Financial Management and Accounting Principles for Businesses

Posted on Dec 16, 2024 in Economy

Unit I.

“Finances and Financial Information

• Finance Definition

When we want to start a business, one of the points that are tackled is the acquisition of the necessary funds for implementation of the company.
When the business need to make your planning of the next period should also solve the problem of business economics, compilation of resources and their proper implementation.

The financial manager then has to address the following questions:

What funding sources can be used?

How to properly apply them in the company?

What are the resources available to the company?

What are the needs of money you have?

Figure 1.1. The questions should be answered in the financial administrator

The financial manager then has the responsibility to find the formula that will help the company develop the vital role of finance.
It can be summarized then that the “Finances are the techniques applied to the investigation of the monetary needs of the company, knowledge of available resources and sources of funding to be tapped to meet your needs and your time management proper resources are obtained to optimize and achieve the objectives of the company. “

Lawrence J. Finance Gitman defined as the art and science of managing money. Almost all individuals and organizations gain or obtain money, and spend or invest money. Finances related to the process, the institutions, markets and instruments involved in the transfer of money between individuals, businesses and governments.

RELATION BETWEEN ECONOMICS AND FINANCE

ECONOMY

Study of the conditions under which they can maximize the welfare of a community, and the choice of actions required to carry it out.

Microeconomics

• It is concerned to determine the optimal strategies of operations of businesses and individuals.
• It deals with the efficient operation of a business.
• Define activities that allow a company to achieve financial success.

MACROECONOMICS

• It deals with the whole institutional and international environment in which a company must operate.

It deals with the institutional structure of the banking system, financial intermediaries, the treasure of the nation and the economic policies available to the government to confront and control the level of economic activity.

RELATIONSHIP BETWEEN FINANCE AND ACCOUNTING

There is a close relationship between these functions, just as there is a relationship between finance and the economy, the accounting function must be regarded as a necessary input of the finance function.

There are two basic differences between finance and accounting.

• The treatment given to the funds

  
  

The counter, its main function is to produce and provide information to measure the performance of the company.

The accountant prepares financial statements, based on the premise that income is recognized as such at the time of sale and expenses when incurred.

Financial Manager is responsible for maintaining the solvency of the company, obtaining the necessary cash flow to satisfy obligations and to acquire the assets to achieve business goals.

Instead of recognizing revenue at the time of sale and expenses when they are incurred, as does the accountant, financial manager recognizes revenue and expenses only in respect of cash inflows and outflows.

• The decision-making

  
  

The duties of financial officer differ from those of the auditor, which it supplies most of its attention to the compilation and reporting of financial data.

While the financial manager, evaluate the reports of the counter, produce additional data and makes its decisions based on their analysis.

• Why we should study finance?

  
  

The main objective of a company is to maximize the wealth of their owners. This means almost the same as maximizing profits, except that the wealth measure takes into account the opportunity of profits. Consequently, companies seeking profits and avoid losses.

The aim must be then, the goals of the owners (shareholders) of the company. In the case of corporations or corporations, the owners are, usually, its directors. The role of managers is not their own ends, is, rather, to increase as widely as possible the benefits of the owners.

Objectives of the finance function:

• Planning business growth, advance viewing your requirements both tactically, and strategically.
• Finding resources necessary for the proper conduct of the business.
• Allocate these resources according to plans and projects.
• Promoting optimal use of resources.
• Reduce the maximum risk or the uncertainty of the investment.
  

Why?

To maximize the value of the shares of the company, maximize the market, see the company’s needs whether short or medium term.

• • Make tactical plans are short term.
• Make plans are long-term strategic

• Financial Decisions in the Family and Business

Policy

Figure 1.2. Framework for Financial Management

Microeconomic and macroeconomic variables of the company:

Micro: These are the internal factors that directly affect the company (commercial, industrial or services) and should be considered by the financial manager of the same or director of finance (in the case of a big company). The study of these factors will help to better knowledge of the company as well as the evolution of it and let you make more accepted. Examples are:

• • Production strategies
  • Pricing Strategies
  • Sales Policy
  • Credit policies
  • Export Regulations
  • Wages and salaries
  • Social security
  • Funding strategies
  • Growth policies

Macroeconomic:

