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Jul 12 2023
Understand a Bookkeeping for Effective Financial Management

Understand the Bookkeeping for Effective Financial Management

What is Bookkeeping?

Bookkeeping is a process of recording and organizing all the business transactions that have occurred in the course of the business.  Bookkeeping is an integral part of accounting and largely focuses on recording day-to-day financial transaction of the business.

All the financial transactions such as sales earned revenue, payment of taxes, earned interest, payroll and other operational expenses, loans investments etc. are recorded in books of accounts.

The way the bookkeeping is managed determines the accuracy of the overall accounting process that is been followed by the business. Thus, bookkeeping ensures that the record of financial transactions are up-to-date and more importantly, accurate

Why Bookkeeping is important for all business?

Just like to prepare a report, you need a source of data, bookkeeping is a source that gets summarized into the financial statements or any other accounting report that you see. With bookkeeping tracks and records all the financial transactions, it becomes the starting point of accounting. No bookkeeping = No accounting.

Thus, it becomes important for businesses, small or big to have bookkeeping in place.

 

The following are the importance of bookkeeping:

  • Bookkeeping helps to keep track of receipts, payments. Sales, purchases and record of every other transaction made from the business.
  • It helps to summarize the income, expenditure and other ledger records periodically.
  • It provides information to create financial reports which tells us specific information about the business as how much profits the business has made or how much the business is worth at a specific point of time.

Tasks and examples of the Bookkeeping system

With the definition of bookkeeping, it’s clear that the bookkeeping task involves all that is required to track, record and organize all the financial transaction that has occurred in the business.

The person is responsible for managing bookkeeping usually entrusted with the responsibility of tracking all the transaction related to business. The following are the bookkeeping tasks examples:

  • Billing for goods sold or services provided to clients.
  • Recording receipts from customers.
  • Verifying and recording invoices from suppliers.
  • Recording payment made to suppliers and so on…

 Are accounting and bookkeeping different? Read ‘Bookkeeping and Accounting’

Bookkeeping  period

The accounting period that a business entity chooses for its business becomes part of its bookkeeping system and is used to open and close the financial books. The accounting period affects all aspects of the company’s finances, including taxes and analysis of your financial history.

In most of the countries, the accounting period is the financial year which starts from 1st April and ends on 31st March of every year. In some countries like the Middle East (UAE, Saudi, Bahrain etc) the calendar year is used as an accounting period i.e. 1st January to 31st December.

Types of Bookkeeping

Business entities choose from two types of bookkeeping systems, although some entities use a combination of both.

The single-entry system of bookkeeping requires recording one entry for each financial activity or transaction. The single-entry bookkeeping system is a basic system that a company might use to record daily receipts or generate a daily or weekly report of cash flow.

The double-entry system of bookkeeping requires a double entry for each financial transaction. The double entry system provides checks and balances by recording corresponding credit entry for each debit entry. The double-entry system of bookkeeping is not cash-based. Transactions are entered when a debt is incurred or revenue is earned.

Read ‘Types and Methods of Bookkeeping System’ to know more.

Method of Bookkeeping

The cash-based system of accounting records financial transactions when payment is made or received. This system recognizes revenue or income in the accounting period in which it is received and expenses in the period in which they are paid.

The accrual basis method, which is favoured under the generally accepted principals of accounting, record income in the accounting period in which it is earned and records expenses in the period incurred.

Principles of Bookkeeping

To ensure the all the transactions are recorded and organized systematically, bookkeeping principles are applied. The following are the bookkeeping principle

  • Revenue principle
  • Expense principle
  • Matching principle
  • Cost principle
  • Objectivity principle

Read ‘Principles of Bookkeeping’ to know more.

How to record entries in Bookkeeping

Entries in bookkeeping are recorded in the archaic method of journal entry. Here, the respective individual or accountant manually enters the account numbers and performs individual action of debits and credits for each transaction. This approach is time-consuming and subject to error, and so is usually reserved for adjustments and special entries.

Posting entries and documentation

All Financial transactions undertaken by a business entity are posted in ledgers using the information from receipts and other documentation. Ledgers summarize the transactions recorded.  Most bookkeeping software automates the posting of transaction details to respective ledgers and reports.

Most entities post financial transactions daily, while others post in batches or outsource the posting activity to accounting professionals. Posting entries regularly helps in generating on-time financial statements or reports.

Financial transactions documentation is an important element of a company’s bookkeeping system. It requires maintaining files of receipts and other documents. The duration period for maintaining documentation records depends on your company policy and legal or tax requirements.

Influence of Bookkeeping on the chart of accounts

A business entity can create more comprehensive bookkeeping system when it includes accounts for each area of financial transactions. Financial accounts are grouped or categorized based on the nature of accounts or impact on the financial statements. This usually includes balance sheet accounts and income statement accounts.

Balance sheet accounts are assets, liabilities, and stockholder or owner equity. Income statement accounts are operating and non – operating revenues, expenses, gains and losses.

 

Understanding Cost Accounting: Definitions, Types, and Real-World Examples

 

Frequently asked questions

What exactly does a bookkeeper do?

