Financial
management
management
Financial Management means the efficient and
effective management of money (funds) in such a manner as to accomplish the
objectives of the organization. It is the specialized functions directly
associated with the top management. The significance of this function is not
only seen in the ‘Line’ but also in the capacity of ‘Staff’ in overall
administration of a company. It has been defined differently by different
experts in the field.
effective management of money (funds) in such a manner as to accomplish the
objectives of the organization. It is the specialized functions directly
associated with the top management. The significance of this function is not
only seen in the ‘Line’ but also in the capacity of ‘Staff’ in overall
administration of a company. It has been defined differently by different
experts in the field.
It includes how to raise the
capital, how to allocate it i.e. capital budgeting. Not only about long term
budgeting but also how to allocate the short term resources like current
assets. It also deals with the dividend policies of the share holders.
capital, how to allocate it i.e. capital budgeting. Not only about long term
budgeting but also how to allocate the short term resources like current
assets. It also deals with the dividend policies of the share holders.
Definitions of Financial Management
- “Financial Management is the
Operational Activity of a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient operation.” by Joseph Massie - “Business finance deals primarily
with rising administering and disbursing funds by privately owned business
units operating in non-financial fields of industry.” – by Prather and
Wert - “Financial Management is an area
of financial decision making, harmonizing individual motives and
enterprise goals.” By Weston and Brigham - “Financial management is the area
of business management devoted to a judicious use of capital and a careful
selection of sources of capital in order to enable a business firm to move
in the direction of reaching its goals.” by J.F.Bradlery - “Financial management is the
application of the planning and control function to the finance function.”
– by Archer & Ambrosio - “Financial management may be
defined as that area or set of administrative function in an organization
which relate with arrangement of cash and credit so that organization may
have the means to carry out its objective as satisfactorily as possible .“
– by Howard & Opton. - Business finance can be broadly
defined as the activity concerned with planning, raising, controlling and
administering of funds and in the business. “ by H.G Gathman & H.E
Dougall
The Financial Management
Service (or FMS) was a bureau of the United States Department of the
Treasury and provides several financial services for the federal government. On October 7, 2012, Secretary of the Treasury Timothy Geithner
issued a directive merging the FMS with the Bureau of the Public Debt to form the new Bureau of the Fiscal Service.
Service (or FMS) was a bureau of the United States Department of the
Treasury and provides several financial services for the federal government. On October 7, 2012, Secretary of the Treasury Timothy Geithner
issued a directive merging the FMS with the Bureau of the Public Debt to form the new Bureau of the Fiscal Service.
Services
These services include
centralized payment, collection, and reporting services, oversight of a daily cash flow
of nearly $58 billion into and out of federal accounts, disbursement of more
than $1.5 trillion to more than 100 million individuals via Social Security and veterans’ benefits,
issuance of tax refunds
and other federal payments, collection of more than $2.67 trillion per year in
payments to the government through financial institutions, and collection of delinquent debts owed to
the government.
centralized payment, collection, and reporting services, oversight of a daily cash flow
of nearly $58 billion into and out of federal accounts, disbursement of more
than $1.5 trillion to more than 100 million individuals via Social Security and veterans’ benefits,
issuance of tax refunds
and other federal payments, collection of more than $2.67 trillion per year in
payments to the government through financial institutions, and collection of delinquent debts owed to
the government.
FMS has a total of 2,100
employees located in its headquarters offices in Washington, DC, and
Hyattsville, MD, and its five regional centers in Austin, Birmingham, Kansas
City, Philadelphia and San Francisco. Before 1984, FMS was known as the Bureau
of Government Financial Operations.
employees located in its headquarters offices in Washington, DC, and
Hyattsville, MD, and its five regional centers in Austin, Birmingham, Kansas
City, Philadelphia and San Francisco. Before 1984, FMS was known as the Bureau
of Government Financial Operations.
