3 Modern Financial Management Techniques that Will Change Your Business?

Whether you’re a business or an individual, you have to find a way to manage your finances now and in the future. The cost of everything continues to increase and there’s no sign that this trend of price increases will stop anytime soon. As a result, all entities have to develop a financial management system to ensure their stability for many years to come.
This system has to provide the businesses in question with enough flexibility for them to continue to grow and pay for their necessary expenses. It also has to be stringent enough to allow for money to be put away in the event of future catastrophes.
In the case of a business, all expenses have to be prioritized in the interest of spending money on the right things.
When it comes time for cost cutting measures to be implemented, they have to be come with consequences in mind. Everything that’s done to cut costs has an end result once it becomes a common procedure.
You have to ponder whether you’re cutting enough or you’re cutting too much. Work has to be done to ensure that cutting individuals from the workforce is the last possible resort. Odds are there are expenses that can be sliced without having to touch the workforce.
Individuals in the private sector have to manage their finances in the interest of being able to acquire credit.
A person’s credit score can affect every possible aspect of their life. The biggest issue currently impacting the financial future of most people is the regular use of high interest credit cards.
Most retail establishments try to push their credit card on their customers on a regular basis. These cards should only be used for small purchases that can be paid shortly after they have been completed.
Financial management is a challenge in a world where spending is seen as the key to getting ahead.
You have to exercise the utmost level of restraint if you want solvency to be in your future. Once you have established an effective budget, your worries about finances will become a thing of the past.

Financial Intermediaries - Meaning, Role and Its Importance

Introduction

A financial intermediary is a firm or an institution that acts an intermediary between a provider of service and the consumer. It is the institution or individual that is in between two or more parties in a financial context. In theoretical terms, a financial intermediary channels savings into investments. Financial intermediaries exist for profit in the financial system and sometimes there is a need to regulate the activities of the same. Also, recent trends suggest that financial intermediaries role in savings and investment functions can be used for an efficient market system or like the sub-prime crisis shows, they can be a cause for concern as well.

Financial Intermediation

Financial intermediaries work in the savings/investment cycle of an economy by serving as conduits to finance between the borrowers and the lenders. In the financial system, intermediaries like banks and insurance companies have a huge role to play given that it has been estimated that a major proportion of every dollar financed externally has been done by the banks. Financial intermediaries are an important source of external funding for corporates. Unlike the capital markets where investors contract directly with the corporates creating marketable securities, financial intermediaries borrow from lenders or consumers and lend to the companies that need investment.

Role of the Financial Intermediaries

The reason for the all-pervasive nature of the financial intermediaries like banks and insurance companies lies in their uniqueness. As outlined above, Banks often serve as the “intermediaries” between those who have the resources and those who want resources. Financial intermediaries like banks are asset based or fee based on the kind of service they provide along with the nature of the clientele they handle. Asset based financial intermediaries are institutions like banks and insurance companies whereas fee based financial intermediaries provide portfolio management and syndication services.

Need for regulation

The very nature of the complex financial system that we have at this point in time makes the need for regulation that much more necessary and urgent. As the sub-prime crisis has shown, any financial institution cannot be made to hold the financial system hostage to its questionable business practices. As the manifestations of the crisis are being felt and it is now apparent that the asset backed derivatives and other “exotic” instruments are amounting to trillions, the role of the central bank or the monetary authorities in reining in the rogue financial institutions is necessary to prevent systemic collapse.
As capital becomes mobile and unfettered, it is the monetary authorities that have to step in and ensure that there are proper checks and balances in the system so as to prevent losses to investors and the economy in general.

Recent trends

Recent trends in the evolution of financial intermediaries, particularly in the developing world have shown that these institutions have a pivotal role to play in the elimination of poverty and other debt reduction programs. Some of the initiatives like micro-credit reaching out to the masses have increased the economic well being of hitherto neglected sectors of the population.
Further, the financial intermediaries like banks are now evolving into umbrella institutions that cater to the complete needs of investors and borrowers alike and are maturing into “financial hyper marts”.

