Do you want to learn about the tools of financial management? Or about techniques of financial management? Or do you just want to be able to apply the techniques and methods of financial management? If so, Financial Management is for you.
Financial management techniques and methods is all about providing you with techniques and methods of financial management. There are tools of financial management which you can follow for effective financial management.
TECHNIQUES
Technique 1. Common-Size Statements:
The common-size financial statements are those in which figures reported are converted into percentage to some common base. Common-size balance sheet and income statement are prepared for vertical analysis and interpretation is done for identification of causes for changes taken place over a period of time.
The items in the financial statements are presented as percentages or ratios to total of items and a common base for comparison is provided. Each percentage shows the relation of the individual item to its respective total.
Technique 2. Trend Ratios:
Trend ratios are the index numbers of the movements of financial figures reported in the financial statements for more than one accounting period.
It is a statistical technique adopted to reveal the trend of financial items which are used in analysis of behaviour of financial items and for preparation of projected financial statements. In preparation of trend ratios, the base accounting period should be selected and the financial figures of that base period should be given the index number of 100.
The trend ratios are calculated for the subsequent accounting periods taking the base period trend ratio as 100. The trend percentages are calculated for select major financial items in the financial statements to arrive at the conclusions for important changes.
Technique 3. Funds Flow Analysis:
The funds flow analysis gives the details of changes in financial position of a concern between two balance sheet dates. It is based on net working capital concept which is termed as ‘fund’. The funds flow statement contains the details of financial resources which have become available during the accounting period and the ways in which those resources have been used up.
The flow of funds refers to movement of funds which cause a change in working capital of the organization. The net increase or decrease in working capital will be further analyzed through preparation of Statement of changes in working capital position. Funds flow statement is a parameter for testing of the effective use of working capital. The analysis is particularly useful for long range planning where projections of liquid resources are vital.
Technique 4. Cash-Flow Analysis:
The preparation of cash-flow statements has been made mandatory. A statement of cash-flow reports the cash receipts and cash payments and net changes in cash resulting from operating, investing and financing activities of an enterprise during the period.
The cash-flow statement reconciles the opening and closing balances of cash and cash equivalents for the reported accounting period. It reports a net cash inflow or outflow for each activity and for the overall business.
Technique 5. Ratio Analysis:
Ratio analysis is used as an important tool in analysis of financial statements. Ratios are used as an index or yardstick for evaluating the financial position and performance of a firm. Ratio is the expression of one figure in terms of another. It is the expression of the relationship between mutually independent figures. Ratio analysis used financial report and data and summarizes the key relationship in order to appraise financial performance.
It helps the analysts to make quantitative judgment about the financial position and performance of the firm. There are various ratios which are used by different parties for different purposes and can be calculated from the information given in financial statements. The comparison of past ratios with future ratios shows the firm’s relative strength and weaknesses.
Technique 6. Working Capital Management:
In the efficient working capital management, some of the techniques like economic order quantity, ABC analysis, fixation of inventory levels, cash management models are adopted.
Technique 7. Capital Structure:
The Finance manager has to decide an optimum capital structure to maximize the wealth of shareholders. In capital structure decisions – analysis of operating and financial leverages, cost of different components of capital, EPS – EBIT analysis, ascertainment of EPS of different financing alternatives, determination of financial break-even point, indifference point analysis and other mathematical models are used.
Technique 8. Capital Budgeting Techniques:
Investment in long-term assets for increasing the revenue of firm is called as ‘capital budgeting’. It is a decision to invest funds in long-term activities for future benefits that increase the wealth of the firm thereby increase the wealth of owners. Capital budgeting refers to long-term planning for proposed capital outlays and their financing.
The future growth of a firm depends on capital expenditure decisions. Capital budgeting involves large amount of funds, risk and uncertainty and they are of an irreversible nature. Estimation of cash-flow is very important for evaluating the investment proposals. Capital budgeting results the exchange of current fund for future benefits which will occur over a series of years to come.
TOOLS
1.Xero (Accounting Software)
This list cannot be complete without mentioning an accounting tool. It’s safe to assume that any lineup of business tools you’re considering should include the keystone features of accounting. You will be able to enhance various value-added components with mobile access and integrate with point-of-sale software and other third-party apps.
Xero, a prominent accounting software company, offers a way to simplify monetary transactions for employees and customers alike. Functions include report generation, automated recordkeeping, expense calculation, and invoicing. Companies can also manage inventory and sales orders through Xero, removing the need for manual data entry.
Xero starts at $20 a month.
