Maness (1998) defines finance as “the study of the acquisition and investment of cash for the purpose of enhancing value and wealth”. The Oxford Advanced Learners Dictionary of current English defines finances as “the money used or needed to support an activity or project”. It is used to mean the money available to a person, company or a country for a project. Finance also involves the identification of resources or funds available to an organisation and the selection of the cheapest and the most effective sources. It however, entails the process of planning for funds raising, identifying and evaluating the profitable areas where such funds can be used.
Hamphery (1991) talked about the need for finance control and management. He said if the business is to survive, it must constantly monitor its resource and cost. He added that, money tied up in unproductive assets will deplete cash resource and cost increases will make the firm unproductive. Corporate plans must be translated into financial objectives. Budgets must be set for all areas of the firm’s activity and actual cost must be compared with budgeted costs. This is an on-going task for the firm’s financial position which changes with different operating levels, if the business is to have an efficient financial control system, management must be immediately made aware of any difference between planned and current activity. This change will immediately affect cash flow forecast and if these are not revised the business could experience cash flow problems.
It is not cash flow problems alone which brings about financial collapse but management inability to recognise them and take corrective action.
The language of the business is money. Firms can only continue by having sufficient cash resources to meet their current liabilities. If cash cannot be generated internally, the financial manager must seek outside sources. This will generally involve additional borrowing and the business must be able to show that it is in a good lending position.
The management of financial resources
According to Hamphrey (1991), financial management is defined as “the study of money as it applies to business”. He said that, all the firms have their current objectives and plans for the future but these can only be realised if they can be financed. He added that, the business must be able to generate its own cash resources from profits to finance its long-term investment programme. If this is not sufficient, other sources of finance must be found. It is the role of the financial manager to ensure that firms always have sufficient funds to meet their current and forecast liabilities.
Kolb and Ricardo (1996), on the other hand had the view that, financial manager’s role is to assist the firm to maximise shareholders wealth. Essentially, this is done by making wise decisions regarding the acquisitions and employment of funds. Stanley and Geoffrey (1992) had it that it is the responsibility of the financial manager to allocate funds to current and fixed assets in order to obtain the best mix of financing alternatives and to develop an appropriate dividend policy within the context of the firm’s objectives. The financial manager will also review past investment and make decisions with respect to the composition of the company’s assets. In particular, the financial manager must ensure that the company’s investments in current assets including cash, inventories and debtors are at appropriate levels throughout the year. The major function of the financial manager is to ensure that the company has sufficient cash to meet its obligations as they fall due. Again he has to decide how to finance those investments. Interrelated with the investment and financing decisions is the dividend decision which involves determining the proportion of the company’s profits to be distributed to shareholders and proportion to be retained by the company. The dividend decision is interrelated with the investment decision which represents the use of funds that could otherwise be available for investment. The dividend decision is also interrelated with the financing decision as the company’s retained profits are generally a major source of funds.
Michael and John (1993) made the following submission on the management of financial resources; the management of financial resources can be considered at different levels. At the micro level, the individual or organisation is interested in how financial resources available may be best utilised to achieve specific objectives. Equally, a large multinational or small privates company will have to manage their complex financial resources to acquire new assets, pay employees and other expenditure while providing a return on capital to the owners. At the micro level, the government is interested in sound financial management of the economy by adopting political policies which ensures return to their supporters and the nation at large. At whatever level the basic raw material for such management is information. In limited liability companies, the management is normally through the board of directors, have a duty to individuals who have either lent money to the company or bought shares in that company to ensure sound financial management.
As stated by Richard and Steward (1991), finance is about financial decisions by corporations. To carry on a business, a modern company needs almost endless variety of real assets. Many of them are tangible such as machinery, offices and factories. All of these need to be paid for. To obtain the necessary money, the company sells unit of ownership called shares or securities. These securities have value since they are claims on the firm’s real assets.
Financial resources in the public sector
Central government manages more financial resources than ever before, and these are expected to grow to ?678 billion a year by 2010-11 – some ?11,000 for every person in Ghana. But, many departments have tighter settlements under the 2007 Comprehensive Spending Review than they had under previous spending rounds. Today’s report, a follow-up to the NAO’s 2003 report, looks at how capable departments are at managing their financial resources.
