Finance is the lifeblood of any organization, be it nano, small, large, for-profit, not-for-profit, etc. It is, therefore, extremely important that the finances of the organization are managed in the most efficient and effective manner to ensure long-term viability, sustainability and profitable (except not-for-profit organizations). The functions of financial management include (but are not limited to):
- Fund procurement
- Fund utilization
- Financial Reporting
- Financial control, etc.
Today, more people realize the importance of financial management in personal and professional spheres. Not just the demand for finance professionals but the demand for finance courses has also increased. It is possible today for even non-finance professionals to learn the concepts and skills related to financial management and accounting through online courses in finance.
Importance of Proper Utilization of Funds
While all the functions of financial management are equally important, special stress is laid on fund utilization. This is because effective and efficient fund utilization enables organizations in profit and wealth/ returns maximization, minimization of the cost of capital, improving savings and bettering its value. When funds are optimally utilized, it will help the organization grow and flourish in the long-run.
If funds are under- or over-utilized or mismanaged, it will be detrimental to the sustainability, viability and growth of the organization, which may even have to shut down operations as a result. This is because the capital needs of the organization are met through external sources in most cases and if the organization is letting the funds sit idle, it is not earning to its maximum capacity. If it is using it all up in an imprudent manner, it will have to raise more funds and in turn, increase its tax/ dividend burden or lose more control over its working. And beyond a certain level, it may not be able to raise more funding. Utilization of funds also impacts the liquidity, safety and risk management of the organization.
Constituents of the Fund Utilization Function
Investment decisions: Every organization requires fixed assets, and since these will be used for a longer duration and involve heavy fund requirement, they are an investment. Some fixed assets appreciate while other depreciate and will have to be replaced. The investment should also be such that there is enough left for the organization to meet its operational expenses and purchase current assets. So, organizations need to properly plan and prioritize the purchase and replacement of the various fixed assets through capital budgeting, profit and loss analysis, opportunity cost analysis, etc.
Working Capital and Cash Flow Management: Organizations need liquidity and cash flow in the short-term in order to meet their operational costs, working capital requirements and emergencies. The level of cash flow and liquidity have an impact on the credit-worthiness of the organization.
Utilization of Surplus: The surplus or profits over and above the fixed costs and tax payments of the organization need to be effectively allocated and utilized for its growth and sustenance. Dividends to shareholders and bonuses to employees must be optimal to enlist continued support and involvement; it must not be too high or too low.
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