Credit Gateway
On September 13, 2010, the Financial Management Service started to use Credit Gateway as a
deposit program for the receipt of federal agency Fedwire
and Automated Clearing House credit transactions.
It is an effort to modernize the collections and cash management programs of
the US Department of the Treasury
and is being implemented in multiple phases over the course of two years.
deposit program for the receipt of federal agency Fedwire
and Automated Clearing House credit transactions.
It is an effort to modernize the collections and cash management programs of
the US Department of the Treasury
and is being implemented in multiple phases over the course of two years.
The Credit Gateway is operated
by a commercial bank that has been designated as a financial agent of the
government.
The bank processes FMS transactions using its own infrastructure and commercial
software. The transactions settle at Federal Reserve Banks, rather than at the
designated commercial bank. The Credit Gateway processes transactions in real
time to FMS reporting systems, namely the Transaction
Reporting System.
by a commercial bank that has been designated as a financial agent of the
government.
The bank processes FMS transactions using its own infrastructure and commercial
software. The transactions settle at Federal Reserve Banks, rather than at the
designated commercial bank. The Credit Gateway processes transactions in real
time to FMS reporting systems, namely the Transaction
Reporting System.
What
is cost accounting?
is cost accounting?
Cost accounting involves the
techniques for:
Determining the costs of
products, processes, projects, etc. in order to report the correct amounts on
the financial statements, and assisting management in making decisions and in
the planning and control of an organization.
For example, cost accounting is
used to compute the unit cost of a manufacturer’s products in order to report
the cost of inventory on its balance sheet and the cost of goods sold on its
income statement. This is achieved with techniques such as the allocation of
manufacturing overhead costs and through the use of process costing, operations
costing, and job-order costing systems.
Cost accounting assists
management by providing analysis of cost behavior, cost-volume-profit
relationships, operational and capital budgeting, standard costing, variance
analyses for costs and revenues, transfer pricing, activity-based costing, and
more.
Cost accounting had its roots in
manufacturing businesses, but today it extends to service businesses. For
example, a bank will use cost accounting to determine the cost of processing a
customer’s check and/or a deposit. This in turn may provide management with
guidance in the pricing of these services.
Cost
Accounting
Cost accounting is a complex
process of collecting, analyzing, summarizing and evaluating various
alternative courses of action. Its goal is to advise the management on the most
appropriate course of action based on the cost efficiency and capability. Cost
accounting provides the detailed cost information that management needs to
control current operations and plan for the future.
Since managers are making
decisions only for their own organization, there is no need for the information
to be comparable to similar information from other organizations. Instead,
information must be relevant for a particular environment. Cost accounting information
is commonly used in financial accounting information, but first we
are concentrating on its use by managers to make decisions.
decisions only for their own organization, there is no need for the information
to be comparable to similar information from other organizations. Instead,
information must be relevant for a particular environment. Cost accounting information
is commonly used in financial accounting information, but first we
are concentrating on its use by managers to make decisions.
Unlike the accounting systems
that help in the preparation of financial reports periodically, the cost
accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting
Principles. As a result, there is wide variety in the cost
accounting systems of the different companies and sometimes even in different
parts of the same company or organization.
that help in the preparation of financial reports periodically, the cost
accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting
Principles. As a result, there is wide variety in the cost
accounting systems of the different companies and sometimes even in different
parts of the same company or organization.
All types of businesses,
whether service, manufacturing or trading, require cost accounting to track
their activities.
Cost accounting has long been used to help managers understand the costs of running a
business. Modern cost accounting originated during the industrial revolution, when the complexities of
running a large scale business led to the development of systems for recording
and tracking costs to help business owners and managers make decisions.
whether service, manufacturing or trading, require cost accounting to track
their activities.
Cost accounting has long been used to help managers understand the costs of running a
business. Modern cost accounting originated during the industrial revolution, when the complexities of
running a large scale business led to the development of systems for recording
and tracking costs to help business owners and managers make decisions.
