Financial Management means planning, organizing, directing and controlling the financial activities such as procurement (income) and utilization (expenses) of funds of the enterprise. It means applying general management principles to financial resources of the enterprise (or one’s life).

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of financial resources of a business or one’s life. The objectives can be:-

1. To ensure regular and adequate supply of funds to the business or person’s life.
2. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
3. To ensure safety on investment, i.e., funds should be invested in safe ventures so that adequate rate of return can be achieved.
4. To plan a sound capital structure. There should be sound and fair composition of capital so that a balance is maintained.

Functions of Financial Management

1. Estimation of capital requirements: A finance personnel (project accountant) has to make estimation with regards to capital requirements of the company/business. This will depend upon expected costs and profits and future programmes and policies of a business. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term capital analysis. This will depend upon the proportion of capital a company/business is possessing and additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company/business has many choices like:-

• Empowerments from the government.
• Partnerships
• Venture capitalists
• Loans to be taken from banks and financial institutions.

Financial Planning

Financial Planning is the process of estimating the capital required and determining its use. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a business. This ensures effective and adequate financial and investment policies. The importance can be outlined as:-

1. Adequate funds have to be ensured.
2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily investing in companies/businesses which exercise financial planning.
4. Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company/business.

Understanding Money and Its Behavior

What is Money?

Money is anything that people use to buy or pay for goods and services, such as food, clothes, rent, school fees, etc.

Money is what many people receive for selling their own things or services. Most countries have their own kind of money, such as the United States Dollar, the British Pound, in Zambia we have the Zambian Kwacha. Money is also commonly called ‘Cash’ or ‘Currency’.

Attitude and Money Beliefs:

Generally, all individuals have their own different beliefs about money based on culture, what we learn while growing up at home, school or even at church.

The following are some of the beliefs and attitudes about money people have;

1. Money is good and we should have it at any cost.
2. Money is evil and people with money are Satanists – money is the root cause of people.
3. Rich people are greedy and corrupt.
4. Being poor is a sign of being a good Christian.
5. Having money is a sign of being blessed by God.
6. Having money is a sign of good life and happiness.
7. Rich people shall not enter heaven.
8. Poor people are humble.
9. Money has to be attained at the right age. You need to be mature enough to have or handle money.

Sources of Money

Where do money come from?

There are a lot of ways one can source or look for money, and some of them include;

1. Salary or Wage: This is the money paid monthly from an employer to an employee. Basically you need to have employment commonly known as a job to access a salary or wage. On the other hand a wage is money paid for doing short term work like creating a Facebook page for someone, cleaning the yard, washing clothes, doing house chores, etc.
2. Business Profits: This is the money you receive at the end of selling goods or services that your business offers.
3. Terminal Benefits/ Retirement Benefits: This is the money you receive at the time of retirement from your work place.
4. Government Empowerments: This is the money regarded as aid from the government to empower or support its people.
5. Loans: This is money accessed from financial institutions, that has to be paid back with a certain interest for a period of time.

Note:

The other name for profits, salaries or wages is called income.

Understanding Financial Management and what it involves

Financial Management is the means of planning, organizing, directing and controlling your day-to-day financial activities in order to achieve your short-term and long-term plans.

We all have plans that we need to achieve in life, some of them are short-term and some of them are long term.

Examples of short-term life plans may include:-

• Bill payments e.g. rent, school fees, food, utilities like water, power.
• Buying clothes, phones, new furniture, etc.
• Event financing such as birthday parts

Examples of long-term life plans may include:-

• Buying a plot
• Building a house, car
• Growing and building a stable business
• Saving for university or college’s fees

But in order to achieve both your short-term and long-term life plans, you need to know how best you can manage your finances or money.

Effective ways to manage your finances or money

The following are some of the ways that will help you to manage your finances or money effectively.

1. Financial Discipline: Is a necessary skill for proper financial management, without it you will never acquire or accumulate anything, without it you will never accomplish anything.

Financial discipline is about controlling your spending and making sure you pay for the things that need to be paid only and save the remaining or excess cash or money. The hardest part for most people is controlling their spending. If you cannot control your spending then no matter how much money you make it will never be enough. One important thing to know is that discipline is a skill and can be learned just like anything else, so as spending is habit that can be broken just like any other habit in life.

