Financial Management in Business Research Paper Starter

Financial Management in Business

(Research Starters)

This essay delivers an overview of the role of the financial manager, in both the private and the public sector. Non-profit organizations are not specifically included in this discussion. A brief review of some standard mechanisms business managers use to monitor financial performance is followed by a larger discussion of the evolving role of financial and business managers, including cautionary notes to those new to the role. Emphasis is placed on internal oversight and monitoring mechanisms; integral parts of effective business accounting which support the plans, methods, and procedures used to meet the company's goals and objectives. It will become readily apparent to the reader that financial reporting, using the traditional tools described herein, is clearly evolving into a more complex and integrated process, not unlike the globalization occurring in many industries. Integration of business processes in lockstep with financial administration is critical to maintain a competitive position in the marketplace. This article highlights the transformations in accountancy and internal practice seen in the marketplace today, and how these changes are bringing about an evolution of the role for those in key positions related to financial management.

Keywords Accounting Audit; Accounts Receivable; Balance Sheet; Cash Flow Statement; Controller; External Review; Income Statement; Internal Controls / Internal Oversight; Inventory Control; Sarbanes-Oxley (Sarbox); Scorecards

Finance: Financial Management in Business


Business leadership is responsible for communicating the organization's expectations, measures, and goals to those responsible for implementing the action plans set forth to meet the organization's objectives. Financial managers establish and monitor performance measures, sometimes termed "scorecards," in today's business environment. There exists an old adage that anything not measured cannot be improved; it is paramount that measures are tracked and charted as part of routine reporting. Financial metrics are increasingly transparent to stakeholders as they offer a robust means to monitor fiscal accountability. The role of the financial manager in the eighties and nineties brings to mind a picture of the bespectacled accountant, donning a green banker's visor, and poring over books under a glowing lamp in the evening office. The 21st century financial manager wears many hats and answers to multiple stakeholders who require manifold levels of accountability. Systems, people and technology impact the financial performance of complex organizations, and it is no surprise that managers find themselves in an evolving milieu which challenges historical paradigms.

The definition of financial management, in broad terms, describes financial performance oversight practiced by individuals, business entities and public domains. More specifically, financial controls, assessed routinely by decision-makers, provide oversight of the entity's financial structure and function. Supervising short-term activities and long-term strategies while protecting stakeholders' interests, falls under the authority of the manager's leadership. Augmenting front-line oversight, publicly-owned businesses undergo independent accounting audits of their financial statements with comment by the auditor, aimed at providing an objective review of the business' fiscal status. Oversight in the public sector has become more highly regulated, but even in the non-public sector, financial managers are facing substantial change, with intense scrutiny and accountability for performance becoming the norm. As performance indicators are more intensely examined, knowledge of historical and future trends must be a priority for those in financial leadership roles. Managers' liability for actions of those and of others in their area of control is today's new reality.

Michael Goldstein, of CPA Journal reports "191 out of 250 executives responded to questions on business finance management at the AICPA Benchmarking and Financial Engineering Conference in New Orleans. The survey, conducted by the AICPA's Management Accounting Executive Committee, laid the groundwork for the Institute's "Financial Management" 2000 {conference}. Nearly 81% of U.S. senior financial executives expected to see more sweeping changes in the core financial functions at their companies, while approximately 58% already had seen such changes, according to a survey by the AICPA. The respondents, 98% of whom described themselves as financial controllers and above at their companies, cited transaction processing, performance measurement, management reporting, and budgeting as among the examples of basic functions that most needed reengineering" (Goldstein, 1995).


Operational Financial Management

A company's fiscal reports provide the data upon which the manager performs his or her financial analysis; reporting should provide key information about the business' prior, current and projected performance. Analysis must be timely to be effective; managers are responsible for ensuring accuracy and applicability of the data while striving to achieve information systems capable of capturing and reporting useful data to support this work. "'In today's swiftly changing business environment, U.S. companies will have to learn to tap into powerful information technology to ensure proper financial controls without continuing to waste critical resources on unnecessary layers of transaction processing,' said Dr. John K. Shank, chairman of the AICPA's Management Accounting Executive Committee and professor of managerial accounting at the Amos Tuck School of Business at Dartmouth College" (Goldstein, 1995). Fortunately with advances in technology, timeliness and accessibility of financial information, decision-making is dramatically better than it has ever been.

Critical Reports

For managers coming out of business schools, the following list offers an inventory of critical reports and tools long-heralded by business as key needs for every financial manager. The list is by no means inclusive of all financial reporting mechanisms utilized in today's business world.

  • Income Statements, by their very nature, provide utility when timely and accurate. Generally Accepted Accounting Principles (GAAP) direct that the income statement follow a relatively standard format that starts with revenue and subtracts from revenue the costs of running the business. Net income, also known as net profit (or net loss) represents the "bottom line" for an entity over a set accounting period. The income statement may be enhanced to include budgeted revenues and expenses with variance percentages; highlights for initial screening of concerns for the busy manager. Variances, particularly those that are material (threshold varies), are a base upon which the financial manager forms her analysis and next steps.
  • The Cash Flow Statement (CFS) is the financial statement, generated at routine intervals, that shows a company's incoming and outgoing cash funds: Where the money is coming from and where it is being used. The statement reports the cash flow in terms of investment, operating and financing activities. The CFS is used to evaluate the short-term viability of a company, most particularly its ability to pay its operating bills, including payroll and other immediate expenses. Banks, lenders and creditors also rely on this information to assess the company's ability to repay loans. In today's highly competitive resources environment, businesses must realize that potential employees' comfort with the viability of the company is as critically important as the opinion of the interested parties mentioned earlier.
  • The Balance Sheet is commonly referred to as the "snapshot" of the business' assets and liabilities at a finite point in time. Essentially, the document provides balances of assets which equal liabilities and net worth. The balance sheet is the one document which reports to a single point in time, rather than a period of time, such as the Profit and Loss statement.
  • Accounts Receivable is managed in large companies through credit control, collections and payment processing; safeguarding assets means tracking the average number of days it takes to collect an account (Salek, 2007). The accounts receivable is mentioned in this article because of its direct impact on cash flow, the necessity of which was addressed in the prior paragraph. Astute managers are on the alert for lengthening collection periods, a heralding sign of potentially decreasing cash flow. Availing customers of the benefit of purchasing goods and services on credit can build a larger customer base; but savvy financial experts know this practice does need to be managed aggressively in order to stay financially protected. In times of sales or economic slowdown, too high an AR can disadvantage the company greatly. The percentage of receivables over 90 days is monitored by managers to gain high-level views of how the sales and collections staff is performing. The older a receivable account grows, the more risk to the creditor (the business) and the less value to the collected dollar. Managers...

(The entire section is 4079 words.)