With treasury guidance and support, departments are producing better information about their financial performance. It is, for example, helping them to manage their assets better. Their finance functions have seen an increase in the number of professionally qualified staff. Most departments now have a professionally qualified Finance Director on their main Board, and non-executive Directors are providing robust, independent challenge to these Boards. Together, these developments have raised the profile of financial resource management at the very top of departments.
However, six departments, accounting for over ?45 billion (eight per cent) of total central government expenditure, still do not have a professionally qualified Finance Director on their main Board, despite the Treasury requirement that they do so by December 2006. Only 40 per cent of departments invariably provide decision-makers with a full analysis of the financial implications of policy proposals. Financial management matters are not automatically included in the performance assessment criteria of Permanent Secretaries and other Senior Civil Servants. And, not a single Permanent Secretary holds a professional finance qualification according to Richard and Steward (1991).
Management of financial resources in the public sector
Management of financial resources is the responsibility of everyone in a department, not just the central finance team. The treasury and other stakeholders have taken steps – such as through their finance skills for all training course, to improve the financial skills and awareness of non-finance staff, who are usually the budget holders responsible for the day-to-day management of departments’ financial resources. But take-up remains low. Nearly 70 per cent of departments cited the level of skills of non-finance staff as one of the three most significant tool for the management of financial resources in the public sector.
An efficient public finance management system is a key factor to the efficient use of a Nation’s scarce public resources and the realisation of public sector objectives such as poverty reduction, and support towards national growth and prosperity. A trustworthy and efficient national public finance management system is also one important prerequisite for donors to provide general budget support and to use national public finance management systems. In this connection, the assessment of Public Expenditure and Financial Accountability (PEFA) which is conducted by European Union (EU) serves as a basis for further identification of a feasible reform programme.
The management of financial resources in the public sector covers the following –Firstly, mobilisation and judicious application of resources; Secondly, management of investments and liabilities of the Government; more to the point, proper custody, use and maintenance of Government assets; and more so, clear and transparent accounting of all public receipts and expenditures and reporting thereon. MOFED is responsible for laying down general directions with regard to financial control and procedures and for the overall control of the collection and disbursement of public funds. This is done through – Firstly, instructions and directions issued from time to time; Secondly, the work of the Financial Operations and Procurement ; Supply Cadres; More so, the work of the Internal Control Cadre; Finally, the close coordination with Departments.
The main rationale for a PEFA assessment is to identify strengths and weaknesses in the Public Finance Management System. The assessment which is conducted by European Union (EU) will serve as a basis for further identification of a feasible reform programme which, where needed, can receive donor support. The framework for PEFA is based on six pillars of performance of public finance management cycle – Firstly, credibility of the budget- the extent of budget realisation in terms of being implemented as planned; Secondly, transparency and comprehensiveness- the budget and the fiscal risk oversight are comprehensive and fiscal and budget information is accessible to the public; Thirdly, policy-based budgeting- the budget is prepared with due regard to Government policy.
In addition, predictability and control in budget execution- the budget is implemented in an orderly and predictable manner and there are arrangements for the exercise of control and stewardship in the use of public funds;Last but not list, accounting, recording and reporting– adequate records and information are produced, maintained and disseminated to meet decision-making control, management and reporting purposes; Lastly, external scrutiny and audit- arrangements for scrutiny of public finances and follow up by executive are operating.
Planning and procedure for the management of financial resources
Accountability is at once a key inducement to individual and institutional probity, a key deterrent to collusion and corruption, and a key pre-requisite for procurement credibility. A sound procurement system is one that combines all the above elements. The desired impact is to inspire the confidence and willingness-to-compete of well-qualified vendors. This directly and concretely benefits Government of Ghana and its constituents, responsive contractors and suppliers.
Systems for the management of financial resources
Just as there are several organizational models for delivering extension services to the public, there are a number of ways to finance those services and to keep track of the money. Sound financial management may be fundamental to success. Poor financial management, on the other hand, often accompanies and contributes to failure.
Firstly, obtaining financial resources; Secondly, keeping track of financial resources; Thirdly, predicting organizational costs; More so, maintaining a balance in how resources are to be used; In addition, decentralizing the decision-making process; Last but not list, using information to improve efficiency; Lastly, using information to increase effectiveness
First, obtaining financial resources – Leaders are responsible for acquiring and maintaining resources for their organization. These efforts tend to be more successful when requests deal with issues of high national priority and when an explanation is provided as to how the additional resources will be used. Secondly, keeping track of financial resources -Leaders of extension organizations are accountable for the financial resources assigned. It is incumbent upon them to establish workable systems that will enable staff members to know how many resources they have to carry out their work.
