The facilitation of corporate finance and the decisions of management may impact the facilitation of the personal finance decisions of individuals and their families. We do not live in a vacuum. Therefore, the activities and decisions of other people can impact our lives.
Functions of Finance
“The key functions of a financial system are to facilitate household and corporate saving, to allocate those funds to their most productive use, to manage and distribute risk, and to facilitate payments. The financial sector is working well when it performs those functions at a low cost and makes the rest of the economy better off” (Greenwood, & Scharfstein, 2012,104). It is the responsibility of the business or individual managers of finance to locate, design or coordinate a financial system that aligns with the personal, business or group goals of the people they lead and serve.
Household and Corporate Saving
Saving for households or corporations can be facilitated in several ways: (1) by paying less for goods and services purchased, (2) by paying less interest on debt by reducing the amount owed and (3) by investing in saving projects that yield higher interest rates. Researching the project is needed to accomplish the objective whether for an individual, family, small business or corporation. In each case, the purchasing manager should secure at least three or more quotes for the item or service to be purchased. Comparison should be made using other factors in addition to price. Analysis of the information obtained should produce a decision to purchase the best value at the best price.
Productive Use of Funds
In order to allocate funds to their most productive use, thought and planning should happen before each project is assigned a budget. For example, research the purchase of the $400 computer to determine its functionality in relationship to the budget allotted for electronics. If the need is to use it for school work for at least a year, there is an added gain when the same computer can be used by the owner manager of a new small business. The purchase of a dress for $400 that will only be worn once is put in a difference light if the decision is between buying the dress or the computer. When one of the primary income earners no longer has the job that she has had for years, all members of the family have to give serious thought to the best use of funds. The beginning small business corporation can no longer be managed like a hobby. The prom dresses for the junior and senior prom can no longer be major purchases. By determining and planning for the objectives that causes the allocated funds to be used to produce purchases that achieve the desired function, both items can be purchased within the predetermined budget.
With corporations and large business entities, the “net present value” (Ross, Westerfield, Jaffe, & Jordan, 2011, 96) can be used to determine which projects the business should pursue. There are other calculations that could also be used so the senior finance manager needs to determine which method will work best for the finance team, the management, stockholders and any other applicable stakeholders.
Manage and Distribute Risk
Management and distribution of risk can be addressed starting in two areas: (1) a portfolio of insurance products and (2) the diversification of the investment portfolio. Research for purchase of insurance products should include comparison of price, features of policy, claim handling and customer service by the agency’s staff. Research for the elements of an investment portfolio will be far more detailed and time intensive. Each type of investment and the investment product in each type should be considered individually and in relationship to its impact to the overall risk of the portfolio. New investors should take the investing process seriously to ensure that investigation and understanding is obtained before money is involved. Necessary care in planning investment objectives and researching to make sure investment projects meet the desired objectives will help allotted funds for investment be most productive.
Facilitation of payments paid and received has an impact on money saved. Incentive can be given to clients to pay earlier, but the discount to your client will mean less money is received in the payment. Your thoughts on this jester will be paramount to whether you see this as a win or a loss. Generally money managers should thrive to receive money as soon as possible and pay out money as late as possible. This does not mean that any bill should be paid so late that there are late fees and penalties attached to the payments. Within the financial system each financial manager designs, the goal should be to also maintain a good credit report because cost of goods or services can be impacted negatively by a low credit score for personal or business transactions.
Change starts with proactive compliance to the commitment to your process of improvement of your financial system to facilitate household and corporate saving, to allocate those funds to their most productive use, to manage and distribute risk, and to facilitate payments. Some of the same principles or processes used by businesses can be used by individuals and families. After determining the objectives, individuals, families, small businesses and corporations should identify skills that need to be obtained to plan for improvement in the financial system employed. At the very least, realize that thought must be given to finance in order to have any control over change in that area. In the end, it will be your thoughts on finance that invoke the all important call to action.