The key to achieving operational effectiveness and efficiency is the proper allocation and utilization of funds. It helps to increase the firm’s value and reduce the cost of capital. The essential factor is to utilize funds in areas that could lead to more sustainability and profitability accordingly.
Financial Management is strategically planning, organizing, controlling, and directing the sources of finance for a company. Thus, the objectives include
Firstly, the main focus is always on the proper utilization of funds. Accumulating the desired amount of funds and using them helps to maximize wealth and increase savings. Thus the utilization of funds helps with the long-term growth of the company.
If a firm is under-utilizing its funds and the resources are sitting idle. It prevents the firm from earning to its maximum capacity. Hence overutilization of funds causes mismanagement. This results in raising more funds, increasing taxes, paying more dividends, and losing control over its decisions. The organization might reach a point where they are unable to raise funds anymore.
In this era where businesses are growing globally, the role of a financial manager has become more technical and complex. Every decision affects the direction of the company. Moreover, the role involves the effective allocation and utilization of funds. The manager needs to plan an investment pattern. The investment in fixed assets requires proper capital budgeting, opportunity cost, and profit & loss analysis.
Funds invested in Fixed Assets:
The investment of funds for fixed assets is always in the future, where the value of investment depreciates over time. As a result, the return on investment increases, making the company produce at an optimal level.
Funds invested in Current Assets:
Also, short-term assets connected to working capital management require funding. A company should work on adequate management of working capital. Inventories, book debts, or cash should not block any excess funds.
To expand a business in a new market, invest in R&D, and have more growth than a competitor, requires funds that could either be acquired by retaining profit or through external sources such as capital funding. Common sources of funds include:
The most basic way of increasing your funds is to sell off a product at a higher price than the original cost. The profit can be used to pay off shareholders through dividends or saved to invest in new projects.
Therefore, just like individuals, a company can borrow loans. Hence this could be done through bank loans or borrowing publicly through a debt issue on a personal level. They allow an investor to become a lender for the company. The amount of interest against the loan is paid to the lenders. The failure to pay interest by the company can lead it to default or go bankrupt.
A company can raise equity by going public and selling its shares. A shareholder gains certain ownership control over the company and is paid through dividends.
Therefore, accumulating funds through various sources gives firm wheels. Managing and utilizing funds helps the firm move in the right direction. Proper allocation of funds helps in both the short and long term. Hence the most important factor is to find a balance between the sources of funding. Borrowing too much debt can get you into trouble. While not being able to use it properly can halt future growth prospects.
Finally, we, at Oak Business Consultant, are specialized in providing consultation on these matters. We have helped many companies build a robust financial model and business plan along with Pitch Deck. Therefore, you can visit our website, Oak Business Consultant, to consult with us for free before reaching out to the investors.