A bookkeeper is primarily responsible to record and track a company’s financial transactions which include, purchases, sales and expenses. These transactions are first recorded as general ledger, which are later used while preparing a balance sheet.

What is the difference between Accounting and Bookkeeping?

Accounting is a broad subject. It calls for a greater understanding of records obtained from bookkeeping and an ability to analyze and interpret the information provided by bookkeeping records.

Bookkeeping is the recording phase while accounting is concerned with the summarizing phase of an accounting system. Bookkeeping provides necessary data for accounting and accounting starts where bookkeeping ends.

Take a look at the difference between Bookkeeping and Accounting

Is it hard to be a Bookkeeper?

No. Bookkeeping is a rather simple and straight forward process which can be easily learnt while you’re on-the-job. 

What are the 2 kinds of Bookkeeping?

The single-entry and double-entry bookkeeping systems are the two methods commonly used. While each has its own advantage and disadvantage, the business has to choose the one which is most suitable for their business.

 

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Kalinka Infotech 1 Comments
Jul 8 2023
Personal Money Management Insights:10 Essential Finance Tips

Personal Money Management Insights: 10 Essential Finance Tips

Introduction: Effective personal money management is crucial for achieving financial stability and building a secure future. By adopting smart financial habits and making informed decisions, you can take control of your finances and work towards your financial goals. In this article, we will discuss ten essential financial tips that can help you improve your personal money management skills and make sound financial choices.

  1. Create a Budget: Start by creating a detailed budget that outlines your income, expenses, and savings goals. A budget helps you track your spending, identify areas where you can cut back, and allocate funds for savings and investments.
  2. Track Your Expenses: Monitor your expenses regularly to gain a clear understanding of where your money is going. Use budgeting apps or spreadsheets to categorize and track your spending, enabling you to identify unnecessary expenses and make adjustments accordingly.
  3. Build an Emergency Fund: Set aside a portion of your income each month to build an emergency fund. Aim to save at least three to six months’ worth of living expenses. This fund acts as a safety net during unexpected events like job loss or medical emergencies.
  4. Prioritize Debt Repayment: Develop a strategy to tackle your debts systematically. Start by paying off high-interest debts first, such as credit cards, while making minimum payments on other debts. As you pay off each debt, allocate the freed-up funds towards the next one, accelerating your debt repayment progress.
  5. Save for Retirement: Start saving for retirement as early as possible. Contribute to retirement accounts like 401(k)s or IRAs and take advantage of any employer matching programs. The power of compounding interest over time can significantly grow your retirement savings.
  6. Diversify Your Investments: Investing is a key component of wealth creation. Diversify your investment portfolio across different asset classes, such as stocks, bonds, mutual funds, and real estate, to reduce risk and maximize returns. Consider seeking professional advice to make informed investment decisions.
  7. Live Within Your Means: Avoid excessive spending and resist the urge to keep up with others’ lifestyles. Differentiate between needs and wants, and make conscious choices to live within your means. Practice frugality and make wise purchasing decisions.
  8. Stay Informed: Stay updated on financial news, trends, and best practices. Develop financial literacy by reading books, attending seminars, or following reputable financial websites. Knowledge is power when it comes to making informed financial decisions.
  9. Regularly Review Your Insurance Coverage: Ensure you have adequate insurance coverage for your health, home, vehicle, and other valuable assets. Regularly review your policies to make sure they align with your current needs and circumstances.
  10. Seek Professional Guidance: When faced with complex financial situations or major life events, seek guidance from financial professionals such as financial advisors or certified public accountants. They can provide personalized advice and help you navigate through financial challenges effectively.

Corporate Finance Definition and Activities

Conclusion: By implementing these ten essential financial tips, you can enhance your personal money management skills and build a strong financial foundation. Remember, financial success is a journey that requires discipline, consistency, and continuous learning. Start taking control of your finances today and pave the way for a brighter financial future

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Kalinka Infotech 2 Comments
Jun 29 2023
How to Successfully Handle Your Companys Finance Efficiently

In business, finance management is the practice of handling a company’s finances in a way that allows it to be successful and compliant with regulations. That takes both a high-level plan and boots-on-the-ground execution.

What Is Financial Management?

At its core, financial management is the practice of making a business plan and then ensuring all departments stay on track. Solid financial management enables the CFO or VP of finance to provide data that supports creation of a long-range vision, informs decisions on where to invest, and yields insights on how to fund those investments, liquidity, profitability, cash runway and more.

ERP software can help finance teams achieve these goals: A financial management system combines several financial functions, such as accounting, fixed-asset management, revenue recognition and payment processing. By integrating these key components, a financial management system ensures real-time visibility into the financial state of a company while facilitating day-to-day operations, like period-end close processes.

Objectives of Financial Management

Building on those pillars, financial managers help their companies in a variety of ways, including but not limited to:

Maximizing profits

Provide insights on, for example, rising costs of raw materials that might trigger an increase in the cost of goods sold.

Tracking liquidity and cash flow

Ensure the company has enough money on hand to meet its obligations.

Ensuring compliance

Keep up with state, federal and industry-specific regulations.

