Financial management consists of those activities that are concerned with obtaining mo
ney and using it effectively. Short-term financing is money that will be used for one year or less. Although there are many short-term needs, cash flow and inventory are two problems that deserve special attention. Long-term financing is money that will be used for more than one year. Such financing may be required for starting a business, expansion, new-product development, or replacement of production facilities. Proper financial management can ensure that money is available when it is needed and that it is used efficiently, in keeping with organizational goals.
A financial plan begins with the organization's goals and objectives. Next these goals and objectives are "translated" into budgets that detail expected income and expenses. From these budgets, which may be combined into an overall cash budget, the financial manager determines what funding will be needed and where it may be obtained. The four principal sources of financing are sales revenue, equity capital (derived from the sale of common and preferred stock) , debt capital, and proceeds from the sale of assets. Once the needed funds have been obtained, the financial manager is responsible for ensuring that they are properly used. This is accomplished through a system of monitoring and evaluating the firm's financial activities.
Most short-term financing is unsecured. That is, no collateral is required. Sources of unsecured short-term financing include trade credit, promissory notes issued to suppliers, unsecured bank loans, commercial paper, and commercial drafts. Sources of secured short-term financing include loans secured by inventory or accounts receivable. It is also
possible to sell receivables to factors. Trade credit is the least expensive source of short-term financing; there is no interest charge. The cost of financing through other sources generally depends on the source and on the credit rating of the firm that requires the financing. Factoring is generally the most expensive approach.
21. Financial management consists of those activities that are concerned with obtaining money and using it effectively.
22. Short-term financing and the long-term financing is the same.
23. A financial plan begins with the organization's plan.
24. The four principal sources of financing are sales revenue, equity, debt capital and financial plans.
25. Trade credit is the most expensive source of short-term financing.
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