Financial Management Report Institution of Affiliation Academic Essay

Financial Management Financial Management is the efficient and effective administration of monetary resources in a manner that is in harmony with the goals of an enterprise (Weston and Brigham, 1981). It involves aspects of planning, raising, controlling and overseeing the utilisation of funds in an organisation. As such, financial management is concerned with every function of an organisation to the extent of acquisition and usage of financial resources. Success companies like Apple were once start-ups that required funding to commence their operations, sustain their activities and expand. Finance is, therefore, a crucial operative function in a company. Indeed, finance is the bottom line for any viable organisation. Also, for an enterprise to be successful, its cash-flow should be managed in an efficient manner to avoid extenuating financial costs and provide adequate operational expenditure capital. Financial management is critical to enabling a business to maximise profits, maintain proper cash flows, ensure survival and mobilise its resources to increase efficiency. Financial Risk Financial risk is the possibility that an organisations cash flow would not be adequate to meet its financial obligations such as paying its suppliers or financing short-term loans (Harvey, 1994). The company might become bankrupt and shareholders lose their investment in such circumstances. The occurrence of financial risks in an organisation can be as a result of internal factors such as failed internal processes or external factors such as weaknesses in the economy and changes in industry regulations. There are four types of financial risks namely: Market, credit, capital and operational risks. Market risks occur when the finances of a company are affected by adverse changes in interest rates or share pricing. Credit risks occur when a borrower is unable to settle their financial obligations in full. Capital risks, on the other hand, happen when a company is unable to raise sufficient cash flow to meet its financial obligations such as paying suppliers. Finally, operational risks are attributed to failed internal systems in the company. Guaranteed Maximum Price Contract It is a form of agreement with a contractor where it is established that the cost of executing the contract will not exceed a special ceiling price (Kerzner, 1995). If the actual contract cost is higher than the ceiling price, then the contractor will bear the additional expenses. However, if the contractual cost is lower than the ceiling price, then the savings are shared with the client. It is a form of target-cost agreement with the sharing arrangement limited only to the savings (Perry and Perry, 1982). For example, if a contractor is charged with the responsibility of carrying out construction work on the clients design and events such as adverse weather occurs, then the contractor has to shoulder the additional expenses. It is different from other forms of contract where the contractor would naturally ask the client for compensation. The advantage of such contracts to a business is that instances of contractor negligence are reduced and an organisation can benefit from savings earned from cost under-estimates. Cash Flow Cash flow is the amount of money that flows in and out of an organisation (Lamont, 1997). It can also be defined as the quantity of cash generated by a company. When the business makes more money than it can spend, then it is said to be operating from a positive cash flow. However, when it spends more money than it generates, then it is supposed to be working on a negative cash flow. Cash flow can be used as a test of the performance of a company. In essence, it is an indicator as to whether the company can meet its financial obligations and take care of its future financial needs. Controlling cash flow is very Important to businesses. A company with a negative cash flow will struggle to pay its bills. On the other hand, a company with a positive cash flow will be able to make new investments, expand its operations and get through economic recessions. Mobilization Payments Mobilisation payments refer to advance money paid to assist in meeting the initial expenditure and to cover a particular proportion of the total contractual overhead (Eyiah, 2004). Such cost includes but is not limited to site mapping, purchase of specialised equipment, movement of personnel, setting up of offices and other facilities necessary to execute the contract. The money is paid after the contract has been awarded but before the contractor commences any physical work. Mobilisation payments are very beneficial to a company because it provides cash flow even before the progress payments are made. Additionally, the need to borrow money to finance project start-ups is reduced, consequently eliminating the costs incurred in servicing loans. A company is, therefore, able to use the surplus cash flow to expand or do more projects. Moreover, the client is also saved from delays