Developing financial scenarios

These are based on the business’ current state and forecasts that assume a wide range of outcomes based on possible market conditions.

Manage relationships

Dealing effectively with investors and the boards of directors.

Ultimately, it’s about applying effective management principles to the company’s financial structure.

Scope of Financial Management

Financial management encompasses four major areas:

  1. Planning

    The financial manager projects how much money the company will need in order to maintain positive cash flow, allocate funds to grow or add new products or services and cope with unexpected events, and shares that information with business colleagues.

    Planning may be broken down into categories including capital expenses, T&E and workforce and indirect and operational expenses.

  2. Budgeting

    The financial manager allocates the company’s available funds to meet costs, such as mortgages or rents, salaries, raw materials, employee T&E and other obligations. Ideally there will be some left to put aside for emergencies and to fund new business opportunities.

    Companies generally have a master budget and may have separate sub documents covering, for example, cash flow and operations; budgets may be static or flexible.

    Static vs. Flexible Budgeting

    StaticFlexible
    Remains the same even if there are significant changes from the assumptions made during planning.Adjusts based on changes in the assumptions used in the planning process.

  3. Managing and assessing risk

    Line-of-business executives look to their financial managers to assess and provide compensating controls for a variety of risks, including:

    • Market riskAffects the business’ investments as well as, for public companies, reporting and stock performance. May also reflect financial risk particular to the industry, such as a pandemic affecting restaurants or the shift of retail to a direct-to-consumer model.
    • Credit riskThe effects of, for example, customers not paying their invoices on time and thus the business not having funds to meet obligations, which may adversely affect creditworthiness and valuation, which dictates ability to borrow at favorable rates.
    • Liquidity riskFinance teams must track current cash flow, estimate future cash needs and be prepared to free up working capital as needed.
    • Operational riskThis is a catch-all category, and one new to some finance teams. It may include, for example, the risk of a cyber-attack and whether to purchase cybersecurity insurance, what disaster recovery and business continuity plans are in place and what crisis management practices are triggered if a senior executive is accused of fraud or misconduct.

  4. Procedures

    The financial manager sets procedures regarding how the finance team will process and distribute financial data, like invoices, payments and reports, with security and accuracy. These written procedures also outline who is responsible for making financial decisions at the company — and who signs off on those decisions.

    Companies don’t need to start from scratch; there are policy and procedure templates available for a variety of organization types, such as this one for nonprofits.

Functions of Financial Management

More practically, a financial manager’s activities in the above areas revolve around planning and forecasting and controlling expenditures.

The FP&A function includes issuing P&L statements, analyzing which product lines or services have the highest profit margin or contribute the most to net profitability, maintaining the budget and forecasting the company’s future financial performance and scenario planning.

Managing cash flow is also key. The financial manager must make sure there’s enough cash on hand for day-to-day operations, like paying workers and purchasing raw materials for production. This involves overseeing cash as it flows both in and out of the business, a practice called cash management.

Along with cash management, financial management includes revenue recognition, or reporting the company’s revenue according to standard accounting principles. Balancing accounts receivable turnover ratios is a key part of strategic cash conservation and management. This may sound simple, but it isn’t always: At some companies, customers might pay months after receiving your service. At what point do you consider that money “yours” — and report the good news to investors?

5 Tips to Improve Your Accounts Receivable Turnover Ratio

  1. Invoice regularly and accurately. If invoices don’t go out on time, money will not come in on time.
  1. Always state payment terms. You can’t enforce policies that you haven’t communicated to clients. If you make changes, call them out.
  1. Offer multiple ways to pay. New B2B options are coming online. Have you considered a payment gateway?
  1. Set follow-up reminders. Don’t wait until customers are in arrears to start collection procedures. Be proactive, but not annoying, with reminders.
  1. Consider offering discounts for cash and prepayments. Cash(less) is king in retail, and you can reduce AR costs by encouraging customers to pay ahead rather than on your normal customer credit terms.
Learn more about maximizing your AR turnover ratios.

Finally, managing financial controls involves analyzing how the company is performing financially compared with its plans and budgets. Methods for doing this include financial ratio analysis, in which the financial manager compares line items on the company’s financial statements.

Strategic vs. Tactical Financial Management

On a tactical level, financial management procedures govern how you process daily transactions, perform the monthly financial close, compare actual spending to what’s budgeted and ensure you meet auditor and tax requirements.

On a more strategic level, financial management feeds into vital FP&A (financial planning and analysis) and visioning activities, where finance leaders use data to help line-of-business colleagues plan future investments, spot opportunities and build resilient companies.

The 6 Ways to Grow a Company

 

Importance of Financial Management

Solid financial management provides the foundation for three pillars of sound fiscal governance:

  1. Strategizing

    Identifying what needs to happen financially for the company to achieve its short- and long-term goals. Leaders need insights into current performance for scenario planning, for example.

  2. Decision-making

    Helping business leaders decide the best way to execute on plans by providing up-to-date financial reports and data on relevant KPIs.

  3. Controlling

    Ensuring each department is contributing to the vision and operating within budget and in alignment with strategy.

