The main problem that arises when we want to open a company or manage one is the use of money . It is the lifeblood of the company since having capital means having the opportunity to buy everything you need to start or grow a company. For this reason, it is essential to plan and manage all possible cash flows in the best possible way. To this end, Financial Management was born and developed , that is, in order to plan actions on the market and manage their feedback , which at times may not be positive. For this reason, planning the use of money is vital also and above all to face moments of crisis .
In this article we will define what Financial Management is and we will make a small summary of what are the three main types of planning. Finally we will define the two types of capital with the aim of touching on some more complex topics and defining them.
Corporate Financial Management
By Financial Management we mean all those decisions that an entrepreneur must make to find and invest money.
In fact, the money available to the company is used to acquire plants, machinery, patents, and other assets which, in turn, will generate money. Therefore, monitoring Financial Management means checking the correct operation of the company.
It is not to be considered a separate part, but is directly connected to other aspects of management, such as production, which deals with developing the goods (or services) to be placed on the market. Also this part must be controlled by the Financial Management , because of what we said before, it too is a consumer of money.
Another example is the management of Human Resources , or the payment of company workers’ salaries. Also this part requires an expenditure of money. An aspect that “produces” money is marketing activities , for example, the activities carried out by the company to obtain revenues from the goods produced.
Types of planning
Within the Financial Management there are three types of planning depending on the time span in which you want to operate. They are:
Strategic Planning : works in the medium-long term (from 3 to 5 years). Strategic business planning is also called a ” business plan “. She is in charge of planning corporate life events, evaluating commercial choices, investments and funding sources;
Budget planning: operates in the short term (no later than one year). The company prepares a summary of all income and expenses and ensures that the net flow remains active and sustainable in relation to business needs and banking positions. In other words, the company checks that between the money it receives from the sale of its products, and the money it uses to pay the expenses, there is a positive margin, or a profit ;
Treasury Planning : operates in the short-medium term (no more than 3 or 4 months). The financial planning of the Treasury has the task of taking into account all the fixed corporate expenses (wages, payment of bank loans, taxes, payment of suppliers and others). He then tries to predict corporate liquidity in the very short term, that is, a few days or months. In other words, he makes sure that these fixed costs can be paid by having the necessary money aside. This planning must be constantly revised.
Fixed Capital and Circulating Capital.
Every business needs capital to finance its production and investment processes. As we have seen, it is the task of the Financial Management to look for these capitals and understand how to use them. For this reason, two types of capital are distinguished: Fixed and Circulating . Let’s try to understand what they are and what is the relationship that binds them.
The Fixed Capital requirement is linked to the degree of capitalization of the operating processes. That is, the need to have new real estate structures in order to carry out the company’s production activities. The more the presence of production plants and equipment grows, the more the fixed capital increases. It is linked to the financial company for the duration of its “life”.
The working capital requirement is related to the reintegration of revenues, also known as the “working capital” reintegration cycle. This requirement, for the same productivity, will be as small as the time it takes for the company to regain the habitual earnings due to the sale of its products, or to the reintegration of revenues. In other words, the faster the corporate collections are compared to the payments, the less the working capital requirement is high.
What binds the two capitals is to estimate the company’s financial needs . In effect, it is the sum of Fixed Capital and Circulating Capital .
The need to know how to distinguish and calculate these two types of Capital is necessary in order to make adequate financial decisions.
Management Balances: Economic, Financial and Monetary Balance.
In Financial Management we understand the set of decisions and operations to find and use corporate funds. It must respect three types of balance: firstly respect the economic balance between costs and revenues. Or have a positive discrepancy between the two allowing the formation of profit. Secondly, aiming at the financial equilibrium, that is, aiming at balancing between capital investments and their reception sources. Thirdly, to preserve cash liquidity, ie to maintain the monetary balance between income and expenditure.
The formation of costs and revenues affects the need for capital and the cycle of monetary movements. In other words, the firm must try, on the one hand, to use the financial surpluses through investments, and on the other, to cover the deficits. On a theoretical level it can be said that, in a situation of economic equilibrium, the income and expenditure will tend to be the same if we consider a sufficiently long period of time. On the contrary, in the short term it is normal that there is a phase shift between the two indices.
In conclusion, as we have seen in this article, Corporate Financial Management is in charge of managing all the economic aspects of the company through more or less complicated and complex means. This is what families, who are also considered to be economic entities similar to businesses, do constantly even without using all these means.
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