|Picture of Business in Unsound Financial Management|
Meaning of Sound Financial Management
Sound financial management is that part of management in which we learn to get and use of fund under effective control. Every risk of business is evaluated in the financial management. In this, we solve our capital collection problems, insufficient credit terms, insufficient sales, inventory issues and reasons of high operating expenses. We buy the fixed assets which are necessary for our business. No buying of unrequired fixed asset will reduce the risk of decrease in profit because excess fixed asset without use will not generate any income but increase our cost with depreciation.
Techniques of Sound Financial Management
1. Follow the Accounting Standards
You would listen that some businesses failed due to poor financial management. They did not follow the accounting standards. Best accounting practice is good technique of sound financial management. If your records are upto date with following all accounting standards, it will give your true and fair view of your financial status. With this, you can make good financial planning. You can control by checking the weakness through reading your correct financial statements. If you have done Bad practices. You have inadequate records. You have unqualified accountant who do not know to follow the accounting standards, you can see the bad face of your business.
As per Patron Prince Michael of Kent
Sound financial management is the crucial factor, not only in the survival of new businesses but for making business more efficient, and sound financial management starts with effective bookkeeping. The Institute of Certified Bookkeepers, ever since its inception, has contributed significantly to good business practice, particularly amongst small and medium sized enterprises, and I am delighted to support this in my role as Patron.
2. Working Capital Management Techniques
Working capital management techniques are the part of sound financial management techniques. In working capital management techniques, we use cash management techniques, inventory management techniques, debtor management techniques and creditor management techniques. For example in cash management, we make cash flow statement, do cash flow analysis, cash budget. All these things helps us, what is the need of cash, what amount of cash should always be in our pocket. Which expenses will we have to pay soon. Which incomes will we have to receive in cash soon. In inventory management techniques, we can calculate the correct quantity of inventory which we need in business for producing new products. EOQ can be used for this. We also calculate minimum level, maximum level, reorder level and inventory conversion period. All are helpful for reducing the over and low buying of inventory. We also calculate average collection period and average payment period. With this, we can estimate correct working capital.
3. Capital Budgeting Techniques
You know that we pay big money on buying of fixed assets or in investment. So, it is better to know which fixed asset will give high return. Without knowing this, we are just gambling with business money. Thanks capital budgeting techniques who supported to make sound financial plan. In capital budgeting techniques you can use buy back period, NPV, IRR and Profitability index.
4. Budgetary Control Techniques
By making different budget, we control our business's fund. In budgetary control techniques, we use variance analysis, responsibility accounting, adjustment of fund, ZBB. Detail of all these techniques, you can read at here.
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