Cost Accounting vs Financial Accounting
- Financial accounting aims at
finding out results of accounting year in the form of Profit and Loss
Account and Balance Sheet. Cost Accounting aims at computing cost of
production/service in a scientific manner and facilitate cost control and
cost reduction. - Financial accounting reports the
results and position of business to government, creditors, investors, and
external parties. - Cost Accounting is an internal
reporting system for an organization’s own management for decision making. - In financial accounting, cost
classification based on type of transactions, e.g. salaries, repairs,
insurance, stores etc. In cost accounting, classification is basically on
the basis of functions, activities, products, process and on internal
planning and control and information needs of the organization. - Financial accounting aims at
presenting ‘true and fair’ view of transactions, profit and loss for a
period and Statement of financial position (Balance Sheet) on a given
date. It aims at computing ‘true and fair’ view of the cost of
production/services offered by the firm.
Classification of costs
Classification of cost means,
the grouping of costs according to their common characteristics. The important
ways of classification of costs are:
the grouping of costs according to their common characteristics. The important
ways of classification of costs are:
- By Element: There are three
elements of costing i.e. material, labor and expenses. - By Nature or Traceability: Direct
Costs and Indirect Costs. Direct Costs are directly attributable/traceable to Cost Object. Direct costs are assigned to Cost Object. Indirect
Costs are not directly attributable/traceable to Cost Object. Indirect
costs are allocated or apportioned to cost objects. - By Functions: production,
administration, selling and distribution, R&D. - By Behavior: fixed, variable,
semi-variable. Costs are classified according to their behavior in
relation to change in relation to production volume within given period of
time. Fixed Costs remain fixed irrespective of changes in the production
volume in given period of time. Variable costs change according to volume
of production. Semi-variable Costs costs are partly fixed and partly
variable. - By control ability: controllable,
uncontrollable costs. Controllable costs are those which can be controlled
or influenced by a conscious management action. Uncontrollable costs
cannot be controlled or influenced by a conscious management action. - By normality: normal costs and
abnormal costs. Normal costs arise during routine day-to-day business
operations. Abnormal costs arise because of any abnormal activity or event
not part of routine business operations. E.g. costs arising of floods,
riots, accidents etc.
Various decisions of management.
- Replacement Cost: This cost is the
cost at which existing items of material or fixed assets can be replaced.
Thus this is the cost of replacing existing assets at present or at a
future date. - Shutdown Cost:These costs are the
costs which are incurred if the operations are shut down and they will disappear
if the operations are continued. - Capacity Cost: These costs are
normally fixed costs. The cost incurred by a company for providing
production, administration and selling and distribution capabilities in
order to perform various functions. - Other Costs
Standard Cost Accounting: Setting Standards and Analyzing Variances
The cost of manufacturing a
product may be determined before production begins. Cost accumulation
procedures (either job order costing or process costing) may apply
predetermined costs to units as they are produced, rather than wait for actual
data to be accumulated.
product may be determined before production begins. Cost accumulation
procedures (either job order costing or process costing) may apply
predetermined costs to units as they are produced, rather than wait for actual
data to be accumulated.
In modern cost account of
recording historical costs was taken further, by allocating the company’s fixed
costs over a given period of time to the items produced during that period, and
recording the result as the total cost of production. This allowed the full
cost of products that were not sold in the period they were produced to be
recorded in inventory using a variety of complex accounting methods, which was
consistent with the principles of GAAP (Generally Accepted
Accounting Principles). It also essentially enabled managers to ignore the
fixed costs, and look at the results of each period in relation to the
“standard cost” for any given product.
recording historical costs was taken further, by allocating the company’s fixed
costs over a given period of time to the items produced during that period, and
recording the result as the total cost of production. This allowed the full
cost of products that were not sold in the period they were produced to be
recorded in inventory using a variety of complex accounting methods, which was
consistent with the principles of GAAP (Generally Accepted
Accounting Principles). It also essentially enabled managers to ignore the
fixed costs, and look at the results of each period in relation to the
“standard cost” for any given product.
