IS PROPERLY MANAGED
Prepared by P. A. Mhache
Yes my friends today I would like to talk a little bit about Finance, Financial Management and Financial Accounting. We normally end up with a confusion when people talk about Finance in our organization. Other thought that as you announce the terminology “FINANCE” you mean Finance Department. As the results we end up with a conflict within different departments, Finance Department are claiming that their duty has been taken by other departments while other department direct their duty to the Finance Department.
To overcome the problem let us make some reference and try to come up with a common stand about it.
According to the Oxford Dictionary of Banking and Finance, the word finance has several meanings. The first meaning is that finance refers to the practice of manipulating and managing money. In another meaning finance means the capital involved in a project, especially the capital that has to be raised either to start a new business, or to facilitate the running of an existing company, e.g. a loan of money from a bank. In the book by Maheshwari (2003)1, finance is defined as the provision of money at the time it is wanted.
In all these definitions, there is one common thing, and that is, something to do with money. It is very common to hear people saying that businesses need money to make money. Another, but equally common saying goes like “money begets money, only when it is properly managed”. The latter saying reminds us that it is not only finance that matters, but it is also how it is managed.
6Meaning of Financial Management
It is the entire range of efforts devoted to the management of sources and uses funds by the organization. It includes the efficient use of an important economic resource, namely capital funds. It concerned with the managerial decisions that result in the acquisition and financing of long term and short term credit for the firm. It deals with the situations that require selection of specific assets or combination of assets; the selection of specific liabilities (i.e. sources of funds to finance the assets) as well as the problem of size and growth of an enterprise. The analysis of these decisions is based on the expected cash inflows and outflows, and their effects upon managerial objectives. In short, financial management is concerned with management of funds, and the finance manager must see that the funds are procured in a manner that the risk, cost, and control considerations are properly balanced in a given situation and there is optimum utilisation of funds.
Financial management is the ways and means of managing money, implying the determination, acquisitions, allocation, and utilisation of financial resources (McMenamin, 1999). Financial management is therefore a process of analysing financial situations, making financial decisions, setting financial objectives, and formulating financial plans, to attain those objectives and providing effective system of financial control to ensure plans progress towards the set objectives.
It is important, now, to distinguish financial management from financial accounting, the two disciplines that are often confused. The two are quite distinct from each other. Financial accounting is concerned with the recording reporting and measuring of business transactions. The information produced by financial accounting is used by the financial manager to take decisions to help the organisation in achieving its objectives. So financial accounting is a data collection process dealing with the accurate recording and reporting while financial management is a managerial decision making process. Financial accounting is concerned with the measurement of funds while financial management is concerned with the management of funds.
The main objective of financial accounting is to keep a systematic record of the transactions of the company (eventually producing the financial statements). On the other hand, financial management is primarily concerned with the task of ensuring that funds are procured at optimum cost and involved minimum financial risk. It also ensures that funds are available at the right time and procurement of the funds does not interfere with the right of management or exercising control over the affairs of the organization.
Is that the case! I need your comments