Thirdly, predicting organizational costs -Budgeting the use of resources to particular purposes and for specific accounting periods is an essential part of the planning and managing processes. This process combined with cost accounting makes it possible to make decisions based on expected costs and returns.More so, maintaining a balance in how resources are to be used: Managers should seek to align resources in ways that make it possible to accomplish organizational objectives. This usually suggests the need to maintain an appropriate balance between salaries and operating expenses.
In addition, decentralizing the decision-making process -The determination of how money is to be spent may best be made by those who are directly carrying out activities that serve intended clientele.Last but not list, using information to improve efficiency: Efficiency is a relative measure. Efficiency can be implied by sets of physical data compared over time or among categories (e.g., number of pages produced per editor, this time period compared with an earlier time period).Lastly, using information to increase effectiveness -Effectiveness is a measure of programme impact as compared with the intended goals. To measure effectiveness, organizations must collect programme impact data. An organization that is both effective and cost efficient is achieving its goals, and the benefits obtained are greater than the costs involved.
Procedure for the management of financial resources in public sector
Stanley and Geoffrey (1992) concluded that, working capital management involves the financing and management of the current assets of the firm. A firm’s ability to properly manage current assets and the associated obligations may determine how well it is able to survive in the short run. The financial manager must also give careful attention to the relationship of the production process to sales. Level of production in a seasonal sale environment increases operating efficiency which calls for more careful financial planning. The financial manager must keep an eye on the general cost of borrowing, the long term structure of interest rates, and the relative volatility of short and long-term rates.
The firm has a number of risk-return decisions to consider, although long-term financing provides a safety margin in the availability of funds, higher interest cost may reduce the profit potential of the firm. On the other side, carrying highly liquid cost may reduce the profit potential of the firm. On the other side, carrying highly liquid current assets ensures bill-paying capability of the firm, it detracts profit potentials. Each firm tailor the various risk return trades off to meet its own needs. The peculiarities of a firm’s industry will have a major impact on the option opened to management.
Graham ettal (1990) concluded that many methods may be employed to determine the composition of a company’s assets. They said, management has to decide on the methods of financing these assets. If a company initially wishes to expand but does not generate sufficient funds to finance and increase in its assets, then it will need to finance the difference but drawing on the savings of households, other business, government and overseas sector. The flow of funds from savings surplus units to savings deficits unit is generally indirect. This occurs through financial intermediaries. The role of the financial intermediaries therefore is to facilitate the flow of fund from saving surplus unit to servicing-deficit unit.
Allocation procedures for the management of financial resources in the public sector
In the effective management of financial resources in organisations investment decisions must be carefully evaluated before embarking upon them. To this end, Graham et. tal. (1990) concluded that “the primary function of the financial manageress raising funds and allocating them to investments so as to maximise shareholders wealth”. In general, management will first examine the alternative investment available to it, after the acceptability of this investment has been determined. Stanley and Geoffrey (1992) defined risk as “the potential variability of the outcomes from an investment”. They went further to present the following view on this subject matter. The less predictable the outcome, the greater is the risk. Both management and investors turn to be risk averse, that is, all things being equal, they will prefer to take less risk rather than greater risk.
The most commonly employed method to adjust for risk in the capital budgeting process is to alter the discount rate based on the perceived risk level. High-risk projects will carry a risk premium, producing a discount rate well in excess of the cost of capital. In assessing the risk component in a given project, management may rely on simulation techniques to operate profitability’s of possible outcome and decision trees to help isolate the key variables to be evaluated. Cash is a scarce resource, if used to finance new investment; the firm will seek an alternative return from its investment and will hope to recover its initial investment cost as soon as possible. The quicker the money can be recovered, the less risk is involved in the project.
A cash flow table shows the cash inflows and outflows which are expected to occur from an investment. Cash will be needed both to finance the fixed assets and to provide the working capital which will be needed to pay the day-to-day expenses. It is usually a mistake to assume that once a fixed asset has been purchased cash inflows will immediately follow. Often, additional capital is needed to pay for new stock, training and spare-parts and this if not budgeted for, can put severe constraints on a business working capital. The purpose of drawing up a cash flow table is to be able to determine the firm’s net cash flow from the new investment. This is calculated by adding up all the inflows and subtracting all the outflows.