For
example: if the railway coach company normally produced 40 coaches per month,
and the fixed costs were still $1000/month, then each coach could be said to
incur an Operating Cost/overhead of $25 =($1000 / 40). Adding this to the
variable costs of $300 per coach produced a full cost of $325 per coach.
example: if the railway coach company normally produced 40 coaches per month,
and the fixed costs were still $1000/month, then each coach could be said to
incur an Operating Cost/overhead of $25 =($1000 / 40). Adding this to the
variable costs of $300 per coach produced a full cost of $325 per coach.
This method tended to
slightly distort the resulting unit cost, but in mass-production industries
that made one product line, and where the fixed costs were relatively low, the
distortion was very minor.
slightly distort the resulting unit cost, but in mass-production industries
that made one product line, and where the fixed costs were relatively low, the
distortion was very minor.
For
example: if the railway coach company made 100 coaches one month, then the unit
cost would become $310 per coach ($300 + ($1000 / 100)). If the next month the
company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000 /
50)), a relatively minor difference.
example: if the railway coach company made 100 coaches one month, then the unit
cost would become $310 per coach ($300 + ($1000 / 100)). If the next month the
company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000 /
50)), a relatively minor difference.
An important part of standard
cost accounting is a variance analysis, which
breaks down the variation between actual cost and standard costs into various
components (volume variation, material cost variation, labor cost variation,
etc.) so managers can understand why costs were different from what was
planned and take appropriate action to correct the situation.
cost accounting is a variance analysis, which
breaks down the variation between actual cost and standard costs into various
components (volume variation, material cost variation, labor cost variation,
etc.) so managers can understand why costs were different from what was
planned and take appropriate action to correct the situation.
The development of throughput accounting
As business became more
complex and began producing a greater variety of products, the use of cost
accounting to make decisions to maximize profitability came into question.
Management circles became increasingly aware of the Theory of Constraints in the 1980s, and began
to understand that “every production process has a limiting factor”
somewhere in the chain of production. As business management learned to
identify the constraints, they increasingly adopted throughput accounting to manage them and
“maximize the throughput dollars” (or other currency) from
each unit of constrained resource. Throughput accounting aims to make the best
use of scarce resources (bottle neck) in a JIT environment.
complex and began producing a greater variety of products, the use of cost
accounting to make decisions to maximize profitability came into question.
Management circles became increasingly aware of the Theory of Constraints in the 1980s, and began
to understand that “every production process has a limiting factor”
somewhere in the chain of production. As business management learned to
identify the constraints, they increasingly adopted throughput accounting to manage them and
“maximize the throughput dollars” (or other currency) from
each unit of constrained resource. Throughput accounting aims to make the best
use of scarce resources (bottle neck) in a JIT environment.
Accounting plays
important role for correct and satisfied operating of any organization. As a
matter of fact, the development of any business is only possible, if we record
all business transactions with correct method and analyze
them. There are following main uses of Accounting:
important role for correct and satisfied operating of any organization. As a
matter of fact, the development of any business is only possible, if we record
all business transactions with correct method and analyze
them. There are following main uses of Accounting:
1. Avoidance of the limitation
of memorizing power: Businessman
cannot remember all business transactions due to the limitation of human
memory. Accounting is helpful for recording all business transaction and when
businessman checks the record, he can easily remember it and use it for his
business purposes.
of memorizing power: Businessman
cannot remember all business transactions due to the limitation of human
memory. Accounting is helpful for recording all business transaction and when
businessman checks the record, he can easily remember it and use it for his
business purposes.
2. Compliance of Statutory
provisions: From
accounting point of view, recording of business transaction is compulsory.