It deals with the institutional structure of the banking system, financial intermediaries, the treasure of the nation and the economic policies available to the government to be front and control the level of economic activity within the economy. Examples are:

• • Consumption
  • Investment
  • Inflation
  • Catchment
  • Unemployment
  • Interest rate
  • Oil
  • Services
  • Exchange rate
  • Gross Domestic Product

International indicators

The company like any economic entity, is not isolated events that can happen around them. The employer should be aware that you can control your internal business aspects such as production, human resources, money, marketing activities, etc., But also knows that the internal aspects (micro-economic) will be affected by other factors you can not control, such as the economic situation of the region or country (a devaluation or inflation), political changes, changes in fiscal policy (tax increases), or simply the economic structure set by the government in the management of its domestic financial market, but to be taken into account in making decisions. To these factors is known as the macro.

No doubt that the success or failure of the business, will be due to the speed with which the company responds to its environmental changes, so it becomes increasingly important that managers are aware of these changes and develop appropriate information systems assist in the decision making of those who lead the fate of the company.

• Business Types

The basic forms of business organization are:

A)Companies with a single owner:These are the majority, led by one person for personal gain

b)

Society:

formed by two or more owners who run a business for profit.
They are often larger than a single owner.

c)

Limited Company:

is an intangible business entity created by legal agreement. A corporation, often called “legal entity” has the same power that an individual, ie it can sue and be sued in the law to establish a contract and be part of it, and acquire property in her name.

Legal Organizations Table 1.1: Advantages and Disadvantages

1.5 The Role of Financial Enterprise

To properly understand what the role of financial manager within the companies first consider the following: to separate the accounting function of the role of financial management.

The accounting function is for registration and classification in a logical and systematic economic and financial operations carried out an entity, which is synthesized as reflected in a series of documents called financial statements, which reflect the results of a period ( Profit or Loss), as well as the financial situation at a specified date, in general we can say that this is the role of Accountant.

Financial accounting is a technique that is used to produce structurally systematic and quantitative information expressed in monetary transactions carried out by an economic entity and certain identifiable and measurable economic events that affect it, in order to provide the various stakeholders make decisions in relation to the economic entity.

The primary objective of accounting is to provide financial information on transactions carried out and certain economic events that affect it. The unit of accounting is money, therefore, transactions and economic events which may be quantified in money. (According to the bulletin A-1, Series “A”, basic accounting principles).

Meanwhile, the financial administration is defined by the roles and responsibilities of financial managers. The basic functions of financial manager can be summarized as follows:

1 .- Analysis and planning of financial activities:

It must transform the accounting data so that they can be used to monitor the company’s financial position, assess the need to increase production capacity and determine the additional funding required.

2 .- Determination of the structure of assets of a company:

The financial manager determines the composition (monetary amount) and type of assets to be stated in the Balance of the company. After determining the composition, the financial manager should identify and try to maintain certain optimal levels for each type of assets, also must determine what are the best assets to be acquired and the timing of their replacement.

3 .- Management of the company’s financial structure:

This function takes care of liabilities and capital. Should be two key decisions about the company’s financial structure:

FIRST .- To determine the most appropriate composition of financing in the short and long term. This decision affects the profitability and liquidity of the company.

SECOND .-

Determine what sources of financing in the short or long term are better for the organization at a given time.

The financial manager then recognized its need for funds and determines the appropriate volume to invest in the company, proposing the rate of business growth. Within the investment manager should be noted that such assets will take and how much money is necessary to invest in them, for example, the appropriate amount of inventory, the volume of accounts receivable that supports the company or cash in their bank accounts, and each of them their proper handling. When the company wants to invest in assets that produce (fixed assets), must determine what type of goods they replace them to optimize their use, examples of investment in machinery and equipment, buildings or transport equipment must be properly managed and disposed of in the right time, that is, when they become high maintenance expense (eg machinery in poor condition) or obsolescence (computer equipment, when no longer useful to the business).

But it is necessary to determine what type of funds will be needed to support the most appropriate funding, as funds expensive (high interest rates) may affect both the economic entity profit (profitability), and their ability to meet its obligations immediate (liquidity). Thus, we determine the most appropriate funding sources in the form (mortgages, short-term loans, stocks, etc..) And time (short or long term).

