Financial management principles and practices

Financial Management

Commercial lenders lend money with the intention of making money in return; they also carry out a kind of business. But when a government sponsored body lends money, then the reasons behind existence are slightly different. Government usually lends money to those businesses which are facing financing issues. Such businesses are often those which are considered by the government officials as potential enough to bring in economic benefits in the area (Bizcoach, 2013).

Calculating the finance requirement is a great challenge for the managers of the organizations. The institutions which are of complex nature face difficulty in calculating the exact finance requirement. An example of such institution would be capital markets which are quite complex. The sum of external financing depends on the operating budget of the business and on the existing capital resources. If a company has a solid operating budget, then it would be easier to calculate the amount of external finance required (ehow, 2013).

A company should project the sales that it expects to generate in the coming year. By using the annual sales growth over the recent five years, sales can be projected. Like for instance, if an organization's growth rate is 5% over the last five years and the current sales are of $100, then the budgeted sales for the next year can be $105 ($100 x (1 + 5%) (ehow, 2013).

By using the average percentage of sales method, a company can calculate its operating expenses and cost of goods sold. If over the five years, the cost of goods sold as a percentage of sales is averaged at 20%, then the next years budgeted cost of goods sold will be equal to $21 ($105 x 20%). If operating expenses as a percentage of sales is averaged at 15% over last five years, then the budgeted operating expenses for next year would be $16 ($105 x 15%) (ehow, 2013).

To calculate pre-tax income, operating expenses and cost of goods sold need to be subtracted from the sales. If we consider the above example only then pre-tax income would be calculated as follows $105-$21=$68.

To calculate net income, the company's next year's taxes should be calculated and then subtracted from the pre-tax income. If the tax average rate of the company is 30% of the last five years then the net income would be $68 -- (35% x $68) = $44 (ehow, 2013).

Inventory, cash and debtors are the current assets. Percentage sales method is used to project the coming year's current assets. If, as a percentage of sales the current assets are averaged at 25%, then the next year's budgeted current assets would be equal to $26 (25% x $105) (ehow, 2013).

Current liabilities of next year can be projected by making use of historical percentage of the cost of goods sold. If, as a percentage of cost of goods sold, the current liabilities are averaged at 40% over last five years, then the budgeted current liabilities of next year would be equal to $8 (40% x $21) (ehow, 2013).

To determine the working capital of the company, current assets are subtracted from current liabilities. For carrying out day-to-day requirements of the business, the working capital is utilised. That is why it is said that working capital fulfils the short-term funding requirements. Under this example, the working capital would be equal to $18 ($26 - $8) (ehow, 2013).