Kepner, K. and Wysocki, A. (2008). Financial Management: Some Important Generalizations. University of Florida IFAS Extension, FRE343.
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This article focuses on two important aspects of financial management, first, providing an overview of the importance of professional management to the corporate/ business world operations and secondly to analyze financial management points of view that tend to limit the financial performance of businesses. This article is very important to managers and supervisors of businesses as steers their organizations to success. The article also highlights traditional beliefs that financial management was a forte of only specialists in the finance field commonly referred to as the money manager, nevertheless, with time, the belief has changed as businesses adopt an ideology that believes that all managers in an organization should be a “money manager” to ensure the success of the company. In addition, all employees should comprehend financial performance if profitability is to be achieved.
The author notes that strategic financial management is a crucial element for business managers to possess. A matter of consideration is that all decisions made by the management will affect the final financial outcome of the business; therefore it’s quite hard for a business to continue as a going concern if they do not incorporate minimum financial performance levels. According to Drucker (1980), “a firm’s minimum cost of staying in business is equivalent to its current cost of capital. That is, if a firm’s return on net worth is not at least equivalent to the rate at which it can borrow money from creditors, it is not achieving its cost of staying in business.”
According to the article, business executives do not realize the ‘Current Cost of Staying in Business is the same as the company’s ‘Current Cost of Capital’; hence, as stipulated by FM studies, positive profitability does not essentially imply that the company is making profits, although the company could be meeting its objectives. (Keown, et al 2001).
According to the authors, many firms’ managements do not distinguish running for profitability and running for profits and fail to realize that profitability can plummet at a time when profits are going up. Though profits are the endpoint of the trading, profit, and loss account, profitability is dollar net profit subjected to dollar net value. However, most executives focus more on profits instead of profitability. Business executives see net profit margin as the most vital financial performance indicator in ascertaining a company’s profitability, however, it is the financial measurement variables, which determine profitability.
Kepner, K., and Wysocki conclude by saying that in a competitive marketplace many companies put a lot of effort to earn maximum profits, however without suitable profitability rates, companies cannot be sustainable. Keown (2001) notes “this can be witnessed in a large number of companies from small to large multinationals, which have filed for bankruptcy protection and wound up on realizing that business ownership does not by default guarantee financial accomplishment.” According to the article, thus it is not questionable that many business people and executives need to embrace financial management.
The authors identify several financial management approaches and perspectives, which when put in place are likely to hamper financial performance. By identifying the mythologies behind these perspectives, businesspeople and executives can implement more professional financial management approaches to their entity firms, which make a financially healthy company.
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Druker, F. (1980). Managing in turbulent times. Colorado Business. 7 (May): 54-55.
Keown, J. Et al (2001). Foundations of Finance, third edition. Saddle River, N.J.: Prentice-Hall.