MAIN AREAS AND OPPORTUNITIES IN FINANCE

The main areas of finance may be best highlighted by summarizing the development and employment opportunities they offer.

Such opportunities may, for better study, divided into two categories:

• FINANCIAL SERVICES

  
  

Financial services are the area of finance which are responsible for providing advice and financial products to individuals, enterprises and governments.

It is one of the most developed areas in some economies.

Financial services include:

The banking and related institutions.

Personal financial planning.

Investments.

Real estate and

Insurance companies.

• FINANCIAL ADMINISTRATION

  
  

It refers to the tasks of the financial manager of a company.

Financial managers are concerned with directing financial aspects of any business, be it financial or nonfinancial, private or public, large or small, with or without profit.

They play such varied activities as:

• Users of financial information

The financial statements of interest from a domestic perspective to the organization as well as from an external point of view or the general public and are justified by the interest they have in our company, they can be:

Internal stakeholders in the company

Shareholders, to know and to value their investment.

• Managers, to assess the success of its management and to set administrative policies.
• The workers, to calculate the share of corporate profits.

External stakeholders within the company

• Creditors, as a source of information to estimate the ability to pay the company to cover claims.
• Credit institutions, to assess the solvency, stability, etc.
• Individuals or companies who requested additional capital contributions, to consider and evaluate the appropriateness of their investment.
• The authorities of the Ministry of Finance for purposes of calculating taxes on the income of the company.
• Various government agencies regarding licenses and franchises or to obtain statistical information needed to guide the planning guidelines of the country.

In summary, several sectors are interested in knowing the level of strength of the company, for this should consider the financial statements by the methods of analysis to measure and weigh them, so that any response may be a wide range of questions regarding the situation of the company.

Fig. 2.3 Information users

Objective of Financial Reporting

The financial statements must comply with the objective of reporting on the financial situation of the company on a certain date and the results of its operations and changes in financial position (cash flows) for the accounting period ended on that date. The financial statements are a means of communicating information and not an end, and they are not intended to try to convince the reader of a certain point of view or the validity of a position.

The financial statements should be capable of transmitting information that meets the needs of the business user.

There are various general users of information and that these include both shareholders and employees, creditors and various sectors of government should not have access to information.

In general, the information in the financial statements should serve to:

• Investment decisions and credit, which requires knowledge of the growth capacity of the company, its stability and profitability. The main stakeholders in this regard would be those that can provide financing, capital or credit to the company.
• To assess the solvency and liquidity of the company and its ability to generate funds.
• Knowing the source and nature of its resources to estimate the financial capacity for growth, as well as their performance.
• Form an opinion on the financial results of the administration in terms of profitability, solvency, cash flow generation and growth capacity.

• Concept Financial Management

It is responsible for specific aspects of an organization that vary according to the nature of each of the following functions:

The investment, financing and dividend decisions of an organization.

It is the area of the administration that takes care of the financial resources of the company. Financial management focuses on two important aspects of financial resources such as profitability and liquidity. This means that the financial administration seeks to make financial resources are lucrative and liquid time to eLearning Awards website.

FINANCIAL ADMINISTRATION

ADMINISTRATIVE PROCESS

ASSET STRUCTURE

LIABILITIES AND CAPITAL MANAGEMENT

1.8 Relationship with the administrative process

The functions described in previous points made by the financial manager, are carried out through the process of management in its four main stages: Planning, Organization, Management and Financial Control.

1. Financial Planning:

Is to decide in advance what will be the proper use and who will be given to them in order to obtain the financial goal of the company. It includes the provision, which allows simultaneous study of several alternatives and decide on the planning stage that alternative with which the company must work to achieve his goal.

Table 3.1 Examples of financial goals. “Financial management: a strategic approach.” Alberto Ortiz Gomez

The financial plans and budgets provide “maps” of paths to follow to achieve the objectives of the company. Moreover, these instruments provide a structure to coordinate the various activities of the company, besides acting as a control mechanism for funding to establish a pattern for which actual results can be assessed.

Two aspects are fundamental in the process of financial planning: cash and profits. The first, which usually takes place when the budget or cash box, owes its importance to the fact that cash is the primary element of the company, of not having an adequate amount of cash (regardless of the level profit) the company would lose credit and would end in bankruptcy. Planning for profit is generally carried out with pro-forma financial statements showing anticipated levels of earnings, assets, liabilities and capital. Cash budgets and pro-forma financial statements are not only useful for internal financial planning, and also current and future creditors are wont to apply.