Conclusion

As we have seen, financial intermediaries have a key role to play in the world economy today. They are the “lubricants” that keep the economy going. Due to the increased complexity of financial transactions, it becomes imperative for the financial intermediaries to keep re-inventing themselves and cater to the diverse portfolios and needs of the investors. The financial intermediaries have a significant responsibility towards the borrowers as well as the lenders. The very term intermediary would suggest that these institutions are pivotal to the working of the economy and they along with the monetary authorities have to ensure that credit reaches to the needy without jeopardizing the interests of the investors. This is one of the main challenges before them.
Financial intermediaries have a central role to play in a market economy where efficient allocation of resources is the responsibility of the market mechanism. In these days of increased complexity of the financial system, banks and other financial intermediaries have to come up with new and innovative products and services to cater to the diverse needs of the borrowers and lenders. It is the right mix of financial products along with the need for reducing systemic risk that determines the efficacy of a financial intermediary.

Role of the Finance Function in the Financial Management for Corporates

The Finance Function in Corporates

We often read about how corporates are doing financially with reference to their profits, asset values, debt, equity, and other measures. These measures are indicative of how well the corporate is doing financially. The next time you read about these measures, do think about the people who enable these performance indicators and these are the finance and treasury functions of the corporates.
Before we proceed further, we would like to remind you that the Treasury or the Finance function does not actualize the broader financial performance which is determined by the various strategic, operational, and financial management. Rather, the role of the finance function is to record, and keeps track of the various matters related to financial management in corporates.
The finance and the treasury functions are also responsible for tax calculations, social security payments, payroll, managing the receivables and the payable, and in recent years, the emergence of the treasury function has meant that they also deal with foreign exchange management and hedging that has been necessitated due to globalization which means that many corporates are now actively dealing in multiple currencies and hedging.

The External Functions of the Finance Department

The functions of the finance department can be broadly broken down into external and internal financial management. The external function encompasses the entire range of activities to do with paying the suppliers, vendors, and the other stakeholders who do business with the corporates.
In addition, the finance function also keeps track of the receivables meaning that they follow up with the clients and the customers who owe the corporate money for the services rendered. Apart from this, the finance function also handles the social security payments of the employees wherein each month or quarter (depending on the prevailing laws of the country), the finance department makes payments into the 401(k) accounts in the United States and the Provident Fund Accounts in India.
Further, the finance function is also responsible for remitting the TDS or the Tax Deducted at Source from the employees into the relevant accounts of the governmental agencies. Above all, the finance department also liaises with the banks in which the corporate holds account.
Indeed, in recent years, it has become the norm to have a single banking relationship in an “Umbrella” format where the corporate engages and partners with a single bank for the entire financial needs of the corporate.

The Internal Functions of the Finance Department

The internal functions of the finance department are similarly important wherein it stars the payroll processing and ensures that employees are paid on time. Indeed, payroll is perhaps the most visible interface that the finance department has with the employees.
The next time when your salary is credited, do think of the people sitting in the secluded (usually the finance department in many multinationals is seated separately in glassed enclosures for diligence and compliance reasons) areas working to get your salary paid on time.
Further, the internal functions of the finance department also encompass the processing of reimbursements on account of travel, dining and hospitality, same city transportation, perks, and any other benefits that are due to the employees. Indeed, perhaps the biggest reason why many employees either praise or curse the finance department is when their vouchers and bills have to be cashed.
In many corporates, this takes some time as not only are the finance personnel overworked but also they have to perform due diligence before processing the payments. Therefore, the next time you have a bill to be cashed, you can think of the various steps and the approvals needed before you shoot off a mail or message on the Bulletin Boards of the organization.

The Treasury Function

We have considered the external and internal functions of the finance department. In recent years, many multinationals as well as domestic companies that operate globally have added another key and vital function to the tasks of the finance department and this is the Treasury Function.
Simply put, Treasury is all about managing the foreign exchange payments and ensuring that the corporate does not lose money due to fluctuations in the exchange rates. Indeed, as those who have received payments in Dollars or Euros would cash them when the exchange rate is favorable.
Similarly the Treasury�s job is to ensure that the corporate does not lose out and towards this end, it ensures that hedging and escrow accounts are managed. For instance, there are active treasury desks in the headquarters of most corporates worldwide due to their global payments.
Most of the time, the employees are unaware of this function since the Treasury staff do not sit in the operational offices but instead, are based in the financial capitals such as New York, London, and Mumbai. Further, details of hedging and treasury management are usually revealed in the annual reports that many employees do not usually read and hence, little is known to them about this vital function.

Conclusion: The Finance Departments are Like Ants

Finally, the finance department is like a pump which keeps the fluids of money and commerce flowing through the system. Indeed, it can be said that though the finance function is a support function and is away from the limelight unlike the marketing, or the project staff, they are vital cogs in the machine which keep the wheels greased and the organization moving.
Some people like to call the finance function in corporates as ants who go about their work quietly and diligently. To conclude, just as one needs the financial advisor from time to time, all employees need the finance function and especially when one sees the money in one�s account for salaries or bills.

