Financial Management for Business Products

Describe about the Financial Management for Business Products.

Credit terms are the time limits set by a company for their customers’ promise to pay for their services or products received. When customers purchase the products from a company, it is expect of them to pay within a particular time (usually 30 days). The credit terms of most companies are either 30, 60, or 90 days but some businesses still have short credit terms as short as 7 or 10 days.

The reasons why companies offer credit terms are firstly that customers are face with a choice between a particular product ‘with credit’ or ‘without credit’. As a result, they would opt to buy products from the seller that provides credit. In other words, credit terms are as important as part of the admixture of features of any product offer. Therefore, if a company’s business is already competitive on several grounds like quality, delivery, and price, it can be develop by offering of credit terms to their customers. Such customers are more ready to purchase goods on credit and very often competitors are ready to provide credit (Laux, 2014). Alternatively, a business may opt to add credit terms as a feature to equal its competitors or to develop its credit terms in order to enhance the competition. The impact of this strategy will be that companies having better quality credit analysis, and/or are less risk averse, and/or adopt effective methods to lessen credit risk etc will be the most advantageous competitors in the medium to long-term (Albrecht et. al, 2011). An automobile industry is the best example that uses credit terms to sell cars to their customers.

Secondly, companies offer credit terms because customers appreciate the companies on being able to pay on credit in opposition to having to pay cash. This helps in enhancing the customer loyalty and goodwill (Gibson, 2012). The offering of credit terms can be a powerful indicator that the company has confidence on the quality of products supplied by it and it wants to establish a strong long-term relationship with the customers. When such credit terms are offer, the relationship built between the company and customers also develops because of mutual respect, trust, and knowledge. Development of commercial relationships may no longer be possible in the current scenario but offering credit terms are still associated with mutual trust and willingness for a long-term association (Libby et. al, 2011). Therefore, good quality of credit management based on good quality information and/or mitigation procedures of credit risk can enable credit terms as an irresistible sign of trust (Horngren, 2013). For example, when credit terms like ‘180 days after date of shipment’ or ’60 days after dispatch of goods from the warehouse’ etc are offered, companies not only provide an option pay at a later date but it also permits negotiation of such terms on the basis of prevailing local conditions. This not only facilitates better relationship between the company and customers but customers will spend more of their money with the company, thereby increasing its sales respectively.

Critical evaluation

Although cash holds a very small portion of the total current assets of a company, it is like a blood stream in the body of a human that provides strength and vitality to the business enterprises, thereby very significant in financial management and reporting. The statement that cash management is not an important part of financial management is false because cash is prevalent in both the beginning and end of working capital requirement and without it, business cannot be operated.

Cash management has a very strong impact on the survival of corporate because it is link to practically every account on the financial reports, maximization of wealth of shareholders, detection, and prevention of fraud and enrichment of liquidity. Therefore, every business enterprises are bound to hold necessary cash for survival. The concept of cash management is not a new one and it has obtained greater significance in the current business world because of a change that occurred in the management of business and ever-rising problems and expenses of borrowing. Irrespective of the fact that cash is consider as the liquid current asset, it is also a mutual denominator to which every current asset can be lessened because other current assets like inventory and receivables are gradually converted into cash (Penman, 2013). Hence, cash management is vital to perform financial roles like financial and business strategy, risk management, financial stewardship, cost control, value creation, performance management, and budgetary control etc. It is also closely associated with other key management processes. Therefore, cash management system with insufficient capacity can leave companies out in the open to scrappy process, doubtful data, dawdling and inefficient audit trail for stewardship and decision-making. Even according to studies by US Bank, around 80% of companies fail because of poor cash management. As cash is very necessary in order to meet the purposes of precaution, speculation and transaction, its management becomes very crucial in financial management and reporting. Management of cash is also vital in reducing the financial costs of an organization and other expenditures in general due to timely allocation base on precedence items (Leo, 2011). Furthermore, a liquid fund (cash and cash equivalents) that are very essential for the survival of an organization and are at the exclusive disposal is utilize in an appropriate manner with the assistance of cash management. Good enterprises like Chrysler and W.T Grant would not have suffered if proper cash management were done. Effective cash management helps an organization to utilize most of its cash that are either idle or susceptible to fraud or theft (Williams, 2012). In financial management, the primacy of shareholders is very important instead of permitting receivables and payables keep cash for a long period. Hence, in relation to this, cash management is relevant to divert the cash back to their shareholders, thereby facilitating in proper financial management.

Therefore, cash management is not only relevant in financial management but also in its associated management processes like financial reporting, financial accounting, internal auditing, and control and management accounting respectively.

References

Albrecht, W., Stice, E. & Stice, J. (2011).  Financial accounting. Mason, OH: Thomson/South-Western.

Gibson, C. (2012). Financial statement analysis. Mason, Ohio: South-Western.

Horngren, C. (2013) Financial accounting. Frenchs Forest, N.S.W: Pearson Australia Group.

Libby, R., Libby, P. & Short, D. (2011)   Financial accounting. New York: McGraw-Hill/Irwin.

Laux, B. (2014). Discussion of The role of revenue recognition in performance reporting.  Accounting and Business Research, 44(4),  380-382.

Leo, K J. (2011). Company Accounting, Boston:McGraw Hill

Penman, S. (2013). Financial statement analysis and security valuation. New York: McGraw-Hill Irwin.

Williams, J. (2012). Financial accounting. New York: McGraw-Hill/Irwin.

 

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