With effective financial management, all employees know where the company is headed, and they have visibility into progress.

What Are the Three Types of Financial Management?

The functions above can be grouped into three broader types of financial management:

  1. Capital budgeting

    Relates to identifying what needs to happen financially for the company to achieve its short- and long-term goals. Where should capital funds be expended to support growth?

  2. Capital structure

    Determine how to pay for operations and/or growth. If interest rates are low, taking on debt might be the best answer. A company might also seek funding from a private equity firm, consider selling assets like real estate or, where applicable, selling equity.

  3. Working capital management

    As discussed above, is making sure there’s enough cash on hand for day-to-day operations, like paying workers and purchasing raw materials for production.

What Is an Example of Financial Management?

We’ve covered some examples of financial management in the “functions” section above. Now, let’s cover how they all work together:

Say the CEO of a toothpaste company wants to introduce a new product: toothbrushes. She’ll call on her team to estimate the cost of producing the toothbrushes and the financial manager to determine where those funds should come from — for example, a bank loan.

The financial manager will acquire those funds and ensure they’re allocated to manufacture toothbrushes in the most cost-effective way possible. Assuming the toothbrushes sell well, the financial manager will gather data to help the management team decide whether to put the profits toward producing more toothbrushes, start a line of mouthwashes, pay a dividend to shareholders or take some other action.

Throughout the process, the financial manager will ensure the company has enough cash on hand to pay the new workers producing the toothbrushes. She’ll also analyze whether the company is spending and generating as much money as she estimated when she budgeted for the project.

Financial Management for Startups

At the outset, financial management responsibilities within a startup include making and sticking to a budget that aligns with the business plan, evaluating what to do with profits and making sure your bills get paid and that customers pay you.

As the company grows and adds finance and accounting contractors or staffers, financial management gets more complicated. You need to make sure your employees get paid, with accurate deductions; properly file taxes and financial statements; and watch for errors and fraud.

This all circles back to our opening discussion of balancing strategic and tactical. By building a plan, you can answer the big questions: Are our goods and services profitable? Can we afford to launch a new product or make that hire? What might the coming 12 to 18 months bring for the business?

Solid financial management provides the systems and processes to answer those questions.

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Kalinka Infotech 4 Comments
Financial Planning
Jun 28 2023
Art of Financial Planning: A Comprehensive Guide for Success

The Art of Financial Planning: A Comprehensive Guide for Success

Financial Planning includes all the activities that apply general management standards to the financial resources of a firm such as planning, directing, organizing, procurement of funds, investment, and return of the funds. In this article, students will learn about the meaning, objectives, and features of financial planning. 
Financial Planning

Financial Planning
Financial Planning is one of the major planning that is required to be conducted by the management. Financial Planning includes all the activities which are related to the procurement of funds, investing those funds, and the return expected from the investment done. Financial Planning also ranges from tax planning which is an important activity. This planning is very important for a business to function, in this regard we have initiated the discussion on this topic ‘Financial Planning’ which is to be studied in greater detail. The scope of this topic is vast hence for a conceptualized study this is to be referred to. 
Definition and Meaning
Financial planning is defined as a document that has records of a business owner or firm’s financial situation along with planning on the spending of money to achieve a certain goal by working by a well-devised plan. Financial planning may be made independently or by an experienced planner.
It is basically a financial budget plan, which helps organize the business and includes a set of goals that are supposed to be followed by the firm or business owner to save and spend accordingly. It helps distribute various monetary expenses such as rent, while at the same time saving some amount of money as short-term or long-term savings. 
Financial Planning is the process of estimating the capital requirement and also determining the competitive elements required for financial planning. This is a plan which has been defined as a document that contains a person’s current money situation with the long-term monetary goals, the strategies to achieve those goals on the basis of the current fund. A financial plan may be devised and drafted independently or with the assistance of a financial planner. The first step in the creation of a financial plan is to involve collecting the numbers from the web-based accounts into a document or a spreadsheet. 
This type of planning is also known as an investment plan as it manages various types of liquid and other assets that involve risk and uncertainty. Financial planning done by individuals is not as risky as they do not involve huge investment or undertaking, such as funds kept separate for college or university, estates, healthcare, or retirement.
Financial Planning in Financial Management
A financial plan is an overall evaluation of an individual’s current pay and future financial state by using the current known variables to predict the future income, asset values, and withdrawal plans. Financial Planning includes the budget which organizes the business and the individual finances and at times includes a series of steps or specific goals for spending and saving for the future. This plan distributes the future income to various types of expenses such as rent or utilities and also reserves some income for the short-term and long-term savings as well. A financial plan is sometimes referred to as an investment plan, while personal financing focuses on specific areas like risk management, estates, colleges, or retirement. 
Objectives
There two main objectives of financial planning which are given below:
  • Ensuring Availability of Funds When Required: The foremost and most important objective of financial planning is to keep in check that funds are available in cases of emergency or whenever it is required for use. Sufficient funds should be available with the firms for various purposes.
  • Check Unnecessary Fundraising by the Firms: Insufficient funds are just as bad as surplus funds. Idle money will only result in a loss for a firm as against investment. Therefore, proper allocation of funds is a very important part of financial planning.
Different Approaches to Financial Analysis
The Objectives of Financial Planning are Enumerated as Follows – 
The foremost objective of financial planning is assuring that sufficient fund is available with the company for different purposes. 
Excess funding is as bad as inadequate funds. If there is a surplus amount of money, then the financial planning is to invest it in the best possible manner as keeping financial resources idle is a great loss for an organization as it will be in vain.
Features
There are a number of features of financial planning that are important for firms and individuals. These are listed below:
  • Foresight: A plan made without foresight will only result in a disaster. Foresight is needed in planning for estimating risks and the need for liquid and other assets. It may not be 100% accurate but it should be able to give an estimate of the future risks.
  • Flexibility: A plan made should be flexible as it will help in the future to make adjustments according to the needs. 
  • Optimal Usage of Funds: A financial plan should be able to utilize idle money and assets so that they can prove to be fruitful in the future. It does not involve funds kept aside for unforeseen circumstances but the assets that could be otherwise utilized.
  • Simplicity: Financial planning should be simple in terms of structure and should be able to provide a sound allocation of resources that can be easily understood even by a layman.
  • Liquidity: It is also a very important aspect of financial planning which involves keeping current assets in the form of money. This will help in easy allocation and payment of various kinds like salary, fees, and other kinds.
Features of Financial Planning is Enumerated as below – 
  • Simplicity: A sound financial structure must provide a simple financial structure that could be managed easily and understandable even to a layman.
  • Foresight: Foresight must be used in planning to know the estimate and the need for capital which may be estimated as accurately as possible. A plan visualized without any foresight will outcast disaster for the company.
  • Flexibility: Repeating the financial adjustments becomes necessary hence its flexibility is required so that it is easily adaptable
  • Optimum use of Funds: Capital should not only be adequate but should also employ productive effects. A financial plan should prevent wasteful use of the capital, thus avoiding idle capacity to ensure proper utilization of funds to earn the capacity in an enterprise.
  • Liquidity: Current assets are to be kept in the form of liquid cash. Cash is also required to finance purchases, to pay the daily needs like paying salaries, wages, and other incidental expenses.
Conclusion:
Financial Planning is an important aspect of the individual as well as business life. This article gives you an insight into what financial planning comprises and what are its key aspects.
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Jun 28 2023

