Finance is the key organ in any corporation or company today. A company that has a strong financial base will thrive to greater heights of success at a faster rate than that with a weak financial base. Managers are supposed to analyze the provided accounting information of a company and make financial decisions on a regular basis.
The managers use their management skills to determine whether a company needs extra capital or not. They are also required to analyze the various available financial sources to determine the best sources of obtaining capital in case a company needs extra financing.
A company whose liquidity goes below a given amount may be declared bankrupt and dissolved. Hence, financial managers play the role of ensuring that the liquidity of a company does not fall below the specified amount. Financial managers also negotiate for better terms of financing with the various financial sources.
A financial manager should know the various aspects of finance which include; the financial sources available, the risks of every financial source and advantages of every financial source (Hickman & Byrd 2013). It is in the financial markets that a company sells its securities as a way of sourcing funds. The financial managers ensures the risks and opportunities in every financial market are considered so as to advise the company on what securities to float in which market and when to float them. Minus the financial manager’s understanding of the financial market, the company will sell its shares and debentures at low prices and that way they will not be able source the required funds for the operation of the company (Hickman & Byrd 2013).
Cash flow is more important than sales in various ways since the rate at which cash flows in and out of the company will determine its liquidity. A company that has a poor liquidity may be declared bankrupt and be subsequently dissolved. Therefore, a company may make huge sales with most of them being on credit. This will reduce the cash flow at a given time and the company may not be able to make future sales if there are no cash inflows from previous sales. A company might also report huge profits as a result of credit sales but then the buyers may decide to pay after a very long period or even not to pay at all. This will see the company’s liquidity fall below the required level and it may be dissolved. Thus, cash flows are more important than sales.
As mentioned before, the failure of management to play its financial roles will see the company’s liquidity fall below a given level and as a result it may not be able to meet its financial obligations. This will lead to liquidation of the company. A good example are companies that have been closed because of the negligence of financial managers which results to companies making losses and unable to sustain their operations such as the Neopak investment in New York (Hickman & Byrd 2013).
The balance sheet attached in chapter two will be of great help to financial managers in decision making. Financial managers can use it to determine the liquidity of the company by calculating the liquidity ratios, the current assets ratios and the quick ratios. Depending on the values of the ratios, the managers will be able to make informed financial decisions. More so, the financial manager can use the balance sheet to determine the net worth of the company as well as to determine whether extra financing is required to run the company. Financial managers can also use the balance sheet to determine the financial sources that have not been fully exploited by the company and advice on whether it is prudent to exploit them or not.
Reference
Hickman, K., & Byrd, J. Essentials of Finance. New York: Bridge Point Education. 2013. Print.