The Process of Financial Management in An Entrepreneur
Why the Process of Financial
Management in An Entrepreneur begins and why it is so important to measure the financial
performance and health of the business?
Importance of Financial Management Process
Here we study about Importance of Financial Management Process for an Entrepreneur. Previously, we studied about Financial Objectives of An Entrepreneurial Firm.
The Process of Financial Management is very
important because it acts as a measuring yard to assess whether an entrepreneur
achieve desired targets or not. Whether financial objectives of a firm are
being met or not?
Why The Process of Financial Management Begins in An Entrepreneur or A Firm?
Now, we try to answer this important question.
Basically, a firm needs to check whether its
financial objectives are meet or not. So for this purpose, an entrepreneur
needs to analyze Financial Statements, Forecasts and Budgets. For this purpose
Analysis of Financial Statements, Forecasts and Budgets are prepared.
There are three Steps in the Process of
Financial Management
1. Preparation of Historical Financial
Statements
2. Preparation of Forecasts
3.
Interpretation of the Results
1. Preparation of Historical Financial
Statements
Financial Statements are basically useful reports written
by Qualified Auditors that quantitatively describes Entrepreneurial health.
Financial Statements include Income Statement
(Statement of Comprehensive Income), Balance Sheet
(Statement of Financial Position), Statement of Cash Flows, Statement of Retained Earnings,
Statement of Changes in Equity and Notes To The Accounts included in these
Financial Statements.
Past Historical Financial Statements are used to show
financial performance, financial position and financial health of the
Entrepreneur. Users of Financial Statements like Major
Banks and Investors are always willing to give loans or to invest in the
company after proper analyzing the Current and Past Financial Statements of the
company. These Analyses can easily be made through Ratio Analysis.
2. Preparation of Forecasts
Forecasts are an estimation of an Entrepreneur’s future
incomes and expenses on the basis of Past, Current And Future Plans.
Forecasting is related to future. Entrepreneurs prepare
Projected or Estimated Financial Statements based on Estimated figures of
Incomes, Expenses And Equity.
As Forecasting is an estimation to measure the financial
performance, position and health of the firm, so no entrepreneur can give you
100% guarantee that all estimations will come true in future. These are just
precautionary measure to meet the Financial Objectives of the Entrepreneurial
Firm.
3.
Interpretation of Results
In this step, Historical Financial statements are compared
with projected Financial Statements to interpret the results. What a firm’s
projected financial statements figures show are compared with the figures of
Historical Financial Statements with the help of Ratio Analysis.
Important Ratios like Current Ratio, Working Capital Ratio, Profitability Ratio, Liquidity
Ratio, Debtor Turnover Ratio, Return on Equity Ratio and other important ratios
are calculated to help users of financial statement to make decisions according
to their business’s needs.
If the ratios are in good positions or nearest to ideal
position, then we can say that the firm is going well and meet its financial
objectives, otherwise firm must take necessary actions to overcome its
weaknesses. The possible reasons may be:
- · Lower sales
- · Inefficient Staff Management
- · Lack of Optimum Cost and Maximization Profit
So, the process of Financial Management is very
important for a firm life. An Entrepreneurial must take necessary actions to
overcome these difficulties to achieve its targets set in Financial Objectives
of an Entrepreneurial Firm.
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