Complete Financial Plan: Importance, Purpose & Core Elements
Financial Plan: Meaning, Purpose & Key Components
What Is a Financial Plan?
A financial plan is a document that details a person’s current financial circumstances and their short- and long-term monetary goals. It includes strategies to achieve those goals.
A financial plan can help you to establish and plan for fundamental needs, such as managing life’s risks (e.g., those involving health or disability), income and spending, and debt reduction.
It can provide financial guidance so that you’re prepared to meet your obligations and objectives. It can also help you track your progress throughout the years toward financial well-being.
Financial planning involves a thorough evaluation of one’s money situation (income, spending, debt, and saving) and expectations for the future. It can be created independently or with the help of a certified financial planner.
Key Takeaways
  • A financial plan documents an individual’s short- and long-term financial goals and includes a strategy to achieve them.
  • The plan should be comprehensive and highly customized.
  • It should reflect an individual’s personal and family financial needs, investment risk tolerance, and plan for saving and investing.
  • Planning in finance starts with a calculation of one’s current net worth and cash flow.
  • A solid financial plan provides guidance over time and serves as a way to track progress toward your goals.
The Fundamentals of Financial Plans
Understanding a Financial Plan
Whether you’re going it alone or with a financial planner, the first step in creating a financial plan is to understand how important it can be to your financial future. It can provide the guidance that assures your financial success.
Start your planning effort by gathering information from your various financial accounts into a document or spreadsheet.
Then make some basic calculations that establish where you stand financially.
You may complete the following steps as an individual or a couple:
Calculate Net Worth
To calculate your current net worth, subtract the total for your liabilities from the total for your assets. Begin by listing and adding up all of the following:
  • Your assets: An asset is property of value that you own. Assets may include a home, a car, cash in the bank, money invested in a 401(k) plan, and other investments accounts.
  • Your liabilities: A liability is something you owe. Liabilities may include outstanding bills, credit card debt, student debt, a mortgage, and a car loan.
Determine Cash Flow
Cash flow is the money you take in measured against the money you spend. To create a financial plan, you must know your income as well as how and when your money is spent.
Documenting your personal cash flow will help you determine how much you need every month for necessities, how much is available for saving and investing, and where you can cut back on spending.
One way to get this done is to review your checking account and credit card statements. Collectively, they should provide a fairly complete history of your income and spending in a wide range of spending categories.
For example, document how much you’ve paid during the year for housing expenses like rent or mortgage payments, utilities, and credit card interest.
Other categories include food, household (including clothing), transportation, medical insurance, and non-covered medical expenses. Still others can include your spending on miscellaneous entertainment, dining out, and vacation travel.
Once you add up all these numbers for a year and divide by 12, you’ll know what your monthly cash flow has been (and where you can improve it).
 
