Name of the University: Irish University Business School

Thesis on financial management

Presented by Grandy Chikweza

Masters in Business Administration: Finance

Words range: 10,000 to 11,000

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Table of contents Page

Chapter 1: Introduction 3

Chapter 2: Excellency and reporting in financial management 4

Chapter 3: Financial management as a source of fund raising and donor

Confidence 10

Chapter 4: Managing risk and working capital in financial management 15

Chapter 5: Equity and Capital Financing for organization sustainability

In financial management 27

Chapter 6: Conclusion 30

Bibliography 32

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Chapter 1:

Introduction to Financial management:

Financial management entails planning for the future both profit and non- profit making

organisation to ensure a positive cash flow and sustainability. It involves the administration of

financial assets, identifies and managing financial risk. The primary concern of financial

management is the assessment rather than the techniques of financial qualifications by looking

on the available data and make judgement on the organisation performance.

A science of money management is important to all levels of human existence, because every

entity needs to look for its finances. Broadly speaking financial management is at all levels at the

individual level, non- profit making organisation and making profit levels. Individual level

differs in organisation levels where in individual level’s financial management involves tailoring

expenses according to financial recourses of an individual ,makes decisions that benefit

themselves in the long run and help them achieve the financial goals. From and organisation

point of view the process of financial management is associated with financial planning.

Financial planning seeks to quantify various financial resources available and plan the level.

Financial control refers to monitoring cash flow. Inflow is the amount of money coming in an

organisation, while out flow is the record of expenditure being made .Managing the movement is

important for the business. The strong financial management in the arena requires a finance

manager to be able to:

Interpret financial reports, income profit and loss account, cash flow and balance sheet

Improve the working capital within the operations

Review and fine tune financial budgeting and ,and revenue and cost forecasting

Look on the finding options for business expansion both long and short term financing

Review the financial status using ratios analysis such as gearing, profit per employee,

acid test, and weighted cost capital.

Understand techniques in using project and asset evaluation

Understand funding accounting if it’s non-profit organisation.

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Apply strong financial decision making on investment, proper allocation of fund to assets

and strategic business unit.

Effective management of the organisation both non -profit and profit organisation is a collective

responsibility for both the non-finance and finance staff, both has common goals to achieve and

without proper financial management it is difficult to realise the dream. The treasure for

investment portfolio and controller for controlling measures both the treasurer and controller

department should forecast on the organisation shareholder’s objective.

Chapter 2:

Excellency and reporting in financial management:

Financial analysing is a tool used in financial management, It is it the assessment of viability,

stability and profitability of an organisation by use of ratios from financial statements and other

report. It analyse the past, present and the future. The analysing is presented to make decisions

based on the followings, continue or discontinue with the business, decisions in other

investments and critically for management to make informed decisions.

It assess the profitability and strength for the organisation, the degree of organisation profit is

measured by income statements, solvency its ability to pay its creditors and other parties in the

long run to earn income and sustain short and long term growth. Liquidity its ability to maintain

positive cash flows .The organisation may use different options by comparing past performance,

comparing the same historical time period for the same firm for five years.

Future performance, by using historical figures , other mathematical and statistical this method is

the main source of errors in financial analysis as the past statistics may be poor for the future

prospects. Comparative performance the organisation can use the technique by comparing with

other similar organisation. Comparing ratios is one of the aspect of financial analysis however

many challenges are faced.

The ratios says little about the organisation’s prospect in really sense , one ratio holds little

meaning, as a indicator it will be good for ratio to hold two or three meanings i.e. one can

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partially overcome this problem by combining several ratios to paint a clear picture of the

organisation performance. Financial ratios are no longer objective than the accounting method

employed changes of accounting policy or choices can give different ratio values.

Ratio fails to account for exogenous that are not based on economical fundamentals of the firm,

the general economy. Financial analysis can also use percentages analysis, which reduces series

of figures as percentage of some base amount. The horizontal analysis are used when

proportionate changes in the same figure over a given time period expressed as a percentage and

vertical or know as common size analysis reduce all line to a common size as percentage of some

base value.

Financial management Excellency

Managing finance is vital to an organisation hence financial planning, forecasting and budgeting

is a critical in financial management. Financial planning is a continue process of directing and

allocating financial resources to meet a strategic goals and objective. Its output takes the form of

budget. The most used form of budgets is pro forma or budgeted financial statements and the

foundation are is the detailed budgets.

Detailed budget include sales forecast .production forecast and other estimates in support of

financial plan and collective a master budget is developed. For an effective planning all

departments should be involved for input ,sale department for sales budget, program department

for program budget, operations department for operation budget, production department for

production budget and cash budget as single process that encompasses both operations and

financing.

Some of the financial processes are strategic planning, sales forecast, and percentages of sales.

The management should design proper coordination and communication from the field office,

the country office and the senior management office. An open door policy is a key to financial

management.

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Styles in Financial management

Three styles of financial management, security stewardship, supporting performance and

enabling performance, are commonly recognized. Security stewardship is based on controlling,

accountability, and finance manager’s approach. Accountability is concept of ethics and

governance and much to do with responsibilities absence of accounting means is absence in

accountability. Supporting performances: the approach of efficient and effective and finally the

enabling transformation are based on the strategic and customer leadership.

Lessons leaned

IMC utilizes both styles of financial management in all country programs and its sub offices.

Working in conflicts areas and funding based on donor driven. Program managers view financial

management as finance issue other than the organisation issue controlling, planning, budgeting

and expenditure analysis are key areas of financial management in IMC hence all this are viewed

as the responsibility of finance department other than the collective responsibilities of all sectors,

as program staff are regarded as budget holders.

Financial management of IMC is donor driven hence donor compliance is priority other than the

financial management principles. The program heads that falls under this category lack skills of

financial management and hence always find it difficult to track budget vouchers. These

circumstances clearly demonstrate the need of them to build capacity in the area of financial

management. The other factor is financial management in conflict areas where 100% of funding

is directed and deals in emergency funding.