Pros:
- Easy to use
- Lightweight software that can run on a variety of devices
- Suitable for small-to-medium-sized businesses
- Integrates well with other tools
Cons:
- Starter version limits your number of transactions each month
- More advanced features for sophisticated financial teams may not be available
2. Expensify (Expense Tracking)
Keeping track of everyday expenses can be a strenuous task, but having the proper tools will save you the hassle of organizing and maintaining physical receipts and small company expenses. Monitoring such expenses is part of some accounting platforms, so look for a program that integrates with your accounting software if the feature isn’t already present.
Expensify is an expense tracking tool where employees can scan receipts or upload cash expenses from their mobile devices for convenient rebilling, expense accounting, and reimbursement. It also generates reports on user transactions.
Expensify has tiered pricing options for both individuals and businesses.
Pros:
- Integration with third-party platforms like QuickBooks
- “Smart scanning” automatically categorizes certain entries to save time
- Extra features like GPS mileage tracking
Cons:
- User interface takes a while to get used to
- Receipt scanning is reportedly slow according to some users
3. PlanGuru (Budgeting)
Creating a realistic budget and sticking to it, while vital for an organization’s financial health, can be difficult for emerging companies. Many accounting software packages allow you to manage cash flow and make projections months in advance. However, if you want to divide your assets strategically on a separate platform, PlanGuru may be for you.
Aimed at small businesses, PlanGuru allows you to analyze your budget and notice financial shortcomings before they become serious problems. It takes data from income statements, cash flow records, and balance sheets in order to do so.
PlanGuru is $99 a month with a free 30-day trial.
Pros:
- Learning resources like demos and tutorials are available so that you can hit the ground running
- Integrates well with QuickBooks and Excel
- The money-back guarantee ensures you can try the service risk-free
Cons:
- Only compatible on Windows PCs
- The cloud-based version is locked behind a paywall
4. Approve.com (Spend Management)
Approve.com is a spend management tool that improves visibility into spend operations. It’s easy to use and integrates with existing Enterprise Resource Planning (ERP) solutions. It’s the ultimate business partner when it comes to financial management.
Working with companies like Approve.com allows businesses to integrate and streamline many of their financial operations and modernize everyday business. With a specialization in requisitioning, Approve enables companies to control spending pipelines and create an accessible, unified process of visible spending.
The entirely cloud-based service features simple customizable forms, streamlined approval processes, and automated POs. It is targeted at medium-to-large businesses, hence the starting price of $1,500 a month.
Pros:
- Easy integration with existing ERP, SSO, and HR systems
- Free demo and trial period
- Training resources available, including webinars, documentation, and in-person instruction
- 24/7 live support
Cons:
- Virtual credit card support is unavailable
- Few options for the end user experience
5. FreshBooks (Billing and Payment Processing)
When it comes to online billing processes, customers expect perfection. The smoother and more seamless your billing process is, the faster final sales can be made, and the better your cash flow.
While a basic online solution with invoicing capabilities is an adequate solution, having added features and flexible pricing plans can make all the difference. With cloud-based billing systems like FreshBooks, you can ensure best practices and a value-added user experience that can increase customer satisfaction and maybe even long-term loyalty.
Designed for smaller organizations, FreshBooks automates important accounting tasks. Users create and manage entries and export them effortlessly. It works on the cloud, allowing you to access your data from anywhere.
Pros:
- Simple to set up and use without too many bells and whistles
- Automatic reminders available for late payments
- Flexible API for integrations with third-party services
Cons:
- Not many heavy-duty functions for larger enterprises
- Limited mobile app that cannot access reports
6. BrightPay (Payroll Management)
Managing every component of wage or salary distribution, sick leave, and holiday pay can be unnecessarily challenging through the standard Excel payroll management systems.
Implementing a system that makes managing payroll a seamless and integrated process can significantly increase the efficiency of your operations and give employees great visibility over their pay. These resources are accessible on various digital devices. BrightPay, for instance, is a cloud-based service from the U.K. that makes payroll processing easy and intuitive.
Pros:
- Excellent ease of use
- The auto-enrollment feature helps manage employee pensions
- Relatively inexpensive for its functionality
- Free trial available
Cons:
- BrightPay Connect, with several online features, is locked behind an additional paywall
Conclusion
Financial management methods are important for every person to know. If you are looking for financial management techniques, or if you want to learn about financial management tools, this is the place. Here you will find info about various kinds of cash flow analysis, cash flow forecast, financial anticipation statement, forecasted balance sheet, and more.