When establishing your cash flow history, don’t overlook cash withdrawals that may have been used on sundries, from take-out, to shampoo, to sodas. ATM withdrawals can also highlight where you might cut unnecessary spending.
Establish Your Goals
A major part of a financial plan is a person’s clearly defined goals. These may include funding a college education for the children, buying a larger home, starting a business, retiring on time, or leaving a legacy.
No one can tell you how to prioritize these goals. However, a professional financial planner should be able to help finalize a detailed savings plan and specific investing that can help you reach them one by one.
 
The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.
Benefits of a Financial Plan
  • A financial plan involves a thorough examination of your income and spending.
  • It can improve your understanding of your financial circumstances at all times.
  • It establishes important short- and long-term financial goals.
  • It clarifies the actions required of you to achieve your various financial goals.
  • A financial plan can focus your attention on important immediate steps, such as reducing debt and building your savings for emergencies.
  • It enhances the probability that you’ll achieve financial milestones and overall financial success (however you define it).
  • It can guide your efforts over time and provide a means to monitor your progress.
  • It can keep you out of financial trouble and reduce the stress and worry you may have experienced in the past.
Reasons for a Financial Plan
Financial planning is a smart way to keep your financial house in order. It’s a money tool for everyone, regardless of age, earnings, net worth, or financial dreams. It offers individuals a way to document their personal goals and corresponding financial goals. It can keep people on track to meet ongoing financial needs and major financial goals.
When to Create a Financial Plan
A financial plan is always an advantage for those who want to make sure that they manage their finances in ways that are best-suited for them. You can create one at any time, whether you’ve just joined the workforce or have been working for years.
Beyond that, here are some particular instances that call for the creation and use of a financial plan. They can also serve as signals to adjust existing plans.
  • A new job that results in added income, new expenses, or new opportunities
  • An income change that can affect your ability to pay expenses, pay off debt, or save
  • Major life events such as marriage, children, or divorce that can change financial objectives and spending needs
  • Health adversities that result in re-directing income and spending away from existing goals
  • An income windfall, such as an inheritance or insurance payment, that can affect efforts to reach your financial goals (such as providing more money for investing and debt reduction)
How to Create a Financial Plan
Certain steps are needed to create a financial plan. In addition to calculating your net worth, determining your cash flow, and establishing financial goals, as outlined above, here are additional plan elements/steps to include.
Do It Yourself or Get Professional Help
Decide whether you’ll create your financial plan on your own or with the help of a licensed financial planner. While you can certainly build a financial plan, a financial pro can help ensure that your plan covers all the essentials.
Build an Emergency Cash Fund
Based on what your cash flow allows, start setting aside enough money in a liquid account to cover all your expenses for at least 6 months (preferably, for twelve) if you find yourself without income due to unexpected events.
Plan to Reduce Debt and Manage Expenses
If you have debt, the faster and more effectively that you can eliminate it, the better for the growth of your savings, your standard of living, and the achievement of specific financial objectives.
Make it a habit to cut expenses whenever possible so that you can add to your savings. In addition, stay on top of expenses that you know you’ll have, such as taxes, so you always meet those obligations on time.
Manage Potential Risks
Your financial well-being can be affected when accidents, health problems, or the death of loved ones strike. Plan to put into place the appropriate insurance coverage that will protect your financial security at such times. This coverage can include home, property, health, auto, disability, personal liability, and life insurance.
Plan to Invest
Take part in a retirement plan at work that automatically deducts contributions from your paycheck. And plan to maximize your tax-advantaged investing with a personal IRA if and when your income allows.
Also, consider how you might allocate any other available income to a taxable investment account that can add to your net worth over time. Your plan for investing should take into account your investment risk tolerance and future income needs.
Include a Tax Strategy
Address the goal of reducing your income taxes with tax deductions, tax credits, tax loss harvesting, and any other opportunities that are legally available to taxpayers.
Consider an Estate Plan
It’s important to make arrangements for the benefit and protection of your heirs with an estate plan. The details will depend on your stage in life and whether you’re married, have children, or have other legacy goals.
Monitor and Adjust Your Financial Plan
Revisit your plan at least yearly (on your own or with a financial professional) and more often if a change in circumstances affects your financial situation. Keep it working efficiently and effectively by adjusting it as needed.
What Is the Purpose of a Financial Plan?
A financial plan should help you make the best use of your money and achieve long-term financial goals, such as sending your children to college, buying a bigger home, leaving a legacy, or enjoying a comfortable retirement.
How to Successfully Handle Your Company’s Finances
How Do I Write a Financial Plan?
You can write a financial plan yourself or enlist the help of a professional financial planner. The first step is to calculate your net worth and identify your spending habits. Once this has been documented, you need to consider longer-term objectives and decide on the ways to achieve them.
What Are the Key Components of a Financial Plan?
Financial plans aren’t one-size-fits-all, although the good ones tend to focus on the same things. After calculating your net worth and spending habits, you’ll explore your financial goals and ways to achieve them. Usually, this involves some form of budgeting, saving, and investing each month. To ensure that you live comfortably and financially stress-free for the rest of your life, the areas to focus on include an emergency savings plan, a retirement plan, risk management, a long-term investment strategy, and a tax minimization plan.
The Bottom Line
A financial plan is an essential planning tool for your financial well-being, now and into the future. It involves setting down the current state of your finances, your various financial goals, and methods that can help you achieve them.
It’s never too early or late to create a financial plan. And no matter the amount of money that you have, a financial plan can help you to determine the best way to put it to work so that you can meet your financial needs through all of your life stages.
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Jun 27 2023