Why Financial Innovation can be both a Force for Good and Bad ?

Exotic Innovations or Weapons of Mass Destruction ?

Anybody who has followed the severe and protracted financial crises of the last Eight years would be aware of the damaging role played by Exotic Financial Products such as Derivates, Swaps, Credit Default Swaps, and Options.
These instruments that are supposedly in place to hedge against risk instead have become so toxic to the health of the global financial system and the global economy that it was no wonder the legendary American investor, Warren Buffett called them “Financial Weapons of Mass Destruction”.
This is because the financial innovative instruments which were hailed as bringing a measure of stability and hedge against risk when they were first invented instead turned into liabilities because as it turned out, they were not that good at pricing risk and hedging against defaults after all.

What is Financial Innovation and Why it was Welcomed ?

Before proceeding further, it would be in the fitness of things to understand what is meant by Financial Innovation. As management students learn during their MBAs and other courses, financial instruments are usually invented to price, factor in risk, hedge against risks such as counterparty default. In addition, innovations in finance are also due to the very real possibility that financial and physical assets might lose value suddenly due to economic cycles and at the same time, they can also inflate beyond measure leading to wild gyrations in the financial markets.
Thus, derivatives which are so named because they “derive” their value from underlying assets are created in a manner that protects both the buyers and sellers of the assets against excessive volatility and wild price movements.

When is Financial Innovation Bad ?

So, one might very well ask, what is the problem if risk is priced in and credit events such as defaults are hedged against?
The partial answer to this is that innovation is good as long as it is directed and controlled in a stable manner. Once innovation takes on a life of its own, the net result or the end result is that it often leads to a situation where neither its creators nor its users understand what exactly they are all about.
Of course, this does not mean that innovation is per se bad and more so, financial innovation is something that is inherently wrong. Indeed, it is only because of the financial innovations of the last few decades that consumers and especially the retail ones like you and we have been able to have greater control over our savings, portfolios, and assets.

How can we use Financial Innovation for Good ?

Thus, while we are not suggesting that financial innovation should cease, we are certainly advocating financial innovation that benefits society and which does not become overly complicated and complex that very few of the financial experts understand what it is all about. Indeed, there are numerous examples of how financial innovation is undertaken with a view to genuinely improving the condition of the poor rather than solely as a way of making profits alone.
These include the Microcredit Initiative that was pioneered by the Nobel Prize Winning Bangladeshi Banker and Social Entrepreneur, Mohammed Yunus, who with his Grameen Bank succeeded in bringing banking to poor women who were hitherto denied access to structured credit and were at the mercy of unscrupulous money lenders.
Or, banks such as Bandhan in the Eastern Indian State of Bengal which similarly, is spearheading a revolution in banking for the masses. Of course, even in the West, there are numerous instances such as the Commodity Bourses which as a result of Bankers merging the financial profit imperative with that of social responsibility has helped the farmers in hedging against bad harvests, weather changes, and even pure speculation that can result in the volatility of the prices.

Profits are not the Only Criteria

Thus, it can be said that like everything else in the world of business and finance, as long as financial innovation has the underlying them of genuinely merging the profitability with that of social change, then it must be welcomed and even supported and encouraged at all costs. However, when financial innovation becomes yet another instance of speculation wherein the sole objective is to make as much money as possible, then it is certainly something that we must be worried about.

The Emerging Threats of High Speed Trading with Uber Complex Financial Instruments

Moreover, with the advent of high speed trading and electronic trading, it is certainly the case that the marriage of advanced technology with that of overly complex financial products is leading us to a dangerous situation where the speed of technological change and the increase in complexity results in a high stakes game of cards where the decisions are not made by humans but machines which though supposedly objective can also veer out of control. Indeed, the fact that at the moment, computers have taken over the roles that traders used to perform in the markets means that there is every chance that one day, there would not be too many of the experts who understand what is going on.

Conclusion

To conclude, financial innovation has certainly lead to efficiencies in the markets. However, at times, such innovation has to be tempered with human and humane considerations. Just like the inventions such as Dynamite and the scientific achievements such as splitting the atom led to devastating outcomes, even financial innovation that is not grounded in the realization that greed can sometimes lead to disaster would definitely lead to that as the world learned the hard way over the last decade or so.