Hereby, accounting helps to fulfill all statutory provisions. In India, it is
compulsory to record of all cash, bank and purchase and sale transaction for
joint stock companies.
provisions: From
accounting point of view, recording of business transaction is compulsory.
Hereby, accounting helps to fulfill all statutory provisions. In India, it is
compulsory to record of all cash, bank and purchase and sale transaction for
joint stock companies.
3. Ascertainment of profit and
loss of the business: Any
business concern is established for the motive of earning profit. Net profit or
loss is pure result of business. For correct calculation of business profit, it
is necessary to record correctly by adopting the principles of accounting.
loss of the business: Any
business concern is established for the motive of earning profit. Net profit or
loss is pure result of business. For correct calculation of business profit, it
is necessary to record correctly by adopting the principles of accounting.
4. Ascertainment of financial
position of the business: At
specific date, company finds the knowledge of his assets and liabilities from
financial statement. Assets means all sources of business and liabilities means
all payable amounts of business. Business can calculate correct financial
position, if businessman records all assets and liabilities in accounting.
position of the business: At
specific date, company finds the knowledge of his assets and liabilities from
financial statement. Assets means all sources of business and liabilities means
all payable amounts of business. Business can calculate correct financial
position, if businessman records all assets and liabilities in accounting.
5. Assessment of Tax: Nowadays, a businessman has
to pay many taxes. For example income tax, sale tax, property tax, excise duty,
import duty and custom duty etc. Its correct estimation is only possible, if
businessman record correctly all his income, production and sale with the help
of accounting. If businessman does not keep his record properly, then Assessing
officer calculates amount of tax with his own estimation.
to pay many taxes. For example income tax, sale tax, property tax, excise duty,
import duty and custom duty etc. Its correct estimation is only possible, if
businessman record correctly all his income, production and sale with the help
of accounting. If businessman does not keep his record properly, then Assessing
officer calculates amount of tax with his own estimation.
6. Knowledge of Debtors and
Creditors: With
accounting, businessman can easily find what amount is due from his debtors and
what amount is payable to his creditors.
If he maintains the accounting records properly.
Creditors: With
accounting, businessman can easily find what amount is due from his debtors and
what amount is payable to his creditors.
If he maintains the accounting records properly.
7. Determination of sale price
of business: If
businessman wants to sell his active business to other party, then the total
sale value of business can easily determine, if businessman records all
investments in business.
8. Evidence in
the court of law: If any disputes are presented between two
parties in court. Then books of accounts
can show as proofs, court accepts these records as evidence of transaction.
of business: If
businessman wants to sell his active business to other party, then the total
sale value of business can easily determine, if businessman records all
investments in business.
8. Evidence in
the court of law: If any disputes are presented between two
parties in court. Then books of accounts
can show as proofs, court accepts these records as evidence of transaction.
8. Assistance in taking
managerial decisions: Accounting
is helpful for many managerial decisions like calculation the price of goods
and services, calculating the product mix and sale mix, purchase decisions,
different uses of plants, determination of the productivity of different
sources of productions, continue or close of business decisions, replacement of
machinery decisions, decision regarding accepting of any specific order, decision
regarding tenders etc.
managerial decisions: Accounting
is helpful for many managerial decisions like calculation the price of goods
and services, calculating the product mix and sale mix, purchase decisions,
different uses of plants, determination of the productivity of different
sources of productions, continue or close of business decisions, replacement of
machinery decisions, decision regarding accepting of any specific order, decision
regarding tenders etc.
9. Development of nation: Nation can also develop with
the help of accounting, if all the businessman records correctly. With this, they
cannot save black money and with huge amount of tax, Govt. can utilize these
funds for development programmes of nation. After this development of nation is
possible. Read also the
Accounting facts of other countries.
the help of accounting, if all the businessman records correctly. With this, they
cannot save black money and with huge amount of tax, Govt. can utilize these
funds for development programmes of nation. After this development of nation is
possible. Read also the
Accounting facts of other countries.