One of the areas, which need critically attention, will be called financial management tips in

conflict areas. The paper reflects some of my personal experiences in financial management

relevant case studies regarding the subject matter.

To demonstrate that financial management must be collective responsibilities at

International Medical Corps (IMC).

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To show that effective financial management, process, planning, forecasting, budgeting,

risk management, asset management, cost management, financial analysis is important

for the progress of staff, donors and the organization.

The Importance of Financial management in organizations

Importance of financial management cannot be neglected when one plan to expand and attract

donor confidence. It is a tool that makes to move ahead with expansion plans i.e. Financial

reports helps in making important future decisions, more benefits are obtained in financial

management gives an organisation to have strategic decisions wisely and with vision.

Accounting and financial reports

It is very important to keep track of the company’s origin and history particularly the account of

the money that has been spent. When analysing reports the financial reports gives a clear picture

of spending pattern, the budget lines spending will give, and organisation a clear focus, finally

financial reports will demonstrate how to manage expenses and provide spending advice to the

organisation and program staff.

Financial ratios:

Ratios provide all information that is needed to know about the organisation. Ratios can be

demonstrated in to percentages, figures, or number of days in any way that makes the program

staff and the management understand better.

Financial statements:

Pattern of expenses are exposed with the help of financial statements and this gives a clear status

of funding of the organisation. Financial planning and management is not only for reviewing the

financial statements but also for the awareness expenses and then manage them in such a way

that no loses will be incurred. The effective financial management helps organizations to deal

with the following:

How to set informed strategy decisions

How to make optimum position of funds

Protect the organization from pre carious mismanagement of funds

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Helps to study the balance sheet and all sensitive facts should be watched which can

endanger our business into losses.

Create a culture of minimize cost, risk and control of borrowed money and risk of losing

donor confidence and future funding

Spending within the approved budget both donor budgets

Create growth and able to manage working capital effectively

Able to manage both long term and short term financing

Probably the most use full reference is the monthly financial reports which IMC produce internal

for expenditure tracking and demonstrates how the reports are helping effective financial

management in IMC. Environmental IMC received a grant from one of the donors: European

Commission (EC) and below is the expenditure analysis (Pipe line for the grant) – Checked

EC- Grant        

  Total

Spending

to date

Balanc

e

%

spentLine Item

Budget

         

Personnel

144,594 121,624

22,970 84%

Fridge benefts

28,462 21,051

7,411 74%

Travel

10,840 10,177

663 94%

Equipment

2,120 1,352

768 64%

Supplies

57,280 54,111

3,169 94%

Other Direct Cost

40,104 34,705

5,399 87%

         

TOTAL DIRECT 283,400 243,021 40,379 86%

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COST

Indirect Cost

23.5% 66,599 57,110

9,489 86%

TOTAL COST 350,000 300,131 49,868 86%

Summary for the management: The total budget is $350.000 and to total spent as at 31st

August is $300,131 (86%) giving a balance of $49,868(14%) for the remaining 2 months

grant period. The monthly burn rate is $21,000 this shows that spending is on track. The

senior management team will make informed decisions once receive the accurate

information from the finance manager.

Lesson learned - The analysis depends on donor requirements rather than IMC requirements this

contradicts the principles of financial management of the organization but rather the accounting

are based on donor driven.

Managing cash as tool to financial management

Cash management is a broad area having to do with collection, and disbursement of cash

including measuring the level of liquidity, managing the cash balance and short-term investments

it is one of essential tool of financial management. The organization needs to have a policy of

managing cash on hand since the value of cash in hand today is not the same tomorrow. In the

development and conflicts countries, cash is not stable and not easy to manage, hence the finance

manager needs to plan effectively to avoid exposure.

Cash management is not only managing cash on hand in conflict areas the manager needs to

maintain less balances in local bank account. The manager will need to open both the currency

bank account if the organization is operating using difference currency. Maintain minimum

amount on local currency to avoid exposure.

Lesson learned: IMC operate in three currencies United States dollar, British pounds and Euro

Currency and the local currency AFs-Afghanistan currency. IMC opens four bank accounts .The

local accounts is the main bank accounts for IMC the manager should bargain for the best rate

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when having a convention from the foreign currency to the local currency. Managing receivables

is critical in financial management.

Having more receivables means the organization is using its own resources other than donor

resources .Cash collection systems should be utilised with an aim to reduce the time to collect

the cash that is owed to the firm by donors or debtors.( For example from customers) the time

delays are categorized as mail float ,processing float and bank float. Obviously, an envelope

mailed by customer containing payment to a supplier firm does not arrive at its destination

instantly, the moment the firm received the payment will not be deposited in its bank account

instantly. In addition, when the payment deposited in the bank account often times the bank does

not give immediate availability to the funds.

These three float are time delays that add up quickly, requiring the firm /organization to find

cash elsewhere to run its operations. Cash management attempts to attempts to decrease the time

delays in collection at the lowest cost. Below are considerations, which a finance manager should

take to minimise collection on delays:

Establish a collection receipts points closer to the customer such as a lock box with an

outside third party vendor to receive, a process and deposit the payment check will speed

up the collection. I.e. if the organization collects $10 million each day and can

permanently speed up collections by five days, at 6 percent interest rates, then the

annual before –tax profits would increase by $3 million. The techniques to analyze this

case would utilize data involves were, how much, and how often they pay. The bank they

remit checks from: the collection sites the firm has ( their own or a third party vendor) the

cost of processing payments :the time delays involved for mail, processing and

banking ;and the prevailing interest rate that can be earned on excess funds.

Managing receivable varies to organization-by-organization base with the mission

statements of the organization. A non -profit making organization survives by donor

funds delays in receiving donor receivables will affect the organization both operations

and programmatic. The finance manager of a no- profit making organization should

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design an age- analysis to track receivables and submit financial report in time and

accurately to avoid delays. Donor remit receivables based on the reports submitted.

