Discuss About The Role Of Financial Management With Regard?
For the successful operation and smooth running of any enterprise, commercial as well as non-commercial ones, several factors are of key importance. These factors may be completely endogenous to the enterprise itself as well as exogenous in nature, the latter being involuntary and not dependant on the working methods of the enterprise itself. The endogenous factors, lying in the hands of the accounting of the enterprise, are therefore, of more importance and needs to be taken care of by the management of the organizations in order to keep the potential of the concerned enterprise increasing and achieving the short term as well as the long term objectives and targets of the enterprise. One of the key endogenous factors of immense significance and implications on any enterprise is the financial management of the concerned enterprise. The term financial management, in general, refers to the efficient management of the monetary belongings and funds of an organization, including their effective usage and efficient and proper allocation, such that the objectives of the concerned organization can be achieved efficiently.
Both commercial, profit maximizing enterprises as well as not for profit enterprises need effective financial management in order to operate efficiently in the economy. The financial management for the not for profit organization is same as the financial management of the commercial sector in various aspects. Though it may seem like the not for profit organizations do not need a financial management framework, as robust as that of the profit oriented ones, as the former is not concerned about persona revenue generation, however, for the not profit organization too, financial management plays an important part (Kaaya 2015). It is crucial to understand variance between the non profit organization and the profit making organization. The main objective of the for-profit organization is earning profit and maximizing the shareholder’s value. Though it is crucial for the for-profit companies to earn profit, their main aim is to deliver the socially desirable requirement on continuous basis. Further, the for-profits organizations depends on the exchange transactions and on the contrary, not for profit organization depends on the money those are contributed for particular purpose and the money is to be utilized for that particular purpose only that will decrease the elasticity of the not for profit organization.
As discussed above the non-profit enterprises are mainly set up to serve social causes and increase the welfare of the society as a whole. Therefore, much of their monetary resources come from the donors and well-wishers, who patronize their initiatives. In some instance, these organizations themselves try to perform some production activities, with the help of their members, in small scales, to earn revenue, which in turn would be used to serve the purpose of the organization. Therefore, for these types of organizations, it is of immense importance to manage their financial resources and spending correctly, as they need to show their earnings and expenditures in a detailed manner to the donors. Financial management is also necessary for the not for profit organizations as their inflow of cash can be irregular and they need to smoothen their expenditures depending upon a rather irregular cash inflow.
Resources of are of immense importance to these organizations and they come in the form of donations mostly and kept as reserve or asset by the organizations as the inflow are scanty and irregular. Therefore, protecting these financial reserves and using them efficiently are of utmost importance to the not for profit enterprises as their life and sustainability in the long run, depend on these resources, thereby indicating the importance of proper financial management framework in the not for profit industries (Brigham 2014).
Another aspect of huge significance, especially for the non-profit enterprises, which is the reputation of these enterprises as almost all of the success and long term sustainability of these organizations depend on the goodwill that the enterprise has in the economy. The amount of donations received by the not for profit organizations also depend significantly on the good will and reputation of the concerned enterprise. In this context, if there are inappropriate usages of the funds received by any not for profit enterprise, then it may hugely affect the operations, targets as well as the goodwill of the enterprise. This may also reflect adversely on the fund collection of the concerned enterprise as donors may lose confidence from the organization, thereby diverting their donations from the organization (Brigham and Ehrhardt 2013). To prevent this, proper financial management, with regulations and limited access to the funds, needs to be implemented in these not for profit organizations.
Financial management helps in forming the budget of the organizations, which, given the limited resources present with them, may prove to be beneficial for the organizations as a well-planned budget provides an insight to the members of an organization regarding fund allocation and proper utilization of these funds in different aspects of the organization (Finkler et al. 2016). The unforeseen events and shocks in the economy can also be mitigated with the help of a foresighted budget plan on part of the company, which implies that financial management is crucial for these organizations.
Often, the non-profit organizations also involve themselves in producing activities, the production levels being small and not of fully industrialized in nature. For this purpose, proper allocation of the funds present with these not for profit organizations are required, keeping in mind the costs and benefits of the productive activities. Therefore, along with the formulation of a robust and foresighted budget, it is also of immense importance for the non-profit organizations to manage their funds, to facilitate revenue-generating productive activities, which help the organization to operate successfully in the long run (Ward and Forker 2017).
Therefore, it is evident from the above discussion, that financial management activities are of immense significance for the not for profit organizations, the significance of these activities being more in some cases than that of the profit-targeting fully commercialized organizations. The management appropriately should be done on a day-to-day basis, to keep the working of these organizations smooth and keeping them free from controversies.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Ward, A.M. and Forker, J., 2017. Financial management effectiveness and board gender diversity in member-governed, community financial institutions. Journal of Business Ethics, 141(2), pp.351-366.
Finkler, S.A., Smith, D.L., Calabrese, T.D. and Purtell, R.M., 2016. Financial management for public, health, and not-for-profit organizations. CQ Press.
Brigham, E.F., 2014. Financial management theory and practice. Atlantic Publishers & Distri.
KAAYA, I.D., 2015. The Impact of International Financial Reporting Standards (IFRS) on Earnings Management: A Review of Empirical Evidence. Journal of Finance, 3(3), pp.57-65.