Graham and Rhona Beck Skills Centre Blog

Graham and Rhona Beck Skills Centre Blog

Business and financial management principles

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on Thursday, 28 August 2014 in Skills Centre Blog

Business and financial management principles:

Management in business is the function that coordinates the efforts of people to accomplish goals and objectives; using resources efficiently and effectively.

1. Business management:

Management consists of four fundamental management functions namely:

1) Planning:

Planning has to do with where the organization sees themselves in the future, in other word what their goals and objectives, mission and vision are. With goals and missions the organization can decide on a strategy to achieve overall success. Top level management will mostly be involved in this step. Thus it is known as strategic planning. Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. It may also extend to control mechanisms for guiding the implementation of the strategy. Strategy has many definitions, but generally involves setting goals, determining actions to achieve the goals, and mobilizing resources to execute the actions. A strategy describes how the ends (goals) will be achieved by the means (resources). The senior leadership of an organization is generally tasked with determining strategy. Strategy can be planned (intended) or can be observed as a pattern of activity (emergent) as the organization adapts to its environment or competes.


2) Organizing:

Organizing is the second step in the management process. This takes place once the goals and plans have been determined. Management will have to allocate human resources to different sections and departments. Task, roles, and responsibilities have to be defined so that each person knows what he/she is responsible for within the organization.


3) Leading:

Leading refers to directing human resources of the organization and motivating them in such a way that they will work productively to reach the organizations missions and goals. Management gets things done by delegating work to subordinates and peers. They also collaborate with peers, superiors, individual and groups in order to reach their goals. Leading an organization means making use of influence and power to motivate employees to achieve business goals.


4) Controlling:

The final step in the management process is controlling. Controlling would mean that the managers should constantly make sure that the organization is still on the right path to achieving its goals. If the organization strays from its path, management will make use of corrective action to rectify the situation and ensure that they reach their goals and missions.


2. Financial Management:

Financial management refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized function directly associated with the top management. The significance of this function is not only seen in the 'Line' but also in the capacity of 'Staff' in overall administration of a company. It has been defined differently by different experts in the field.


It includes how to raise the capital, how to allocate it i.e. capital budgeting. Not only about long term budgeting but also how to allocate the short term resources like current assets. It also deals with the dividend policies of the shareholders.


Accounting equation: Assets = Liabilities + Equities

Basic terms and concepts:


i. Debits and Credits

These are the backbone of any accounting system. Every accounting entry in the general ledger contains both a debit and a credit. Debits must equal all credits. If they don't, the entry is out of balance. Out-of-balance entries throw your balance sheet out of balance.


Debits and Credits vs. Account Types

Account Type          Debit         Credit

Assets Increases Decreases

Liabilities Decreases            Increases

Income Decreases Increases

Expenses               Increases Decreases

ii. Financial ratios:

a) Liquidity: The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.

b) Leverage: The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.

c) Activity: Activity ratios are used to measure the relative efficiency of a firm based on its use of its assets, leverage or other such balance sheet items. These ratios are important in determining whether a company's management is doing a good enough job of generating revenues, cash, etc. from its resources.

d) Profitability: A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.


iii. Trail Balance: A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial balance is to ensure the entries in a company's bookkeeping system are mathematically correct.


iv. Income statement: A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. Also known as the "profit and loss statement" or "statement of revenue and expense."


v. Balance sheet: A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet must follow the following formula:

Assets = Liabilities + Shareholders' Equity

Business management and financial management go hand in hand with one another. Both the business and the financial manager works together to ensure that the organization reaches their goals and makes a profit and gains a larger market share.



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