Today's world is fueled by money. Every government department, business, household and individual needs to understand and manage money; but many neither have the inclination or capacity to do so. In good times, money managers are needed to handle the excessive finance that everyone needs to deal with. In bad times, everyone needs help to conserve the limited finances available. Money managers are in demand no matter whether the times are good or bad.
Whether you are managing money on a small or large scale; and whether in a business or personal context, there are always three things you must aim to achieve:
1. Increase Assets
Total assets (e.g. Money and investments such as property, shares, etc) either increase or decrease, but never remain constant. If assets decrease and continue to decrease, eventually there will be no assets (or finance) to manage.
2. Sustain Cash Flow
Assets need to be used in order to survive. Businesses use assets to sustain activities that generate income. People use assets to sustain their existence. If cash flow stops, a business stops doing business. If personal cash flow stops, there is no money for food or shelter.
3. Organise Finance Effectively
Finance must be organised and controlled well if you are to optimise gains and minimise losses. Financial activities (business or private) are subject to legal controls (e.g. everyone pays tax, and everyone must be able to account for how they handle their finance).
Note that each module in the Qualification - Certificate in Financial Management is a short course in its own right, and may be studied separately.
Managing financial resources applies to individuals and businesses. Every month you should check income against debts and expenditure. You'll be surprised at the incredible fluctuations that can occur. Also you are checking against going into the "red" i.e. becoming overdrawn.
No matter how much money you earn, some of your income should be put aside and saved. There are three stages in your life when savings/investing are at an optimum. They are (i) when you cohabit a lodging with another person and share expenses, (ii) when you are living at home and are a wage earner, or (iii) when your children have finally left home, you are both working and your mortgage is greatly reduced.
However, it is all very well to convince yourself that starting your savings program can wait until you are established and earning more, or until the children leave home, but that way you may never start. Saving is a habit, a healthy one at that! It is best to establish the habit from the outset, by for example, setting a savings target which you can achieve, such as five per cent of your take‑home pay. For people who cannot start a savings habit, another option is to have money automatically deducted from your pay. If that fails, take out a personal loan, invest it at 12% – your repayments will then be your compulsory savings.
We all need some money set aside for that rainy day; as a rough guide, a “safety net” fund equal to three months take-home pay is advisable. This money should be deposited where it will earn interest but is also absolutely safe and accessible at very short notice ‑ such as a few days‑ should you need it to deal with an emergency. A term savings account with a bank, credit union or building society, is suitable for this purpose, provided of course you can draw on the account without having to wait a period of months. A cash management trust is also suitable for this purpose but anything less liquid or more risky is best avoided when planning where to keep “rainy day” money.
Once that initial buffer is there ‑ keep saving! But you can now afford to be a bit more adventurous ‑ you can invest in long‑term propositions in which your money is less accessible but which offer a slightly higher return. Examples of these types of investments will be dealt with in lesson 6.
Following finance news so that you are aware of changes in interest rates, general trends in currencies and share prices will help you to keep a sharp eye on your investments.
Money governs what can be done in any situation. Careful management of money should always provide better value for the pound spent, but even more than that, an awareness of monies available will enable a manager to make informed decisions on what can be afforded at any one time.
There are two aspects to financial management:
1. The BUDGET
This is a plan of what can and should be spent over a given period of time. It is an itemised account of what things money should be spent on, and how much should be allocated for each item.
Some businesses may decide to operate a zero budget. This approach sets each department’s budget at zero and demands that budget holders justify every pound they ask for. This helps to avoid the trend of budgets increasing year on year. The zero budgeting tool can also be adapted to suit personal financial management. For example, do you really need a monthly budget for clothing/shoes/other luxury items? Will you spend it unnecessarily simply because it is there?
Budgets are normally prepared for a 12 month period and are based upon what has happened over the previous 12 months.
2. The FINANCIAL RECORDS
A managed system of books or computer files, keeping track of what is spent when and where; paying accounts, making purchases, authorising and making payments, receiving money, sending bills to customers etc. are known as financial records.
The financial records should be close to what has been budgeted for, and the budget should be based upon what has been recorded in the financial records.
Cash flow refers to the flow of cash through a business or household, that is the flow of cash in as income and out to cover expenses. (This is different to how much is available in a budget.) It is one of the most important factors to be considered in any budget.
Example: A nursery sells more plants in spring than at any other time. This means more money is available to spend in spring than at any other time of the year. Cash flow is good in spring and bad in winter. The nurseryman should budget to either save money in spring to pay for things in winter, or else operate on a budget which spends more in spring than it does in winter.
Below is an example of a simple cash flow forecast. This document is also extremely useful for applying for finance, and will need to be submitted to the bank as part of the business plan. The figures used to complete the cash flow forecast will need to be formed from market research and industry/competitor analysis. Cash flow forecasts used by established businesses can be formed by looking at past data and trends.