How to Master Finance Management Importance & Key Principles
Finance Management: Understanding the Importance and Key Principles
Finance management is the strategic planning and managing of an individual or organization’s finances to better align their financial status to their goals and objectives. Depending on the size of a company, finance management seeks to optimize shareholder value, generate profit, mitigate risk, and safeguard the company’s financial health in the short and long term. When working with individuals, finance management may entail planning for retirement, college savings, and other personal investments.
Purpose of financial management
The purpose of financial management is to guide businesses or individuals on financial decisions that affect financial stability both now and in the future. To provide good guidance, financial management professionals will analyze finances and investments along with many other forms of financial data to help clients make decisions that align with goals.
Financial management can also offer clients increased financial stability and profitability when there’s a strategic plan for where, why, and how finances are allocated and used. How financial management professionals help clients reach goals will depend on whether the client is a company or an individual.
Types of financial management
Finance management professionals handle three main types of financial management for companies. These types involve various aspects of the internal decisions a company will likely need to make about cash flow, profits, investments, and holding debt. Many of these decisions will depend significantly on factors like company size, industry, and financial goals. Financial management professionals help companies reach financial goals by guiding in these areas of financing, investment, and dividends.
Financial management
Financial management professionals assist companies in major decisions that involve acquiring funds, managing debt, and assessing risk when borrowing money for purchases or to build the company. Financing is also required when raising capital. Companies can make better, more strategic financing decisions to raise capital or obtain funds when they have information on cash flow, market trends, and other financial stats on the health of a company.
Investment
Financial management professionals can help companies choose where to invest, what to invest in, and how to invest. The financial professional’s job is to determine the number of assets (both fixed and long term) a company will need to hold and where cash flow goes based on current working capital. In essence, this type of financial management is about assessing assets for risk and return ratios. Financial managers will consider a company’s profits, rate of return, cash flow, and other criteria to assist companies in making investment decisions.
Dividend
Companies should have a dividend disbursement plan and policy in place, with guidance from a financial management professional who can create and implement that plan, suggest modifications when needed, and monitor payouts if and when they occur. Any time a financial decision is made, it’s essential to consider dividend payments since you may hold dividends to fund certain financial decisions within the company.
It’s also important to have a flexible long-term plan that can grow with the company. Some more mature companies may pay out dividends at certain times or once a year; the payout schedule depends on many factors. Other companies may retain or reinvest dividend payments back into the company if the company is in a growth phase.
What is the financial management cycle?
The financial management cycle is a financial planning process critical to a company’s growth and development. It includes:
Effective financial management aligned with an organization’s goals and objectives can lead to greater efficiency and stability. These parts of the financial management cycle must work together to be the most effective.
1. Planning and budgeting
During this analytical phase in the financial management cycle, a company uses past and current financial data to set financial targets, modify objectives, and make changes to the current budget. This phase will typically involve detailed planning as well as a big picture one, meaning a company will look at day-to-day operations, long-term financial plans, and try to link financial targets to these activities.
The goal is to create a strategic financial plan for the company that aligns with objectives for the next three to five years. When setting specific budgets, a company may budget for one fiscal year at a time. A big reason for this is that a budget involves many moving parts that are subject to change by market fluctuations.
2. Resource allocation
Financial managers assign value to capital resources ( anything a company uses to manufacture/produce goods/services) and offer advice on allocating these resources based on criteria like projected company growth and financial goals. Resource allocation is important because it allows a company to have a long-term financial plan focused on its business objectives. Financial management professionals help companies by providing a framework for using capital resources and creating a portfolio that will generate the most revenue, given the company’s financial status.
3. Operations and monitoring
This phase is critical to protect against fraudulent activity, errors, compliance issues, or other variances in the allocation of funds, etc. Financial management professionals should run regular financial reviews of business operations and cash flow. These periodic reviews can help mitigate fraud and identify other issues. It is a preventative step that ensures the continuity of business operations by securing the validity and accuracy of a company’s financial processes.
4. Evaluation and reporting
Financial management professionals should evaluate a company’s current financial management system and propose changes when necessary. Financial reports and financial data can be helpful when assessing the efficiency and success of an existing system.
Some criteria a financial management professional may consider when evaluating a financial management system include security, compliance, company data needs, and level of support needed. These criteria vary by the company’s size, industry, current financial situation, and long-term goals.
Financial management professionals should be able to offer research-based suggestions that can help a company securely store and manage financial data in compliance with relevant laws and harness that data when needed.
How to work in finance management