Planning should meet three basic principles:

Accuracy:

The plans should not be of vague and general statements, but as accurately as possible, because it will govern action. Plan “being the best” is a vague goal, it would be better to increase our profitability by 10% over the previous period.

Flexibility:

Every plan should leave room for changes that may be needed, either because of an unpredictable situation, or is that the circumstances have changed. A change in the external economic situation such as a devaluation, for example, can vary the projected plans and the administrator will have to react according adjusting to new circumstances.

Unit:

The plans must be such that one can be said to exist only for each function, the same as integrated into other plans of the other functions, form a single general plan. Management should strengthen their plans so as to pursue a single purpose, regardless of the business area of the question.

Some examples of financial planning tools are:

The cash budget or cash:

It is the numerical representation of the cash inflows and outflows of the company. Its purpose is to anticipate economic movements in cash balances and determine probable at certain times.

The sales forecast:

determined in advance the likely sales of a given period, either monthly, semi-annual, etc., And may use statistical techniques or comparison with other periods.

Pro-forma financial statements:

The financial documents can be designed in such a way that represents the planned financial position at a specific future. The company could then make a Pro-forma Balance Sheet, Income Statement or a Pro-forma documents, which represent the expected financial situation in relation to its assets, liabilities or equity, or sales, costs, expenses and profits.

Breakeven Analysis (profit planning):

The company determines in graphical or mathematical equality among its revenues and costs, the point where they can plan and check the sensitivity of their sales prices to its costs. It helps you determine the likely profits to different sales prices and considering fixed and variable costs.

Analysis of operating or financial leverage:

The company can be financed with resources obtained from their sales and are affected by the level of costs and operating expenses, but in some cases, the financing required by the company will resulting financial costs that affect operating profits reflecting a decrease that may be sensitive to the financial income.

2. Financial Organization:

It consists of the grouping of activities necessary to carry out plans through administrative units, defining the hierarchical relationships between executives and establishing communication in the vertical and horizontal directions within those units. The grouping must be logically and harmonizing the activities that are related.

Some forms of organized according to the diverse needs of the entrepreneur can be: by divisions, departments, units, functions, products, areas, classes, etc..

The organizational structure depends on the size of the spin or the high culture of the business, but the important part of such organizations is meeting the objectives to be achieved, ie there is congruence between what we want to achieve and as I want to do. An example of organizational structure can be observed in Table 3.3 where you can see that the size is big business and therefore requires an organizational structure that can guide and make decisions more complex than a smaller business and equally important.

Some organizational principles most important to consider include:

Expertise:

Achieving grouping related activities which are carried on continuously by the same position can help avoid errors or delays in work due to the personnel responsible, learn to perform and make decisions everyday thanks to the specialization that familiarity can be achieved through work and responsibility. Management must ensure that work can become routine, so that sloppy work by fatigue or boredom its work.

Unity of command: You must take responsibility and importance of authority, it being defined in such a way that can be exercised, delineating the roles and responsibilities of each post to avoid confusion due to lack of communication or simply to ignorance on the lines of command. In addition, recognize a single line of authority for each set of responsibilities.

Authority-responsibility:

A maximum administrative illustrate this principle: “A greater responsibility should have greater authority, and vice versa, without doubt, one of the most serious mistakes committed within the administrative structures, is that by giving greater responsibilities within the organizational hierarchy, it is often not delegate greater authority, which can cause lack of respect, who does not obey orders, or simply lack of communication between managers and performers of the work. We must always remember that we can delegate authority but not responsibility, since the latter shared with subordinates.

3.Financial Management:

The role of management in the financial field corresponds to the highest levels of company management, even when these are made with the advice of the entire administrative staff (internal and / or external), and consists mainly of monitoring the the entity’s operational objectives are achieved in a coordinated fashion to dictate the orders necessary to achieve the goals specified in the planning, within the structure established in the organization and with the elements obtained by integrating the administrative staff, all the above, as a whole should achieving the overall goals of the organization. It is important therefore that adequate motivation, communication and coordination functional is one of the more demanding responsibilities for managers, since not only is ordered and how it should be done, but also must ensure that is done properly and as planned by top management. The failure of many companies, not outside, but internally to the bad managers who fail to properly, leading their companies, hence it is said “There is bad business, there are bad managers.”

