The Importance of Financial Management to an Organisation

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“Credit control is the process of control over payments coming into and going out of the firm. It is mainly concerned with the firm’s and the firm’s debtors. Tight credit control is important if a firm wants to avoid cash flow problems” (Garrison, Ray. H., et al : 2009). According to(Kaplan, Robert. S., Bruns. W, 1987) Cash or finance is considered the life blood for any business. In the current competitive era Granting credit in order to win sales is a fact of life for every business, as is the likelihood that more than 50% of your credit customers will fail to pay on time. Sadly, no matter how good your product or service is and no matter how adapt you are at winning new customers and increasing sales, unless you can convert those sales into cash reasonably quickly, you won’t remain in business for long. The solution to this problem is setting up a simple credit control system and injecting a little more discipline into the process of granting credit and recovering cash, your customers will start paying. If we look at the financial report of Wal-Mart, Current liabilities exceeded current assets at January 31, 2010, by $7.2 billion, an increase of $789 million from January 31, 2009. Our ratio of current assets to current liabilities was 0.9 at January 31, 2010(financial report, 2010 p.10). According to the Wal-Mart officials it is the proof of efficient cash flow management but if we look at the industry average, it is clear that Wal-Mart’s working capital ratio is critical and they should maintain working capital ratio around 1. Furthermore, the increased provision for doubtful debts which was $298 million and $188 million at January 31, 2010 and 2009, respectively also shows the poor credit control management (five years financial report, 2010 p.17).

1.2 How a company can adjust its fixed and variable cost

“A fixed cost is that cost which does not vary with the level of activity within a specified range” (Garrison, Ray. H., et al, 2009). “A variable cost is that cost which varies with the level of activity within a specified range” (Garrison, Ray. H., et al, 2009). There are number of ways by which a company can adjust its fixed and variable costs in economic downturns like reducing activity level, downsizing, and decrease in the level of borrowings or investments. Wal-Mart Stores Inc. acquired a controlling interest in Distribucion y Servicio D&S SA, Chile’s largest grocer, completing its biggest acquisition in Latin America on 23 January 2009, and other collaborations with China and Indian firms to open super markets in these particular countries, when Wal-Mart acquired D&S, there was too much overstaffing and non-productive debt burden which was paid by Wal-Mart these activities shows the strong financial position of Wal-Mart (Bloomberg, 2009). Wal-Mart is also reducing its fixed cost like interest by paying off the unproductive debts of D&S but due to the new acquisition of D&S the overall staff is increased and hence there is an increase in the administrative expenses and variable expenses like labour cost but by downsizing and training the staff these expenses are being removed gradually (five years financial report,

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