Here are a few tips to help get you on the path towards financial responsibility:-

• Spending Without a Plan: Financial planning is important to financial prosperity in everyone’s life. One can grow his or her finances and make millions but without careful planning or proper budgeting it can all disappear and you become broke, it is important therefore, to take careful steps in planning financial spending. We must make our financial plans in tune with what we want to achieve and then bend our energies to acquire that, plan before spending and spend the way you have planned i.e. according to your business budget. To get real satisfaction from money, one must have the ability not only to earn it but also to manage it wisely. Most people have good ways of acquiring money than managing the money. Financial planning is vital in everyone’s, spend on a budget so that it guides you in your expenditure, this financial plan will be a guideline that will help you to go for needs and not wants. ‘Needs’ are things you can’t do without and yet ‘Wants’ are things you can do without.
• Carrying Excess Cash without Purpose: As a matter of principle, do not carry large sums of money when you go shopping. In most cases, when your budget for shopping is K500.00 and you happen to carry K700.00 with you, then be rest assured that all of this money is likely to be used. The human tendency is that as long as you have cash on you spend it, resist carrying large sums of money when you are out shopping. Human beings do not want to suffer when they have money, they would rather spend and solve the problem even if it will lead them into debt. Carry enough money equal to your shopping list, beyond the shopping list you are likely to spend the excess money you have. These days it may not be cash only, you have visa cards that you can use any time to withdraw cash, what is needed is just self-discipline. Withdraw cash when there is real need to do so, there are many things in this world that attract our eyes, and these attractions may force you into spending. Avoid carrying excess cash.
• Increasing Expenses Instead of the Income or Profits: If your needs are increasing then you must increase your income or profits as well. If your family is growing it is also automatic that your needs will increase. Therefore, it is a good principle when you discover that your needs are increasing then you also need to increase the income, It is a financial mistake to increase expenses and not the income. This may force you to start borrowing money for important things you could have put on the budget.

2. Establish Excellent Record Management or Record Keeping: Another important aspect to financial management is records management or records keeping; if you want to keep your finances in check always keep every record of any income and spending, this will come in handy when reconciling your personal finances.

Records Management or Records Keeping is the supervision and administration of digital or paper records, regardless of format. Records Management or Keeping activities include the creation, receipt, and maintenance of records or documents. In this context or training, records refers to income statements such as bank statements, pay-slips and receipts.

Importance of record management or keeping:

1. It is easier to know the way you spend your income.
2. People who keep records have a clearer picture of the prices of various items and can take wise decision in purchasing.
3. The present expenditure can be compared with that of the past.
4. Various ways and means can be found for balancing your total income and expenditure.
5. Records can serve as a control over a person’s budget.

Understanding Budgeting

What is a budget?

A budget is a plan you write down to decide how you will spend your money or income each month. A budget helps you to make sure you will have enough money every month, without a budget, you might run out of money before your next income.

So, a budget shows you;

• How much money you make, and
• How you spend your money.

Why do you need a budget?

A budget helps you decide;

• What you must spend your money on.
• If you can spend less money on some things and more money on other things.

Understanding Financial Service Providers

In order to understand savings and investments, you need to first understand financial service providers. Financial service providers are where we keep money.

There are different types of financial providers, and these may include;

1. Commercial Banks
2. Mobile Money Services
3. Village Banking

Now, let us discuss each of these financial service providers in details.

1. Commercial Banks: A commercial bank is a financial institution that accepts deposits, offers checking and savings account services, and makes loans. Examples of commercial banks are; Zanaco, Atlasmara, Standard Chartered Bank, etc.

There are mainly three types of accounts in banks, and these are:-

Current Accounts:

• No minimum balance.
• No interest.
• Has monthly or service fees.
• Becomes dormant if there is no activity on the account for at least 3 months.

Savings Accounts:

• Has a minimum balance of K500 to K1, 000.
• Has a small interest on the money left in the bank account, usually the interest in not more than 5% per annum.
• Has a monthly or service fees.
• Becomes dormant if there is no activity on the account for at least 3 months.

Fixed Deposit Accounts:

• No minimum balance.
• No maintenance fee.
• No withdrawals allowed until maturity of the account
• Has interest on the investment amount.

Why do you need an account?

• Money is safest in the bank account.
• Bank accounts are good for book keeping and best way of keeping money records.
• Banks have no limit on the amount a person can deposit, save or withdraw.
• Money in the bank can grow by putting it on a savings or fixed deposit accounts.

How to maintain an active bank account or avoid being dormant

• Bank accounts become dormant or inactive if you do not leave some money for monthly charges or if you do not transact (deposit & withdraw) on the account for 3 months.

2. Mobile Money Services: These are financial services delivered by way of mobile networks using mobile phones. In general, such services include depositing, withdrawing, sending, saving and transferring money as well as making payments.

Examples of mobile money services include:-

• Airtel money
• MTN Money
• Zanaco Xpress (Xapit)

3. Village Banking: This refers to a group of individuals who come together to save their money with the hope of each one of them receiving interest on their savings after a period of time.

Advantages and Disadvantages of Financial Service Providers

1. Commercial Banks

Advantages:

• Money is safe.
• Money is always available when needed.
• Can get financial advice.
• Access to financial statements.

Disadvantages:

• Bank charges on every transaction.