VICE PRESIDENT

Operations

VICE PRESIDENT

Finance

(Financial Director)

VICE PRESIDENT

Marketing

TREASURER

• Capital Budgeting
• Cash Management
• Foreign commercial banks and investment banking
• Credit Administration
• Dividend Payout
• Planning and Financial Analysis
• Investor Relations
• Pension Administration
• Insurance / Risk Management
• Planning and fiscal analysis

CONTROLLER

• Cost Accounting
• Administration costs
• Data Processing
• General Ledger

(Payroll, accounts payable / receivable)

• Report to the government (income tax, VAT)
• Internal Control
• Preparation of financial statements
• Budgeting
• Preparation of projections

Figure 3.3 Structure of a large company

4.The financial control:

Means to verify to what extent the objectives and goals of organization and this has been achieved through information provided by its control systems. At this stage it becomes important to use a system of reliable information and standards, to ensure the source and use appropriate resources effectively and efficiently to achieve the objectives of the company.

Planning tools are then used to compare the results are being achieved against expectations, so they also become a tool of control. Some types of accounting and financial control are: general accounting systems, internal and external audit, analysis and financial evaluation and budgetary control.

After this, we can conclude that the accounting function is to collect and display in financial reporting, the events held by any economic entity, and the finance function, identifying needs and financial problems shown in the financial summaries, so that helps decision making within enterprises, public or private, large or small, and not necessarily carried out by any particular race, but by those who have the ability to view the company and take the right path to meet their group expectations.

Level	Management Control
Advice Managerial Management General Command “Senior Management”	Global Strategic
Manager Production Manager Sales Manager Staff Manager Finance General Management “Senior officer”	Functional Logistics
Treasurer Comptroller Divisional or Functional Management “Cadres”	Operational Tactics
Assistant Assistant Implementation “Operators”	Operational

Table 3.2 Level of management and financial control

1.9 Objectives:

We can say that the implementation of administrative process in the financial area is to exercise financial management and then, the objective would be the same, maximize wealth.

1.10 Elements of the financial management system

• It is an application of financial management

  
  

Indeed the financial management of investments is a phase or application of the general financial management.

• Significant data collection

  
  

That is important data collection internal and external company to provide the basis in making investment decisions.

• Financial analysis

That is, study and evaluation of financial and economic past of the company, channeled to make investment decisions.

• Financial Planning

Study, evaluation and projection of future economic and financial of the company, to make investment decisions.

• Financial Control

That is the study and evaluation of both the past and future economic and financial of the company, to make sound investment decisions, to detect and correct variations emerged when comparing the concepts and figures of the analysis and financial planning.

• Making good decisions

Make good decisions with the application of techniques: Collection of relevant data, analysis, planning, control and financial evaluation by the optimal choice of alternatives, normally, inflation or deflation, the short, medium or long term conditions of certainty, uncertainty, risk and conflict, to achieve the objectives set by the company and maximize long-term equity.

• Investment

  
  

Investment is the “contribution of time, money, knowledge or energy, for a profit.”

Or:

“Sacrifice this to try to get a return, though, uncertain future.”

The investment can be productive or unproductive:

Productive investment, when a yield or profit.

Unproductive investment, not getting any benefit or performance, that is, suffer breakdowns or losses.

• Maximize profits

All investments of the company will aim maximize income, benefits and utilities, of course, having paid the best wages to workers, according to purchasing power of consumers and even government needs to provide public services to the community.

• Maximize long-term assets of the company

All investments of the company, also aim to maximize profits, must be achieved to maximize the assets, equity or value of the company’s long term.

Now, assume that the equity is the difference of total assets minus total liabilities to maximize the stockholders’ equity will be necessary:

• Coordinate the assets of the company.
• To coordinate the debts of the company.
• Coordinate the performance of the company.

1.11 Private sector financial management

Currently a financial manager has to adapt to the changing world of finance, in which the effectiveness of their decisions will greatly affect the course of the company itself.

