Financial Management can be defined as:

The management of the finances of a business / organisation in order to achieve financial

objectives
Taking a commercial business as the most common organisational structure, the key objectives
of financial management would be to:
• Create wealth for the business
• Generate cash, and
• Provide an adequate return on investment bearing in mind the risks that the business is taking
and the resources invested
There are three key elements to the process of financial management:

(1) Financial Planning

Management need to ensure that enough funding is available at the right time to meet the needs
of the business. In the short term, funding may be needed to invest in equipment and stocks, pay
employees and fund sales made on credit.
In the medium and long term, funding may be required for significant additions to the productive
capacity of the business or to make acquisitions.
(2) Financial Control
Financial control is a critically important activity to help the business ensure that the business is
meeting its objectives. Financial control addresses questions such as:
• Are assets being used efficiently?
• Are the businesses assets secure?
• Do management act in the best interest of shareholders and in accordance with business rules?
(3) Financial Decision-making
The key aspects of financial decision-making relate to investment, financing and dividends:
• Investments must be financed in some way – however there are always financing alternatives
that can be considered. For example it is possible to raise finance from selling new shares,
borrowing from banks or taking credit from suppliers
• A key financing decision is whether profits earned by the business should be retained rather
than distributed to shareholders via dividends. If dividends are too high, the business may be
starved of funding to reinvest in growing revenues and profits further.

Taking control
Financial management involves taking a historic view of your group's finances. By looking at
your past records of income and expenditure, you can form an accurate idea of what you are
likely to receive and spend in the future - otherwise known as budgeting and forecasting.
Budgeting and forecasting
Budgets are much more than an arithmetical exercise - they are a fundamental element of
planning and management. Management is about decision taking and this means making
assumptions about the future. The best way to get an accurate forecast is to study the past
performance of the organisation and identify trends. Looking at monthly figures rather than
annual performance figures will naturally give earlier warning of any change in trend.
Clearly if income can be predicted with a high degree of certainty, a finance manager can agree
to future expenditure. In a less certain income climate, management will need to find ways of
protecting the organisation from risk by reducing commitments and increasing reserves.
Costs
Its very important to accurately measure the cost of your activities. List your various activities
then systematically look at the costs of running each of them. It is helpful to categorise them as
either fixed or variable costs. Fixed costs are those which stay the same whatever the volume of
output and variable costs increase or decrease directly in proportion to volume.
Think of the cost of using a car over a year - the fixed costs will include tax and insurance,
whereas the costs of petrol and repairs, which will change according to how much the car is
used, are variable. For more information about fixed and variable costs and calculating your
break-even point - see the costs activity and break-even activity.
Services provided by the voluntary sector might not always be the most cost-effective, and any
financial manager will have a difficult juggling act trying to provide high quality services that
users can afford, while keeping a close eye on the financial health of the organisation.
Comparisons between the commercial and non-profit sectors
Charity financial managers Business financial managers

Less complex workload, but important to More complex, structural questions about how to
understand commercial operations. use shareholders funds - pay dividends or plough
back?

Ability to deal with numerous different More straightforward 'textbook' business

grants and stakeholders - requiring different accounting.
types of accounting.

No bottom line profit means problems of Measurement of success or failure should be

motivation, performance measurement and easier.
control.

Monitoring and reporting

Measuring performance in non-profit organisations is much more problematic than in a
commercial enterprise, where the return on an investor's capital is the key performance indicator.
There is a legal obligation for all organisations to account for their income and expenditure - see
the accounting section for full details.
Management reporting requirements are less prescriptive as they tend to deal with matters of
judgement and details peculiar to an individual organisation. Good practice requires that
financial management information should be available on a regular basis, as often as necessary
for decision taking and at frequent regular intervals for monitoring purposes. For the smaller
charity quarterly reports may be sufficient but for larger charities should aim for monthly
management accounts.
Being on top of your cash-flow is crucial. Be certain about how much money is in the bank and
what you can afford. If a large number of receipts are coming in, it's advisable to report on a
daily basis.
Financial reports are rarely sufficient in themselves and should be accompanied by quantitative
information wherever possible. This is especially important in the case of services to
beneficiaries.
A financial procedures manual
It is well worth keeping a financial procedures manual. This will allow the relevant staff - and
your management committee - to consult and operate within its specifications. You will need to
decide which of your members or employees is allowed to authorise spending, and how much
each person is able to spend before they must check with their manager. An office assistant, for
example, might have a spending limit of £100 for items of petty cash, while a department
manager might have a limit of £5,000. All these details need to be recorded in the procedures
manual and included in training programs.
Tax matters
In general, non-profit organisations are exempt from income tax under the Taxes Act 1988 and
from capital gains under the Chargeable Gains Act 1992. Where a charity has trading
subsidiaries it is common to transfer any profit away from the subsidiary into the charity by way
of a profit-shedding covenant, thereby reducing or eliminating any liability for tax on profits.
In general financial managers should make sure they properly classify receipts on which tax may
be recoverable. There are specific reliefs, which include:
• Covenanted donations.
• Gift aid relief for single gifts.
• Gifts free of capital gains tax.
• Gifts free of inheritance tax.
• Gifts from charitable trusts.
• Covenanted salaries.
Needless to say these aspects of financial management are affected by complex statutory
regulations which are liable to change from year to year. You may need professional advice to
keep abreast of opportunities and threats in this area.