Financial Management & Financing : Key Factors for Business Success
Financial management & financing are key factors for the success of any business, both new and current. In fact, all businesses are established to earn profits, which is impossible without proper financial management and financing. Getting the required funds for capital, assets and operations is the main focus of financing. Thus, it is considered part of financial management. These issues are highlighted in this post within our discussion of the Entrepreneurship 2016 Book, the 2nd book in your channel “Management with Merits – Manage to Prosper”. The book conceptualizes entrepreneurship as a process that has primary steps (parts) and minor ones or tasks (chapters). In our previous sessions/videos, we have introduced this book and completed the 1st & 2nd steps of the entrepreneurial process in it, which are “Entrepreneurship Decision” and “Developing Successful Business Ideas” respectively. Last session, we started the 3rd step “Moving from Ideas to Entrepreneurial Firms” by discussing the ethical/legal and human aspects of firms. This session concludes this step by discussing the financial aspects, specifically financial management & financing. To access all our previous posts for this book, please click here. To download the associated presentation with this session, please go to its video on YouTube and click on the appropriate link in the description section below the video.
Financial Management & Financing Concepts :
There are several definitions for financial management. However, it can be simply expressed as the art & science of managing funds & assets, along with how to obtain & develop capital, funds and assets. Thus, it is a crucial aspect not only for businesses, but also for individuals, families and societies. As an encompassing concept, financial management includes financing because of it focuses on the means of obtaining sufficient funds to establish and run the business efficiently and effectively. As a result, we can conclude that financial management has two pillars. The first is the assets, which includes the capital and all other funds, both tangible and intangible; whereas the second is the liabilities and stockholders’ equity, which is the financing part of financial management. Both these pillars form the sides of the balance sheet, one of the key financial statements for firms. In this regard, we would like to remind you, as we did in the post of business plans, that all aspects related to financial management will be discussed in details when we take one of the channel’s future books, which is “Financial Management 2012”.
Financial Management Objectives :
Financial management is an integral part of the organizational overall management. Thus, all managerial functions that we discussed at our 1st book (Management 2015) apply to financial management. Thus, objectives of financial management should be constructed within the guidance of the overall organizational strategies. Our book (Entrepreneurship 2016) lists four primary objectives for financial management as per below.
The Procedure of Financial Management :
The book conceptualizes financial management in a procedural format that contains four primary steps. However, in reality, this rarely happens due to the fluctuations and disturbances of both internal and external environments. Therefore, such procedure can be described as means of guidance for firms in their financial management. Besides, it takes the characteristic of iteration, where firms need to go back and forth through the steps depending on their circumstances. Below is the process.
Financing Forms : Personal
As discussed before, financing is part of financial management. Definitely, all firms need financing for several reasons as per the below shape (1st one). However, they have the choice regarding its forms. The book states two main financing types. The first one is the personal financing, which is the most famous form of financing for new entrepreneurs. It includes using personal funds, getting funds from friends and/or relatives and bootstrapping as below (2nd shape).
Financing Forms – External
Despite the popularity of personal financing for new entrepreneurs, they tend to recognize the need for extra financing (external) after their businesses progress and start expanding. A good explanation for that is the “Break-even Point” concept, which shows the time gap between business expenditures and profits gain. All start-ups must spend ample amounts of funds to establish their firms and start their operations to gain sales (revenues). After that, they continue acquiring costs to keep their operations or sales. Thus, despite the revenues gained, they simply serve as a coverage for the costs of start-up and sales operations, without any profits. This process continues until firms reach a specific point (either sales units or money) where the cumulative revenues obtained equalize the costs incurred for both start-up and operations until reaching the point. This point is the break-even point. Beyond it, entrepreneurs start to gain profits from sales.
Types of External Financing :
There are two main types of external financing, which are debt and equity; each of which has its pros & cons. Debt financing involves borrowing from banks or venture capitals. The borrowed money must be returned, usually with interests. Thus, this is a drawback for debt financing. On the other hand, this type doesn’t take ownership or managerial control on the firm from the entrepreneur, which is not the case of the 2nd type (equity). In this type, the entrepreneur gets financing from others in favor of becoming shareholders (owners), receiving profits (mostly annually) in the forms of dividends. On the other hand, this characteristic is the down side of this type because entrepreneurs have to give up some of their ownership and control to the financing agents. The below shape shows the procedure of external financing. Finally, our book provides a great table that helps firms choose the most suitable financing method depending on their conditions and status, which is reproduced below.
That was our session for today, which concludes the 3rd step in entrepreneurship. Thank you so much for watching and following us. Next session we start with the 4th and last step in entrepreneurship (Managing & Growing an Entrepreneurial Firm). Watch and follow us each Thursday on your channel Management with Merits – Manage to Prosper. Please support your channel strongly so that it can continue its glorious mission and services. Subscribe to the channel in YouTube and activate the notifications bell there. Follow us, participate with us and share the channel and all its electronic contact platforms.