2. Mobile Money Services

Advantages:

• Money can be transferred from anywhere.
• Easy access to your money.
• Cheaper and easy to use.
• No minimum or monthly charges for keeping money.

Disadvantages:

• Limits how much someone can deposit or keep.
• No interest for keeping the money.
• Need phone to access the money.

3. Village Banking

Advantages:

• Interest earned belongs to members.
• Group support.
• Lump sum of money at a specified time.

Disadvantages:

• High risk, the money is not safe due to dishonest members or group conflicts.
• Unreliable.
• Lack of financial advice.

Source Documents

The source documents are the original record of a transaction. During an audit, source documents are used as evidence that a particular business transaction occurred. Examples of source documents include; quotation, purchase order, invoices, receipts and cheques.

At a minimum, each source document should include the date, the amount and a description of the transaction. When practical, beyond these minimum requirements source documents should contain the name and address of the other party of the transaction. When a source document does not exist, for example, when a cash receipt is not provided by a vendor or is misplaced, a document should be generated as soon as possible after the transaction, using other documents such as bank statements to support the information on the generated source document.

Source documents also serve as evidence that a transaction took place and is part of the audit trait for as long as those documents are required to be kept by law or policy. Of such, they are a part of the record keeping process.

1. Quotation – This is an agreement, usually written, from a producer to a potential customer to sell goods or services at a particular price and quantity. The quotation may include the cost to produce, deliver and finance the purchase.

2. Purchase Order– this is written order giving the authorization to purchase goods or services from a supplier.

3. Invoice – this document is sent to request payment for monies owed, for goods that were delivered, or services that were installment.

4. Receipt – A written document that confirms that money has been received as a payment, account settlement or installment.

5. Cheques – A cheques is a special bank note that represents the cash that is being paid by the customer. The cheque requires the signature of the person who is an authorized signatory of the bank account form which the cheque is issued. Each cheque has a special number on it which should be recorded into the book-keeping system. The name of the payee should be written on the cheque. If it is left blank anyone can fill it in with their own name and deposit the cheque thus stealing the money.

Records Management or Records Keeping is another important aspect to finance; if you want to keep your finances in check always keep every record of any business transaction, this will come in handy (useful) when reconciling your business finances.

Understanding Savings and Investments

Now that you have understood what financial service providers are and what they involve, let us focus on savings and investments as part of financial management.

Many people use the terms saving and investing interchangeably, while these two terms are related they are not exactly the same. Saving and investing are two very different financial strategies, once you understand the difference between the two, you may do a better job of managing your money.

There are two ways to make money; one is to work for money, which is what we all do and another way is to get your money to work for you by saving and investing, which we all neglect to do. While money doesn’t grow on trees, it can grow steadily through saving and investing wisely, you don’t have to be a genius to save and invest your money, you just have to know some basics through consulting an expert in that area and you need the determination and discipline to be prudent and your finances.

A perfect example of saving and investment to allow your money work for you is becoming an owner of something that you hope increases in value over time and will generate more money for you. For instance, saving to buy a piece of land that will increase in value as that area gets developed with new roads, houses, schools, clinics, minimarts, etc. building a property for rentals either houses or offices, this way your money will be able to generate a steady income for you as well as appreciate in value.

What is Saving?

Saving is the practice of setting money aside part of your current earnings for future use, it is keeping money aside to use in the near future. You might deposit this money into a bank savings or fixed account. Saving is a good strategy if you will need your money in a short time. You may earn some interest on your balance as you have learnt previously. When you save money regularly over a period of time, you money will grow.

Why do we save?

Income sources are not consistent, saving helps you in difficulty times under different circumstances such as:-

• Emergencies like sicknesses, death, fires, droughts, etc.
• Future expenses like school fees, up keep (food), rent, etc.

In such circumstances your savings can help you recover and be back on your feet, make sure you keep money for emergencies, and if you ever happen to use part of the emergency fund, top it up again as soon as you can so it shouldn’t run dry.

What is Investment?

Investing is the act of committing money to multiple itself in order to generate a future return that would reward the investor for a period of time in which the funds are committed. It is simply growing your money, putting it in an economic activity with the expectation of obtaining additional money.

An investment can be in the form of tangible assets (such as livestock, property and your own business), and intangible assets (such as shares, bonds).

Why do we invest?

• Become secure – be able to pay for future expenses.
• Increase the ability to earn more income.
• To make more money for use in our retirement days.

Types of investments

There are basically three (3) types of investments depending on the time it will take to pay you back the returns:-

1. Short-term Investments: these give back money put in it in less than 12 months (1 year). Starting a grocery store.
2. Medium-term investments: These will give you back money invested in 1-5 years. Farming.
3. Long-term investments: Requires a lot of money and delays to give back money invested. Real Estates.