that may arise as a result to the contractor spending time to consolidate start-up capital. Retention Bonds Retention bonds are agreements between a customer, a contractor and a third party who is the surety provider and acts as a guarantee between the two parties (Hughes, Hillebrandt and Murdoch). The third party guarantees the full performance of the contractors obligations. Under standard contracts, clients retain a certain percentage of the amount to be paid to the contractor as security against the possibility of default. However, through retention bonds, the contractor is obliged to discharge their obligations fully even after payment is made. For example, if a contractor puts up a building, then any structural defects that might occur after execution are repaired. Retention bonds improve the cash flow of a company and eliminate the need to wait until execution to get retained payments. Further, the retention bond has a clear expiry date so there would be no contention as to when the contractor has fully discharged their obligations. Time and Cost Escalations Cost escalation refers to the unanticipated increase in the price of particular goods, over a period which consequently enhances the cost of carrying out a business activity. Such increase in prices is often dictated by market forces. Time escalation, on the other hand, is when there is an unanticipated increase in time spent to execute a contract on the estimated time. Cost and time escalations can have an adverse impact on the cash flow of an organisation because there will be a need to solicit additional funding which in turn causes project delays. Also, if the contractor is working within a limited budget, they will be forced to reduce the scope of work so as to fit the project within the budget. In consequence, the quality of service provision will be compromised. Currency Fluctuation Currency fluctuation is a change in the value of one currency in relation to another (Rosenberg, 1996). For example, the British Pound is worth 1.42 U.S. dollars. If in the next two days, it sells at 1.20 dollars, that would be a case of currency fluctuation. The value of money changes every day, influenced by forces of demand and supply. When investors seek to invest in a particular financial market, the currency will be in demand and its value will go up. However, if investors have lost confidence in a financial market, the value of its currency will consequently go down Exchange rate fluctuations directly affect businesses; especially those dealing with imports and exports. The exchange rates can affect the ability of a company to purchase goods because of the impact it has on purchase and importation costs of raw materials. Similarly, exchange rates affect operational costs for international businesses due to the impact it has on profit margins. Economic Development Economic development can be defined as the qualitative and quantitative measure of economic progress in a country (Schumpeter and Opie, 1934). Economic development is characterised by transition from an agriculture-based based economy to an industry-based economy. It is further distinguished by job retentions, growth in personal incomes, increase in literacy rates, a decline in infant mortality rates and increase in life expectancy. Its success, however, is country specific and hugely dependent on the development goals, the political will to implement those goals and the resources required to fund those goals. Economic growth brings business opportunities to a country and impacts all sectors of the economy. A company that releases a product when a country is in a period of economic growth is likely to reap maximum profits. Economic growth also increases investor confidence in a countrys financial markets. Therefore, foreign investors are likely to invest their money in local ventures and get into partnerships with local businesses. The overall effect on the cash flow of the businesses will be positive. Bibliography Eyiah, A. (2004). Regulation and Small Contractor Development. Manchester: Centre on Regulation and Competition. Harvey, C. (1994). Predictable Risk and Returns in Emerging Markets. Cambridge, MA.: National Bureau of Economic Research. Hughes, W., Murdoch, J., Hillebrandt, P. and Brian Guerin., (1998). Financial Protection in the UK Building Industry: Bonds, Retentions, and Guarantees. Taylor & Francis Group / Books. Kerzner, H. (1995). Project Management. New York: Van Nostrand Reinhold. Lamont, O. (1996). Cash Flow and Investment. Cambridge, MA: National Bureau of Economic Research. Perry, J. and Perry, J. (1982). Target and Cost-Reimbursable Construction Contracts. London: Construction Industry Research and Information Association. Rosenberg, M. (1996). Currency Forecasting. Chicago, Ill.: Irwin Professional Pub. Schumpeter, J. and Opie, R. (1934). The Theory of Economic Development. Cambridge, Mass.: Harvard University Press. Weston, J. and Brigham, E. (1981). Managerial Finance. Hinsdale, Ill.: Dryden Press.

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