Stanley and Geoffrey (1992) had the following view on the allocation policy of an organisation; a successful owner of a small business must continually decide what to do with the profits that his firm has generated. One option is to invest in the business, purchasing new plant and equipment, expanding inventory and perhaps hiring new employees. Another alternative however, is to withdraw the funds from the business and invest it else-where.
Allocation systems for the management of financial resources
Over allocation systems is most likely to occur when there are multiple projects in a company or when software is used to allocate tasks to resources. Over allocation systems occurs when project managers have been encouraged to meet unreasonable expectations. Project managers then push their resource allocation beyond obtainable limits in order to meet constrained schedules and budgets. Over allocation systems puts unreasonable pressure on resources and can be costly not only in overtime monies but in resource burnout.
Techniques for Avoiding Resource Overload
The most obvious way resource overload can be avoided is by setting up a project schedule that is realistic. Avoid pushing employees through an unreasonable or aggressive project schedule as a first defence. Schedule the project in a realistic way as part of effective project plan. According to Stanley and Geoffrey (1992), here are five other ways to avoid resource allocation overload in your projects:
• Resource Levelling – In this method, the project manager can either level resources by hand (complicated, but perhaps more sound) or use a software program such as Microsoft Project to level resources for you. This method requires the project manager to be truly on top of his or her game, and to recognize areas of concern before they become problematic.
• Prioritize Projects-By prioritizing projects, when a resource allocation overload is apparent or a task conflict exists, it can be resolved without piling pressure on the individual or team (or requiring the individual or team to put in a couple twelve-hour days). In this way, when you find your resources have been overloaded, decisions as to which tasks they should focus on are easier to make.
• Linking Tasks – Linking tasks is more of a logistical solution. If the resource has been assigned to research the markets for project A and project B, these tasks could be linked. In this manner, when it appears that a resource has been over-allocated, really the tasks are similar enough to count for two projects. By linking these tasks from the different projects, the problem can be resolved.
• Approach to project management – If your team is consistently putting out fires, it makes it difficult to focus on the project.
How you plan your resource allocation is key in keeping your project on track and on budget with the outcomes you expect. If you have problems with resource allocation or your teams are complaining of burnout or being overworked, consider reviewing your resource management skills to keep your projects healthy (Stanley & Geoffrey, 1992).
Working capital management allocation
Working capital management is an essential component that enhances the efficient management of financial resources in an organisation. Humphrey Shaw (1991), Myers (2003) and Westerfied (2004) have defined working capital as “the term used to describe a firm’s short term use of funds”. Shaw (1991) continued to expatiate that, part of the firm’s capital will be locked away in fixed assets but a certain sum must be set aside to finance the day-to-day business expenses. Thus money is needed to pay wages, purchase stock and finance obligations, it will be unable to continue trading and so the management of credit sales. If the firm lack sufficient working capital to meet its short term working capital cycle is very important. Accountants have defined working capital as “the difference between the current assets and current liabilities of a business”.
The manager’s role is to ensure that the business has sufficient current assets in order to meet its day-to-day financial obligations. The amount of money invested in current assets will depend upon the type of business which the firm is engage in. For instance, many service industries such as hair dressing and small restaurants need only a small amount of stock. Also most of the sales are for cash and so on. In theory, they should not experience the same working capital problems as manufacturing business which needs to keep large investments in stocks and to sell nearly all of their products on credit. The control of working capital is important because, generally, current assets represent sixty percent of the total assets of any business. Unlike fixed assets, current assets are continually changing. Stock is constantly being sold and bought and the investment in debtors is constantly changing as the firm sells and collects its debts. As a result, most firms have majority of their assets in a volatile form and so this area of the business needs constant attention.
Many small businesses find it difficult to raise long term capital to finance their capital investment programmes. As a result, the owners seek to minimize their investment in fixed assets and enter into high purchase agreements because; the assets can be acquired without having to pay for them immediately. This inevitable increase the risks of running business and accounts for more than a fair share of business failures. It should be remembered that many firms are forced into liquidation not because they are unprofitable, but because they simple do not have sufficient working capital to meet their day-to-day expenses