Having emphasized on receivable the finance manager should mange his optimal cash balance .A

number of method to determine the IMC cash balance, which should be targeted so that costs are

minimized and yet adequate liquidity exists to ensure bills are paid on time. One of the steps,

which, a Finance manger can take to manage cash, is by measuring liquidity. Numerous ways to

measure this, including cash to total assets ratio, current ratio (current assets over current

liabilities), quick ratio (current assets less inventory, divided by current liabilities), and the net

liquid balance (cash plus marketable securities less short- term notes payable, divide by total

assets.

The higher the number generated by the liquidity measure, the greater the liquidity and vice

versa. Managing cash on day-to-day basis in actual dollars and cents the manager needs to adjust

the use of different models. Baumol model it is the same with economic order quantity (EOQ)

model, Miller –Orr Model, Stone Model. Decisions should be made by the finance manager on

short-term investments which answers the questions of (how much money and how long) .The

short-term decisions necessitates the analysis of return (needs to analyse returns in order to

compare) and liquidity.

The short term will help the manager to meet the liquidity test, as long duration instruments

expose the investor to too much interest rate risk.

Chapter 3:

Financial management as a source of fund raising

International medical corps is a non- profit-making organization with sore responsibility of

managing donor funds by utilising the resources based on the donor needs. A call is received

from the donor with specific requirements of the funding and the management of ICM set

measurement of weather it is worthwhile to go for the call or not.

One of the question asked by the IMC team is, does the organization financial management

policy in line with the donor financial requirements. In my observation, financial management is

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used as tool to give donor confidence and increase IMC cash portfolio. IMC has a strong

accounting system which identify financial information and ,expressing the information in

numeric terms and communicating this information to interested parties ,heads of section .An

accounting policy is developed to give guidelines on how IMC standard accounting procedures

are followed.

Financial management is general the responsibility of the finance manager, however all section

managers contribute and benefit from financial management system and satisfy donor

requirements. IMC success vitally depends on its ability to manage and safeguard the resources

government and private donors entrust .Central to this goal is a sound structure of financial

management and control, and making wise use of funds received and manage both short term

and long term finances.

Policy and procedure are designed to insure the effective and efficient uses of these funds in the

diverse settings the organization operates.

Importance of financial accountability at IMC

Sound financial management is critical to the effective efficient use of resources and the funds

provided by donors on behalf of beneficiaries. The ability to provide accurate, complete, and

timely financial information enables to comply with the rules and regulations of its donors and

grant reporting requirements and adhere to GAAP .Accurate and timely financial information

assists in decision-making and enhances an ability to attract funds from donors. IMC has general

responsibilities to conduct activities morally, ethically and in the spirit of public accountability,

transparency and responsible to donors.

No funds or asset will be used for any unlawful or improper purpose, No donor funds should be

used for political purposes, financial data to be submitted to donors should be accurate, complete

and prepared in accordance to donor requirements. All financial transactions are accounted

accurately and properly .One of the area is financial management and auditing cycle: the

financial management and accounting cycle is intricately tied to the cycle of donor wards.

Donor regulations should follow and adhere to as are the basis of donor satisfaction.

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Lesson learned: IMC’s annual budget is essentially the cumulative budgets of each of its

donor’s awards the master budget is a consolidation of all donor awards of different donors and

the indirect cost recovery (ICR funds to cover senior management overheads recovered from the

grants). The process of consolidate the wards from all donors to master budget is the source of

income of IMC hence bad financial management will result in donor withdrawing the award and

affect the annual operations of IMC.

Donor satisfaction and sound financial management is a key to IMC’s sustainability. Internal

control assists in the preparation of fair and honest reports and the safeguard of asset donor

funds. Control include insurance, compliance with the generally accepted accounting principles,

vouchers, dual cheque signing, double approval for expenditures. IMC has an organised structure

and segregation of duties so that on one staff has complete control over one section of the

information flow.

IMC is responsible and accountable to the donors and expected to produce financial reports for

the donors the reports based with the donor format and include statement of receipts and

disbursements. Finance manger needs to take attention when preparing the donor reports and

needs to consider below information:

Donor contract requirement

Donor format

Approved budget by the donor

Flexibility

Allowable cost and unallowable cost

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It is important for IMC to maintain good relationship with its donor for easy to mange it is cash

flow. IMC cash flow comes from the donor .Long term and short term financing is practised by

IMC, after receiving and advance payment IMC opens a fixed account to accumulate interest as

it not necessary for the funds to be in cheque account/operating account. Cash on hand does not

earn a return it is prudent to invest some funds in the interest account.

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Improving financial management and investment decision at IMC

Proper understanding of financial management, objective, and value for money is important for

IMC to move from good to great. As the basis of financial management is to support the

organization goals this include knowing and reporting accurately how much organizations are

spending ,where, and on what, planning the use of the resources ever more effectively and

efficiency .

As the financial management seen as stewardship of resources: then, with that essential

underpinning, supporting organisation performance: and ultimately enabling organization

transformation. Good financial management is the end about results however; results are

delivered through structures and systems. To be good at financial management an organization

needs.

Financially knowledgeable and effective leadership

Appropriately skilled people

Effective process and information systems

How the organization relates to its stakeholders

How to make best investment decisions

My assessment: financial management of IMC is reviewed, externally and Internal, by:

Treasury as part of programme departmental reviews

By controller level as part of controls

By the internal audit as part of controls checks and balances

Regardless of the positive outcome on good basic accounting and reporting ,internal controls,

planning and resources allocation and looking to the future IMC has a room to improve on poor

skills ,monitoring and forecasting ,effective information systems and lacked widespread

ownership of value for money and capital budgeting techniques.

Actions

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Ensure that all financial management personnel are fully qualified: Heads of departments should

be qualified to promote good financial management practice with the departments. IMC should

improve the quality of personnel hired into financial management positions .They should seek

out financial management candidates in the public and private sectors with strong backgrounds

in accounting ,finance and information systems when vacancies occur at all levels and the

vacancies position should be open to all qualified candidates and certified candidates should be

the top priority.

Coordinate efforts to provide low-cost ,effective training for the financial management

personnel: Training options for financial management personnel should be designed and seek

low cost and no cost training alternatives and relocate existing training resources in a more cost

effective manner. A mechanism of tracking training of personnel both individually and aggregate

(An award for the best-trained staff should be put in place to encourage staff to go for trainings)

to promote a learning culture.

Job rotation or visitation (within various financial management functions of a department

between program and financial functions) continues education should be in IMC policy.

One of the key areas is the information sharing and management; IMC needs to insure that

information collected, disseminated, and reported on is useful, objective, timely, and accurate for

the benefit of program and donors.

Regular coordination meeting with staff in the field and proper performance indicators are met

by the finance in the field. IMC risk awards other than risk, adverse risk financial risk such as

huge receivable. business risk, liquidity risk, Market risk, interest rates risk and money transfer

risk, lack of institutional capacity, lack of weak government commitment in development and

conflict countries where IMC operates, Too many project components leading to coordination

and integration problems, overly complex information systems, pursuit of vested interest by

various stake holders needs to manage effectively to avoid IMC exposure.

Information management systems increases effectiveness and efficiency of IMC financial

management and facilitate the adoption of modern information sharing. The core program should

be introduced to describe the financial system requirements of a good system as the ability to

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collect accurate ,timely ,complete ,reliable, and consistent information, provide management

reporting ,support the donor wide policy decisions, support budget preparation and execution,

facilitate financial statement preparation, provide information for the donor on budgets ,analysis

and reporting.

One of the area is the design ,much of the work for IMC is focused on implementing an

integrated financial management information system including general ledger, accounts payable,

receivables, procurement, payroll, asset management, debt management, budgeting. The

approach is to implement effectively, in timely fashion, or to achieve results.

It is better to think automatic some core of the system, such as general ledger and accounts

payable and receivable, with an eye of adding –on or replacement the system of FM system

development, rather than where IMC what to be and also recognise that not everything may need

to be automated. Given the rapid change of technology, IMC is not feasible to plan all these or

put all the systems in place but it is feasible to plan of the potential needs in advance.

Delegation as sustainability in IMC Financial Management:

Delegation in finance is one of the financial tools and it is a two way process, good delegation

saves time, develops people and grooms a successor and motivates finance staff. However, poor

delegation will de motivates and confuses other people hence the finance manager needs to be

carefully when delegating. Effective delegation is important for the succession plan

Chapter 4:

Managing risk and working capital in financial management

IMC has been working to enhance mutual understanding of issues related to risk management in

financial management. After my approach, l has found that while there is convergence between

the sectors in various respects based on country program, there are still significant differences in

the core activities and the risk management tools that are applied to these activities.

There are also differences in the regulatory capital frameworks, in many cases reflecting

differences in the underlying activities and in supervisory approaches. Difference in the core

activities: sector differences in the core activities and risk exposures are well reflected in the

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balance sheets typical within each sector and country programs. In order to illustrate the

differences the, stylised balance sheets for each sector are presented monthly the balance sheet

suggest the following patterns:

The majority of assets typically consist of loans and other credit exposures, while the majority of

liabilities consist of deposits payable on demand from donors.

Many sectors are exposed to substantial risk associated with lines of credits and commitments

that are not directly reflected on the balance sheet. In addition, as result the primary risk is

liquidity related to the structure of their balance sheets, which often contain significant amounts

of short-term liabilities and relatively illiquid assets. The assessment and management of risk in

IMC sectors are handled in ways that reflect both similarities and differences between sectors .in

all sectors, policies and procedures exist to ensure that an independent assessment of risk occurs

and that controls are in place to limit the amount of risk that can be taken on by IMC global.

The priority placed of risk management is also reflected in substantial efforts taken across all

sectors to develop quantitative measures of risk, including risks-such as operational risk, that

significantly to measure. Continuing pressures to deliver strong and sustainable risk adjusted

returns on capital motivate financial managers in all sectors to invest in improved methodologies

for quantifying risk.

The emphasis on risk measurement can be related to efforts to manage significant risks through

hedging or holding capital or provisions are truly needed to support their retained risk would

tend to improve the firms risk adjusted returns. Now withstanding these similarities of the sectors

HIV-Aids sector, emergency sector, relief Sector, agriculture sector, and financial Sector, there

are differences reflecting the different programme activities and risk exposure to each sector

based on the donor.

Based with my findings IMC is investing more in risk management techniques for the risks that

are dominant in their sector. Therefore, risk management will often more specialise and

sophisticated for the primary risk in that sector than would be the case for management of the

same risk in other sector where it is more secondary risk. The emphasis that all sectors are

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placing on risk management and risk measurement issues are encouraging .This should result in

stronger and better-managed sectors.

The ability to improve risk quantification can provide important tools for assessing risk/return

trade –offs and encourage risk management practices. However, sectors need to understand the

limitations of such methodologies and should supplement these where necessary through tress

testing.

As sectors become active participants in new markets and programs and take new types of risk,

it is important that appropriate policies and procedures be put into place to measure and manage

these risks and that IMC risk management practices are appropriate to the level of activity that

sectors are in. In particular, Sectors should focus on the need to hold capital to support new

activities and support their judgement of the necessary capital by comprehensive assessments of

the relevant risks that are independent of the relevant operations unit.

Clearly, the senior management team (SMT) should approve significant expansions of a firm’s

activity into a new risk area. Supervisory emphasis on the importance of risk management is also

clearly beneficial .The efforts that a supervisors have made to highlight appropriate practices,

policies and procedures in regards to various risk is desirable and helps to increase the rate at

which effective risk management approaches are adopted across all sectors as well as IMC

global.

Within a sector, looking forward ,supervisors should seek to understand ,how Sectors may be

assessing those risk that are traditionally less common in their sector than in other sector and the

methodology which IMC will develop to provide all its sectors globally. View of risk that spans

multiple risk categories .In this regard cross –sector supervisory cooperation and information

sharing is critical to ensuring that supervisors in the different sectors have a sound understanding

of how risk management practices may differ and where improvements may be made.

General approaches to the management of key risks

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There are a number as risk management tools which that the sectors use to manage risk. These

include development of appropriate corporate policies and procedures ,the use of quantitative

methods to measure risk ,pricing products and services according to their risk ,the establishment

of risk limits ,active management of risk through diversification and hedging techniques ,and the

building of cushions ( both reserves/provisions and capital) to absorb losses.

The relative emphasis and application of these tools differs both across sectors and across risk to

some extent depending on the nature of the relevant supervisory regime. Sectors set policies and

procedures identifying acceptable risks and desirable risk management techniques as an integral

part of their ongoing risk management process.

The objectives scope and contents of the sector policies and the associated approaches to

implementation are largely by senior levels of the IMC globally. The primary aim of IMC’s risk

policies is to set the sectors appetite for taking on various risks and to establish approaches for

the sectors measurement and management .The practically and likelihood of IMC of the major

categories of risk are typically undertaken prior to establishing risk tolerance levels.

IMC risk policies requires ,by determining the principles that govern the sector’s risk exposures

allow for a conscious ,deliberate and consistent risk selection and are therefore aimed at avoiding

taking on unwanted risk in the future. These polices should typically specify the strategies of the

sectors will pursue, define how specialist skills are to be deployed to sustain them. Require

quantification of risks whenever possible and offer guidelines for general management that

reflect the given level of risk tolerance.

The sectors management should implement sector risk policies by translating them into

components i.e. and approach to risk identification and measurement ,a detailed structure of

limits and guidelines governing risk taking and internal controls and management information

systems for controlling ,monitoring and reposting risk. While most risks are identifiable, not all

are quantifiable. Conceptually, the measurement of any risk , whether market, credit, liquidity,

technical, default ,interest rate risk is composed of three factors ,the scale of exposure, the

likelihood of a loss, and the size of the loss.

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The latter two components are uncertain and generally need to be looked at form of statistical

perspective this requires the use of data, which is readily available in some areas. The extent of

measurement varies across risk types according to the sophistication of the available

methodologies and the emphasis of the organization. The use of techniques, often statistically

based, is common to the measurement of the key risk in each sector.

Quantitative measures of risk are important inputs risk management decisions. including the

appropriate pricing of products (whether a loan, or derivative contract) A common aspect of risk

measurement is the analysis of different scenarios, including moderately adverse scenarios as

well as low probability events with potential for large losses and scenarios where key

assumptions break down, to create a accurate profile of the institutions risk susceptibility.

The result of these tests should be reported to the senior management and considered when

establishing and reviewing a risk management policies and limits.

Assessment of risk:

Both qualitative and quantitative, forms the key means by which risk exposure are monitored on

an ongoing basis. The frequency of monitoring varies with the speed at which a situation can

change and the importance of the risk to the organization. Once risk identified and quantified to

the degree possible, management establishes, policies and procedure to limit or otherwise control

them.

Managing working capital in the new economic environment

The problem is acknowledged throughout the world in difficult times and this is not an

exemption to IMC. The successful management of cash and working capital is often crucial to

the organization success and its survival. Shortening the cash cycle and better use of working

capital is the most important factor as a non- profit making organization struggle to overcome

current economic volatility and the increasing difficulty of accessing capital markets.

IMC recognise the challenges of managing working capital and the big challenge is how to

manage it. During my approach I made a simple study on getting publicly available receivables,

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payables and inventory date from three IMC country programs by providing a benchmark

analysis of working capital management within the country programs, I was able to offer new

perspectives on the release of organic sources of free cash flow.

My study have three main aims; to get a fact based understanding of the real impact that

the current financial services and credit liquidity situation was having, or was likely to

have ,on other sectors. To isolate and identify the root causes why some country programs

struggle with cash flow and working capital management above beyond the impact of the

current economic environment. To show how leading country programs are finding ways

to improve cash flow without relying on external sources.

I found that the key was to focus both performance management and incentive mechanism on

working capital and cash ,to get back to basics, to gain effective insight and to release cash

organically by observing those priorities even country programs which were performing

potentially more successfully despite the wider problems of the economy.

Overall operating cash flow for all the country programs in the study was 2.7% by the end of

2008 but that figure was much more serious by the economic downturn of 2009 and the resulting

pressure on cash flow. Some of the observation was the time taken to receive receivables from

the donor was more than planed and also exposure with the exchange rate as some of the country

programs where using black markets in which the rate is not determined.

Good news on my study:

By setting up end to end visibility of the root cause of difficulties in the management of

receivables ,payables and inventories ,measurement are put in place at operational and process

levels to advise top performance data and reporting mechanism and tightly integrated with the

planning and forecasting processes. Incentives are introduced throughout the organization and

especially in sales and marketing to encourage effectiveness in the management of cash and

working capital.

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Management has access to data, which enables comparisons of the company’s performance with

industry averages, and with what can be, achieved. Quick win initiatives introduced to generate

momentum fast and to fund broader, sustainable solutions. Over ambitious schemes for working

capital and cash management are generally less successful than getting back to basics and

organically releasing cash from core operational sources.

Tactical quick win initiatives have been deployed particular in the area of receivables

management, focused on better managing credit exposure and more quickly converting IMC

money to donor money.

The organization should have clear visibility management processes of receivables, payables,

and inventories. In addition, able to measure results effectively ability to consolidate and

standardise data about working capital performances, using tools to make and drive fact based

decisions and perspectives in the business. Creating multidimensional views of working capital

performance differentiated by business segment, service and or product, so that needed process

improvements or projects that drive improved cash management can be isolated.

Working capital cycle

Cash flows are a cycle into a round and out of a business, it is the organization lifeblood and

every manager’s primary task is to help keep it flowing and to use the cash flow to generate

profits. If a business is operating profitably, then it should be in theory generate cash surpluses.

If the business does not generate profits, the business will eventually run out of cash and close

down its operations.

The faster for business to expand the more cash, it will need for working capital and investment.

The cheapest and best sources of cash exist as working capital right within business .Good

management of working capital will generate cash, will help improve profits and reduce risk,

bear in mind that the cost providing credit to customers and holding stocks can represent a

substantial proportion of a firms total profits.

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There are two elements in the business cycle that absorb cash – Inventory (stocks and work in

progress) and receivables (debtors owing money). The main resources of cash are payables

(creditors), equity, and |loans. Sources of additional working capital: Existing cash reserves,

profits (when secure it as cash), payables (credit from suppliers) new equity or loans from

shareholders, bank overdrafts or lines of credit, long-term loans.

If one has an insufficient working capital and to increase sales, one easily over stretches the

financial resources of the business. This is called overtrading handling payables: Cash flow can

be significantly enhanced if the amounts are collected faster .Every business needs to know who

owes them money , how much is owed ,how long it is owing, for what it is owed. Late payments

erode profits and can lead to bad debts. Slow payment has a clipping effect on business; in

particular on small business who can least afford it.

If do not manage debtors, they will begin to manage, businesses as gradually lose control due

to reduced cash flow, and of course, could experience an increased incidence of bad debt. The

following helps an organization to manage its debtors:

Have the right mental attitude to the control of credit and make sure that it gets the priority. It

deserves, establish clear credit practices as a matter of company policy. Make sure that these

practise clearly understood by staff, suppliers, and customers, be professional. When accepting

new accounts and especially larger ones, check out each customer thoroughly before offer

credit ,use credit agencies ,bank references ,industry sources etc, establish credit limits for each

customer and stick to them, consciously review these limits when suspect tough times are

coming or if operating in a volatile sector.

The organization should keep very close to larger customers, invoice promptly, and clearly,

consider accepting penalties on overdue accounts consider accepting credit /debit cards as a

payment option, monitor debtor balances and ageing schedules and do not let any debts get too

large or too old. Recognize that the longer someone owes the greater the chance will never be

paid.

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If the average age of debtors is getting longer, or is already very long, may need to look for the

following possible defects. Weak credit judgement, poor collection procedures, lax enforcement

of credit terms, and slow issue of invoices or statements, errors in invoices or statements,

customer dissatisfaction. Debtors due over 90 days (unless within agreed credit terms) should

demand the immediate attention, warning signs:

Longer credit terms taken with approval, particularly for smaller orders, use of post dated

checks by debtors who normally settle within agreed terms, evidence of customers switching to

additional supplies for the same goods, new customers who are reluctant to give credit

references, receiving part payments from debtors. Profits on comes from paid sales: the act of

collecting money is one which most people dislike for many reasons and therefore put on the

long finger because they convince themselves there is something more urgent or important that

demand their attention now.

There is nothing more important than being paid for product or services .A customer who does

not pay is not a customer. The organization can follow some of the following ideas when

collecting part payments money from debtors. Develop appropriate procedures for handling late

payments, track and pursue late payers, get external help if own efforts fail, do not feel guilty

asking for money. It is for the organization and is entitled to it, make a call, and keep on asking

until get some satisfaction. In difficult circumstances, take what can now and agree terms for the

remainder, it lessens the problem, when asking money be hard on the issue but soft on the person

do not give a debtor any excuse for not paying, make it objective is to get the money.

Inventory management:

Managing inventory is juggling act .excessive stocks can place a heavy burden on the cash

resources of a business .Insufficient stocks can result in lost sales delays for customers. Finance

manager should able to track how quickly stock is moving or put another way, how long each

stock sit on shelves before being sold . Obviously average stock holding periods will be

influenced by the nature of business environment for example a fresh vegetable shop might turn

over its entire stock every few days while a motor factor would be much slower as it may carry a

wide range of rarely used spare parts in case somebody needs them.

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The tactic is to operate on a just in time (JIT) basis whereby all the components to be assembled

on a particular today. arrive at the factory early that morning, no earlier no later .This helps to

minimize the risk of obsolete on IMC stock .Because JIT manufactures hold stock for a very

short time, they are able to conserve substantial cash .JIT is a good model to strive for as it

embraces all the principles of prudent stock management.

The management should identify the fast and slow stock movers with the objectives of

establishing optimum stock levels for each category and thereby, minimize the cash tied up in

stocks. Organization should consider these factors when determining optimum stock levels ,what

are the projected sales of each product, how widely available are raw materials components ,how

long does it take for delivery by supplies, can remove slow movers from product range without

compromising best sellers.

Stock sitting for long period ties up money, which is not working for the organization. The

organization should review the effectiveness of existing and inventory systems know the stock

turn for all major items of inventory. Apply tights controls to the significant few items and

simplify controls for the trivial many, sell off outdated or slow moving products it gets more

difficult to sell the longer keep it, consider having part of product outsourced to another

manufacturer, rather than make it yourself, review security procedures to ensure than no stock is

going out the back door.

Below are important ratios to measure working capital utilization:

Ratio Formulae Result Interpretation

Stock

Turnover

( in days)

Average stock

*365/Cost of

Goods sold

=*days It turns over the value of entire stock every day. It

May need to break this down into product groups for

effective stock management. Obsolete stock, slow

moving lines will extend overall stock turnover days.

Faster production, fewer product lines, just in time

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ordering will reduce average days.

Receivabl

es ratio

(in days)

Debtors

*365/sales

=*days It take on average *days to collect monies due. If

official credit terms are 45 day and it takes 65 days –

then why One or more large or slow debts can drag

out the average day’s .effective debtor management

will minimize the days.

payables

Ratio

(in days)

Creditors*365/

Cost of sales

( or purchases)

=*days On average , pay suppliers every *days .if negotiate

better credit terms this will increase .If pay

earlier .say ,to get a discount this will decline. If

simply defer paying suppliers (without agreement) this

will also increase –but reputation the quality of

services and any flexibility provided by suppliers may

offer.

Current

Ratio

Total Current

assets/Total

current

Liabilities

=*times Current assets are assets that can readily turn in to

cash or will do so within 12 Months in the course of

business ,Current

Quick

Ratio

(Total Current

Assets-

Inventory)/Tota

l current

Liabilities

=*times liabilities are amount due to pay within the coming 12

months i.e. 1.5 times means that should be able to lay

hands on $1.50 for every $1.00 owe .Less than 1

times e.g. O.75 means that could have liquidity

problems and be under pressure to generate sufficient

cash to meet oncoming demands. Similar to the

current ratio but takes account of the fact that it may

take time to concert inventory into cash

Working

capital

ratio

(Inventory

+Receivables-

Payables)/Sales

As%

sales

A high % means that working capital needs are high

relative to sales

Once ratios have been established for business, it is important to track them over time and

to compare them with ratios for other comparable businesses or industry sectors

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Organization means of sustainability in financial management

The organization needs to take consideration before formulating the financing strategy in terms

of source and the amount considering the following. The cost and risk associated with the

financing strategy, the future trend of the market and how is will affect the organisation future

available funds, The ratio of the debt equity, the maturity dates of the present debt instruments,

the restrictions on the loan agreements, the tax rate

The organization set many avenues of growth and the finance manager’s objective is to increases

the organization capital and shareholder growth as discussed before:

Equity investments

It is the buying and holding of shares of stock on the stock market in anticipation of income

from dividends and capital gains, as the value of the stock rises. It may also refer to the

acquisition of equity (ownership) participation in a private (unlisted) company or a start up

company. It appears in the balance sheet of the organization.

It is also the act of raising money for the organization activities by selling the common or

preferred stock to individual or institutional investors in return for money paid, shareholders

receive ownership interest in the corporation. The book value of equity will change in the case of

the following events, changes in the organisation’s assets relative to its liabilities, depreciation,

and issue of new equity. In which the organization obtains new capital increases total

shareholders, share repurchase in which the organisation gives back money to its investors, the

assets, and liabilities can change without any effect being effect measured in the income

statement under certain circumstances.

Share holder equity:

This when the owners are shareholders the ownership is spread out among the shareholders,

equity financing has its own merits and demerits and the finance manager should look on the two

before making a decision. Merits, the funding is committed to the organization and with specific

intended purpose, investors only realise their investment if the business is doing well.

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The right business angels and venture capitalists can bring valuable skills contacts and

experiences to business and assist in strategy and key decisions making. In common with the

investors have stake in the business, success i.e. growth, profitability and increase in value and

investors are prepared to provide follow up funding for the growth of the business.

The demerits of equity is raising equity finance is demanding, costly and time consuming.

Depending with the investors the organization may lose certain powers to make management

decisions more management time is needed to provide regular information for the investors to

monitor. More legal and regulatory issues to comply with are when raising finance is when

promoting investment.

Debt financing:

This means taking out a loan (money that is to be paid back over a certain period) usually with

interest) It is either short term (the loan to be in less than one year) or long term (the loan to be

repaid in more than a year). The most popular source of debt financing is the bank .Advantages

of debt financing is maintaining ownership.

Tax deductions this is a huge attraction for debt financing the principal and interest payments on

a business loan are classified as business expenses and deducted from the business income taxes

lower interest rates. Draw backs of debt financing, repayment even if the organization fails the

organisation still needs to pay back the loan, high rates payment.

Investment banking:

The financial institution assists corporations or organization in raising capital buy acting as the

agent in the issuance of securities. An investment bank also assists organization involved in

mergers and acquisitions derivatives .It also provides ancillary services such as market making

and the trading of derivatives, fixed income instruments, foreign exchange, and commodity and

equity securities.

Venture capital financing:

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It is a type of financing by venture capital, the type of private equity capital is provided as seed

funding to early stage ,high potential ,growth organization and more often after the seed funding

round as growth funding round (also referred as series around) the ventures does much of

negotiating about the financial terms and the legality. The stages in ventures are as follows: The

seed stage, the start up stage, Second stage, Third stage, the bridge /pre public stage.

Leverage investment:

It is strategy of borrowing to invest (using someone’s money to achiever investments goals) the

organization gets a loan and a make a single large investment at once and portion the income

month to make interest payments of the loan. It has potential of generating far greater returns.

Advantages of leverage is that the compounds returns are added to the organisation initial

investment, tax deductibility, the interest pay is tax exempted this reduce the overall cost of this

strategy. The final investment value is r returned to the investor.

Mergers and acquisitions:

It is the buying of one company by another. The transaction are done privately and

confidentially and a merger is when a two organization agreed to go as one both with the aim of

building the working capital ,economy of scale this the fact that combined company can often

reduce its fixed cost by removing duplicate departments or operations. Economy of scope this

refers to the efficiencies primary associated with demand side changes such as increasing or

decreasing the scope of marketing and distributing of different types of products, Increased

revenue or market share and recovery plan to smooth the earnings results of a organisation and

increase its working capital.

Before both parties agreed, a valuation should be contacted based on evaluating assets, historical

earnings. Future maintainable earnings, relative valuation and discounted cash flow

(DCF) .Investors in an organization that are aiming to take over another one must determine

whether the purchase will be beneficial to them in order to do so, how much the company to

acquired is really worth.

The Finance manager needs to use the appropriate method, which will be a win-win situation.

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The use of ratios is important in the M&A comparative ratio and Price Earnings ratio (P/E ratio).

With the use of this ratio, the finance manager makes an offer that is a multiple of the earnings of

the target organization. Looking at the P/E for all the stocks within the same industry group will

give the acquiring company good guidance for what the targets. P/E ratio multiple should be ,

Enterprise value to sale ratio(EV/sales) with this ratio the acquiring company make s an offer as

a multiple of the revenues again while being aware of the price to sales ratio of other companies

in the industry.

The following are some of the steps to take to a make M&A successful:

A new Entity- All staff should understand that a merger will transform and reason

behind a merger should also known, this will make the organisation to adopt the new

culture an opportunity to move forward and create a productive ,effective

organization for long term success.

A New Vision- A new entity needs a new vision or a statement of what the new

organization intends to become .It is a broad ,forwarding thinking in IMC that the

company must have before it sets out to reach goals .it tells what it intends to deliver

over time to customers ,shareholders and employees.

Determine that vision- The vision of the new entity might be to become the best relief

organization in the world and this needs the collective efforts to achieve both from the

junior staff to the executive. Unfortunately without this effort, employees in a new

organisation formed by a merger can enter into a passive /defensive style, typified by

a dependent culture .Workers are afraid of losing their authority, being moved to a

less prestigious position or being fired in the avoidance culture, fear and apprehension

constrict the ability to make decisions.

Measures success- Measuring success helps employees feel confident that leadership

is on board to make the new company everything it can be .Using a survey to measure

the climate in an organization will reveal if its culture is producing the desired

outcomes for employees, management, and the organization.

Step at a time- No merger is easy .Each one takes into account a difference set of

variables: employees, products, culture, history. Advance planning will not only make

a merger and acquisition go more smoothly ,it will help ensure a successful merger

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with a promising future and make employees proud to be part of the new

organization.

International financing:

A branch deals in dynamics of exchange rates, foreign investment. In addition, how these affect

the international trade, international projects, investments, capital flows, and trade deficits. The

other approach, which an organization can take to increase its working capital, is buy venturing

into multinational corporations that have much impact in foreign transaction.

The finance manager of the multinational company requires knowledge of international finance.

It requires much in managing working capital, control of foreign exchange and foreign direct

investments.

The finance manager needs to understand how to deal with foreign currency, receivable,

payables And currency exchange risk, derivatives (futures, options and swaps), International

markets debt and equity, real assets and markets and international investment portfolio. The aim

of multinational approach is to increase working capital, expand the market, growth and

maximising the return of equity.

The financial management is conducted in more than one cultural, social, economic, or political

environment. The out -come of multinational finance are (1) multinational investment policy –

higher returns from existing investments, brings in new investments opportunities and

multinational financial policy –reduce capital costs through access to international capital

markets. Growth in foreign trade and primary rapidly expanding global financial activities have

increased dramatically cross border capital flows closer integration of financial markets around

the world.

International finance binds together domestic and global transactions and brings competitive

way. Finance managers need to manage currency risk way to avoiding losses to an organisation.

The exchange rates fluctuation increases the riskiness of the investment, incurs losses, and

concerned about changing values of the currencies.

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Conclusion

The success of financial management is the backbone of any organisation and the successful of it

is not an individual approach but collective approach from all departments. Finance managers are

the stewardship of the organization hence there should hence and in force that all the financial

principles are adhere to the subject has thought me that for organization to succeed financial and

it should maintain the followings

Evaluate its financial performance and its prospects for the future by analysing the

financial statements and its cash flow by the use of ratios

The finance managers should know the goals and objective of the organization and one of

the key objectives is to maximise the shareholder’s wealth. It provides the major role of

the finance manager.

Financial planning is a key area to financial management; it gives proper direction by

estimating the future financial needs.

The finance manager should be able to manage working capital by making decisions in

capita l investment ,long and short term financing and improve the cash management by

inducing the cash policies i.e. avoiding holding much cash and able to effectively manage

inventory.

Finance managers should always pays attention to managing

risk( uncertainty) ,markets ,liquidity, default ,business, interest rate and economic risk

and measure risk by use of ratios and make informed decisions. He should make risk

analysis before making an informed decisions

One of the key areas is international finance, the finance manager should be aware of the

exposure in the international market, and the FM should be able to manage the currency

risk management affected by economy, markets, political and inflation of currency.

Finally the financial managers should have financial strategies, No financial strategies means a

strategy for failure and a clear strategy and plan not only incorporates goals and the activities

needed to reach these goals and a well thought out strategy prevented them from being another

victim of the financial crises .Financial strategies are the starting point of Internal control.

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The finance manager should able to communicate and implement the financial strategies to all

sectors. A good financial strategy does not mean much to a business without customers and

beneficiaries .There are never any guarantees for the business success ,but creating financial

strategies gives the business direction and guidance’s, without that ,there is no telling where will

end .

Strategy financial management is one of the most critical and important activities for the

professional finance manager. It is a fact that the consequences of all-important management

decisions, financial and otherwise, are immediately and/or eventually will be reflected in the

financial performance of the business enterprises. At the same time, many managers and even

business owners have had relatively little professional exposures to, and training in strategic

financial management.

Unless minimum financial performances levels are achieved, it is impossible for a business

enterprise to survive over time. At the same time, many organizations do survive for relatively

long periods without satisfactory levels of profitability .In a competitive marketplace many

organization struggle to earn a satisfactory level of profitability .Yet without appropriate

profitability rate, firms will survive over time.

There is no question but that many business owners and managers have the need to improve

financial management professionalism .This article perspective s and viewpoints that, when they

exist, tend to restrict financial performance. By recognizing the fallacies associated with these

viewpoints, finance managers have the opportunity to apply more professional financial

management practices to their organization. The result may bring financial health organization.

Bibliography

Ducker. Peter F (1980) managing in turbulent times

Financial management graduates (http://www.worldwidelearn.com/umc/index.php)

IMC financial manuals and

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Shim J : Financial management Third Edition

USAID cost principles A133,A122

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