The term “financial policy of the company” combines a set of methods for managing cash resources and activities aimed at the formation and then rational use of financial reserves. The concept of management of internal or external financial relationships adopted at the enterprise must comply with the Charter and the nature of the strategic objectives of the organization.
The volumetric concept of FPK consists of many subsystem components: tax, price, depreciation, budget and other types of activity.
The key goals of establishing the company’s financial policy and management mechanism are to strive for market leadership; ensuring the survival of the firm; growth of profits with parallel minimization of losses; measures to prevent the threat of bankruptcy.
The object of the FPK is the activities of the organization, carried out on the basis of the economic system, and the subject is the owners, founders of the organization, and financial departments.
Cash flow management structure
Regardless of the level of the economic entity (small business or state corporation), financial policy is set in motion using a mechanism that has a complex structure. The financial mechanism is created for the individual needs of the subject, it includes all the elements of the company’s monetary relationships: methods, tools, leverage, information and legal support.
It is customary to understand financial methods as ways of influencing business processes with the help of monetary relations. Financial functions in the production process are inextricably linked with the commercial component, therefore, the financial management methodology is divided into two areas: resource flow management and commercial (market) relations.
Financial methods include such processes and activities as:
- forecasting ;
- planning ;
- accounting ;
- regulation of monetary relationships (which can be both external – between the enterprise and partners, and internal – between departments).
The effectiveness of financial methods is expressed in the accumulation and use of cash reserves (funds). For example, analytical activity allows you to get an objective picture of the ratio of profit and loss, and therefore, makes it possible to optimally redistribute financing of certain areas of activity: to stimulate promising business processes, reducing the “content” of unprofitable lines.
- Personnel Planning Systematization Management Finance
Financial management instruments are called contractual relations (contracts), as a result of the conclusion of which one party receives one or another financial asset, and the other – obligations associated with the movement of capital.
In turn, assets are expressed directly in the receipt of cash or in the emergence of the right to demand their payment (in some cases, an asset implies an exchange of profitable instruments). In other words, a financial asset is something that a company can exchange either for money or for another object that is easier and more profitable to exchange for money than its own.
Thus, a contract under which the claims of one of the parties are satisfied by the other party through the supply of services is not considered a financial asset.
Obligations, however, formed as a result of the conclusion of an agreement (the emergence of a financial instrument) imply payment either in money or in assets that can be exchanged for money. An example of a financial liability is a debt under a loan agreement. Unable to pay the debt, the borrower can pay off, for example, with vehicles, which the lender will sell and cover his losses.
Among the instruments of the company’s financial policy, there are credit, deposit, investment, insurance, payment and other contractual relations.
The organizational and legal support of financial management is based on the requirements of the current set of laws governing entrepreneurial activity. Financial and legal laws (decrees, orders) regulate all aspects of financial activities (tax obligations, bankruptcy procedures, etc.), are imperative in nature and determine the scope of powers and obligations of participants in financial relationships.
The regulatory support of the financial policy mechanism is expressed in the creation of instructions, guidelines, tariffs, rates, standards.
Information and methodological support
Information service of the financial department of the enterprise consists in the collection of detailed, relevant, reliable information, which is expressed in the system of indicators of the economic, production and other business processes of the company. The more capital the company operates, the higher the quality of information collection and processing becomes. To make effective management decisions, the owner must have as complete information as possible in two areas:
- the property status of the company (expressed through financial statements);
- dynamics of environmental conditions (accumulated in statistical data).
When talking about financial policy, there are three main styles of management.
- Aggressive type is characterized by a high level of risks: pursuing an aggressive policy, managers give preference to highly profitable projects, regardless of the likelihood of losses, since they are guided by the earliest possible receipt of the highest results. Characteristic features of an aggressive management style: setting prices below the market average in order to stimulate sales; financing of existing assets is carried out through new liabilities (for example, loans); maintaining large stocks; lenient attitude towards significant delays in customer payments.
- Moderate model focuses on the ratio of average risks to results. Management rejects high-yield investments if they are accompanied by significant threats to the stability of the enterprise, preferring to maintain a compromise between income growth and preservation of liquidity.
- Conservative policy seeks to minimize financial threats: the governing body tries to avoid the slightest risks, sacrificing profitability for the sake of safety the achieved position. Typical features: the formation of the company’s pricing policy is based on the average market indicators; minimum warehouse balances are maintained; the sale of assets is carried out exclusively thanks to its own sources, avoiding the injection of borrowed money into the circulation.
Strategy and tactics of financial policy of a business project
It is generally accepted that strategy is always long-term, and tactics are short-term. In fact, in the field of economics, everything is relative: the timing may vary depending on the level of market stability. If the immediate external situation is not conducive to the implementation of certain tactical tasks, their funding can be reduced until better times. Thus, in practice, the solution of a tactical task may have a longer period than the implementation of any of the strategic goals.
A distinctive feature of strategic financial policy should be considered the global nature of goals and criteria aimed at improving the main indicators of the enterprise.
The strategic management policy consists of such elements as:
- forecast and financial planning ;
- description of the financial condition of the organization upon the occurrence of certain circumstances, for example, a change in the company’s sales policy (modeling);
- elaboration of alternative development plans in case of unplanned market conditions;
- determination of effective risk management techniques.
Long-term financial management
Prolonged financial management covers the full life cycle of the company (or one of the projects), from the launch of the business process to the redirection of finance to more profitable areas. Through the methods of long-term financial policy, a financial strategy is implemented – the most important component of the company’s basic strategy, which provides material for the development of all other areas of the organization’s activities.
Since long-term financial policy is a full-fledged part of general corporate financial management, it includes tax, budget, credit, investment and other areas.
Short term financial concepts
Short-term policy refers to financial measures, the implementation of which is designed for a period of no more than twelve months. The system of short-term solutions is implemented through such areas of activity as accounting, management of various activities, a system of statistics.
The essence of the individual financial policy of an enterprise is expressed through a set of goals set, as well as the means by which these goals are realized. The implementation of the financial concept is always a compromise between the tasks, needs of the company and the real opportunities formed by the external market environment.
If we consider the role of financial policy in the management process, then we can say that financial strategy determines where, to what achievements the organization is moving, and financial policy explains how, by what methods, by specific actions we are going to achieve our goals.
That is, it would not be an exaggeration to say that financial philosophy appears even before a strategy: a young, small company may not have a mission, ideology, strategic goals, while the original concept of cash flow distribution is formed at the stage of registration of a legal entity.