To work in finance management, you’ll need a bachelor’s degree in business, economics, finance, or a related field. While there’s no mandatory licensure for careers in financial management, certification is highly recommended. In many cases, employers like to see at least five years of professional experience before hiring into a financial management position. Typical jobs that individuals may pursue as an entry point to finance management may include loan officer, junior tax accountant, personal finance advisor, or accountant.
How to Successfully Handle Your Companys Finance Efficiently
Educational requirements
A bachelor’s degree in finance, business management, or a related field is the minimum requirement to work in finance management. A master’s degree may be required for senior-level positions. Typical coursework for bachelor’s degree programs in finance or business management may include accounting, economics, finance, and human resources. Many master’s programs will offer internships, along with some bachelor’s programs. Internships are highly recommended.
Read more: Personal Money Management Insights:10 Essential Finance Tips
Certifications
Certification is optional but suggested if you plan on a long-term career in finance management. Professional trade organizations typically offer certification. The type of certification you earn can be specialized to your job title or role. Common certifications that financial management professionals hold include:
  • Certified Management Account (CMA) certification is offered by the Institute of Management Accountants (IMA) and is ideal for anyone wanting to work in financial management. Requirements include at least two years of professional experience and a bachelor’s degree.
  • Chartered Financial Analyst (CFA) certification offered by the CFA institute focuses on investment analysis. This certification is for financial management professionals who want to work in senior-level positions like CFO. Educational and experiential requirements are also necessary to enroll in the CFA program.
  • Certified Government Financial Manager (CGFM) certification offered by the Association of Government Accountants (AGA) is for professionals who work in government financial management specifically. You’ll need at least two years of professional experience in government financial management to earn certification.
  • Certified Treasury Professional (CTP) certification offered by the Association of Financial Professionals (AFP) can benefit anyone who wants to work in corporate treasury. This certification focuses on risk management, corporate liquidity, and ethics. You’ll need to meet educational and experiential requirements for this certification, with several options available for admittance into the CTP program.
Skills
Careers in finance management require a mix of financial skills and business skills. It’s essential to understand business operations, but proficiency in accounting, financial, and data analytics is equally important. Finance management merges management and finance. You may find success working in the field of finance management if you hold these skills:
Workplace skills
  • Good communication
  • Problem-solving skills
  • Organized
  • Quality leader
  • Proficiency in public speaking and presentation
  • Ability to manage a group of people
  • Detail-oriented
  • Analytical skills
  • Strong decision-making skills
  • Ethical
Technical skills
  • Basic and advanced math skills (algebra, statistics, basic computing)
  • Computer skills
  • Proficiency in financial management systems
  • Understanding of statistical modeling software and spreadsheets
  • Industry-specific knowledge
  • Proficiency in accounting principles and techniques
  • Understanding investment principles
Experience
Professional experience in finance or business management is key if you want to advance into upper-level finance management positions. Expect to work at least five years in an entry to mid-level finance position before being eligible to work in finance management. Remember, finance management careers are managerial positions, so requirements like experience and education matter. It’s not just the quantity of experience but also the quality that matters. Try to find jobs in finance or accounting. It’s also helpful to find jobs that can help you move into the specific industry that you want to work in.
Careers in finance management
The scope of careers in the finance management field is vast. From entry-level positions in bookkeeping to management positions like a financial manager or management accountant, you’ll have many career pathway choices.
The career you choose will depend on factors like education, certifications, professional experience, industry, employer, and location. Salaries among finance management jobs will also differ based on these factors. Individuals in senior-level positions like CFO and vice president of financial planning and analysis will be among the top-tier earners in finance management.
*All annual salary data is sourced from Glassdoor as of August 2022
Financial manager
Average annual salary (US): $133,190
Job outlook (2020 to 2030): +17% [1]
Financial managers oversee a financial department and may assist in creating strategic financial plans for an organization. Their duties include preparing financial reports and statements, forecasting, setting budgets, analyzing financial markets for trends and investment opportunities for an organization, and seeking ways to mitigate costs.
Financial advisor
Average annual salary (US): $106,012
Job outlook (2020 to 2030):  +5% [2]
Personal financial advisors assist individuals in planning for their future by helping them manage money and seek out investments based on individual situations. A personal financial advisor meets with individuals to set financial goals with short and long-term plans to achieve those objectives. Some financial aspects an advisor may handle include taxes, retirement, college savings, insurance, estate planning, and more. Financial advisors may work for an investment firm or on their own.
Financial analyst
Average annual salary (US): $93,605
Job outlook (2020 to 2030): +6% [3]
Financial analysts may work within a large corporation or with individuals. Their job is to analyze their client’s financial situation and make financial suggestions based on goals and financial status. A financial suggestion may include finding investment opportunities. The goal of an analyst is to evaluate market trends and position a client in a secure financial standing based on the analysis of trends and related data.
Management accountant
Average annual salary (US): $106,058 [4]
Management accountants work for corporations or government agencies. Their goal is to provide an in-depth financial analysis of an organization’s internal financial processes for strategic financial decision-making. Key decision makers in an organization use the information gathered by management accountants to aid in decision-making in the long and short term.
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