Financial management is responsible for the acquisition, financing and asset management in making decisions, in which investment decisions indicate what amount of assets necessary for the company to keep functioning, as well as, what they are for each one of these investments in such assets.

Funding decisions are made listed as liabilities in balance sheet of a company, these vary depending on how the company is in debt and debt policies are enabling the convenient, this is seen as a mix of funding, these turn must be balanced with the amount of profits that the enterprise retains common capital funding.

Administration of assets indicates the efficiency with which investments are managed both as financings. Once you have established, of course there was a greater emphasis on those assets due to volatile external environment.

1.12 Objectives

The efficient financial management requires a goal or objective to be comparatively appropriate, this assumption is the maximization of shareholder wealth, this objective is closely linked to the price of the shares as they are a reflection of the investment, financing and asset management; this entails the difficulty of understanding of the term, since it has to do what will be the best investment project which ensures a steady performance in the actions of members, and to reduce speculation.

It must take into account what is required to maximize the profits left the shares or the price of each action depending on its application in the stock market, so it is important to take as a pattern of maximizing the current price of each action, which we see how well the company is developing within the financial administration.

Another important point to note is (a goal) to maximize shareholder wealth, but as long as the manner in which it is responsible and ethical conduct with the rest of the company, that is, with the aim of it to the consumer with its employees, with wages offered, etc.

The usual way as financial management is organized in three levels led by Vice President of Finance (in a big company) which serves to direct the management and reporting to the CEO, second is a treasurer and a controller.

The treasurer is responsible for financial management functions, this is investment (capital budgeting, investing, etc.), finance (investment banking relationships, commercial, investor relations, payment of dividends), and asset management (mainly cash and credit).

The controller functions are purely accounting, to the projection, accounting, budgeting, etc. Turn makes the reports of the movements are all departments that are affected during the operations are performed to support the projects.

1.13 Location of the finance function within the organizational structure

Location of finance in the company:

Financial management covers all activities of the company, which is why it is necessary to analyze financial management in an organization.

• • In a medium-firm economic power is the finance department to department head level.
  • In a company of great economic strength is at management level area can be like:
  • • Finance Director
    • • Chief Financial Officer
      • Vice President of Finance

In fact, the finance function within the organization runs the responsibilities ranging from the acquisition of resources or funds for the life of an institution until the problems involved in their distribution within it.

• • Raising Funds

• Contribution of the partners or the owner to the capital
• • Borrowing short and long term.
  • The proceeds from the specific activity of the company.
  • Others, who would in fact lead or joint operations of the previous three.

• • Distribution or use of resources

• Acquisition of assets
• Payments of liabilities from short and long term
• Payment of dividends
• Operating expenses
• Administrative expenses
• Others

14.1 Financial Statements

RISK ISSUES:

• • Concept
  • Structure and component parts or main and / or where applicable, classification.

1.15 information systems management

• Concept

Organized to provide technical managers involved in the management of an enterprise, data, records, notes and clear and timely reports needed to make good decisions.

• Characteristics of an information system to management

  
  

Focused to produce formal and informal information to executive levels in all areas of the company. Operate as an independent unit. His trained staff, will investigate new sources of data. Investigate new forms of presentation.’ll Equipment and database. The system be adapted to the needs of the company. It will be a balanced and selective, considering and defining the needs and possibilities of interpretation. Comparative reports on her environment, competition and the company together, and so on. It will be repeated self-criticism for failures of the system used for defining force.

• Requirements for implementation

That there is an organization defined. Support and involvement of senior management. Implantation stages.

First, as a prerequisite, ie there must be a proper definition of roles and responsibilities; also coordination between them, there must be systems and procedures for the operation of the enterprise objectives for knowing where to target members the same.

Secondly, to carry forward the implementation of information system management.

Thirdly, by virtue of which meet both requirements above, an integrated management reporting, you must implement in stages.

• Attributes of an information system to management

  
  

To measure the impact of decisions before or after they are taken by management. That measure the environment, to analyze, plan and monitor the effect of changing external circumstances of the company. What reactions within a time frame on to allow time to meet the development of problem areas, so we can act and serve as a useful and accessible and quick in making decisions.

• Attributes of an information system to management

  
  

The infrastructure and necessary steps for the implementation of an integrated information system to management, are included in the following table: