Internal Controls

The most important element of good financial management is a strong internal control structure. Internal control is generally defined as the policies and procedures established to ensure that an organization’s objectives can be achieved. With respect to financial management, this includes the safeguarding of assets; accurate and reliable record keeping; compliance with internal policies and funding requirements; and the separation of duties. Some examples of a good internal control structure include:

• The person responsible for making deposits and writing checks does not also perform the bank reconciliation (separation of duties).
• The person writing the checks is not authorized to sign them as sole signatory (separation of duties).
• Office equipment and furniture are inventoried with supporting documents (safeguarding of assets).
• Employees handling cash are bonded (safeguarding of assets).
• A competent internal staff member or outside service is responsible for recording transactions (record keeping).
• A central filing system for supporting financial documents — invoices, deposits, loan agreements — is used (record keeping).
• A written accounting policies and procedures manual (compliance) exists.
• Required Internal Revenue Service (IRS) forms or other financial reports are filed on a timely basis (compliance)

Financial management is concerned with the acquisition, financing and management of assets with some overall goal in mind. Thus the decision function of financial management can be broken into 3 major areas:

• the investment,
• financing and
• asset management decision.

Investment decisions is the most important of the firm’s 3 major decisions when it comes to value creation. It begins with a determination of the total amount of assets needed to be held by the firm. Financing decision concerned with the make up of the right-hand side of the balance sheet. Also the dividend policy must be viewed as an integral part of the firm’s financing decisions. The dividend pay-out ratio determines the amount of earnings that can be retained in the firm. Retaining a greater amount of current earnings in the firm means that fewer money will be available for current dividend payments. The value of dividend paid to stockholders must therefore be balanced against the opportunity cost of retained earnings lost as a means of equity financing. Asset management decision: once assets have been acquired and appropriate financing provided, these assets must still be managed efficiently. The financial manager is charged with varying degrees of operating responsibility over existing assets. These responsibilities require that the financial manger be more concerned with the management of current assets than with that of fixed assets.

The efficient financial management required the existence of some fixed objective or goal because judgment as to whether or not a financial decision is efficient must be made in light of some standard. Frequently the profit maximization is offered as a proper objective of the firm? Is maximizing a firm’s earnings after taxes(EAT). However a manager could continue to show profit increases be merely issuing stock and using the proceeds to invest the Treasury bill. (гос вексель). Maximizing earning per share (earnings after taxes divided by the number of common shares outstanding) is often advocated as an improved version of profit maximization, but it is not a fully appropriate goal because it does not specify the timing or duration of expected returns.

Is the investment project that will produce a 100 000 return 5 years from now more valuable than the project that will produce annual returns of 15 000 in each of next 5 years? An answer to this question depends on the time value of money to the firm and the investors at the margin. Also the risk facors should be taken into account.

Дата добавления: 2014-01-11