What Is Financial Management?
Financial Management can be defined as the management of the finances of a practice in order to achieve financial objectives. The key objectives of financial management would be to create wealth for the practice, generate cash and provide an adequate return on investment bearing in mind the risks that the practice owner is taking and the resources invested.
There are five key elements to the process of financial management. These five elements are goal setting, financial planning, financial control, pricing and inventory management.
Goals of Financial Management
Modern managerial finance theory operates on the assumption that the primary goal of the practice is to maximize the wealth of the practice owner, which translates into maximizing the practice’s value. Other goals also influence the practice’s policy but are less important than practice’s value maximization. These goals usually include:
- Owner wealth maximization
- Profit maximization
- Managerial reward maximization
- Behavioral goals
- Social responsibility
Financial planning is the basis for budgeting and for estimating future requirements. Financing may derive from either internal or external sources. Internal financing refers to cash flow generated by the practice’s normal operating activities; external financing refers to capital provided by parties outside the practice, such as investors and banks. Practices are able to estimate their need for external financing by planning future revenues, sales and related expenses.
Management needs to ensure that enough funding is available at the right time to meet the needs of the practice. In the short term, funding may be needed to invest in equipment, pay employees, pay for supplies and for inventory.
In the medium and long term, funding may be required for significant additions to the productive capacity of the veterinary hospital, open a new veterinary practice or to make acquisitions.
Financial Control (particularly budget management)
Once the practice has establish goals and associated strategies (or ways to reach the goals), funds are set aside for the resources and labor to the accomplish goals and tasks. As the money is spent, statements are changed to reflect what was spent, how it was spent and what it obtained. A review of financial statements is one of the more common methods to monitor the progress of programs and plans. The most common financial statements include the balance sheet, income statement and cash flow statement. Financial audits should be conducted to ensure that financial management practices follow generally accepted standards, as well.
Financial control is a critically important activity to help the practice ensure that the hospital is meeting its objectives. Some of the main objectives should be to control your practice’s finances, project operating costs, meet ongoing expenses, analyze financial statements, understand the time-value of money, make capital budgeting decisions, cope with taxes and turn a profit.
Financial control addresses questions such as:
- Are assets being used efficiently?
- Are the practices assets secure?
- Does management act in the best interest of practice owner and in accordance with the hospital rules?
Most veterinarians have fears and false assumptions about raising their prices. Our goal is to alter your belief about pricing. Most veterinarians are more sensitive to raising their prices than their market is. Typically, resistance to raising prices is more of an internal problem than an external one so we must liberate your thought processes about pricing.
There are a number of pricing models out there. Some make sense for veterinarians and some don’t. You may even use different pricing models within your hospital. Just keep in mind that others work better given the competition, demand and your cost basis.
We give you the pricing strategies based directly on your particular demographics, so these strategies will work no matter what the economic basis of your clientele is, whether you’re in a rural area or downtown New York, none of that matters, these strategies are universal.
These strategies will work no matter what the economy is doing. They will work even more so in a downtrodden economy, because it is more difficult to get a new client when the economy is bad as compared to when there is an upbeat economy. Why? Well, if you have higher prices, your bottom line is better. And, if your bottom line is better, you can afford to spend more money to attract new clients.
“Inventory” to many practice owners is one of the most visible and tangible aspects of doing business. Each type of inventory represents money tied up until the inventory leaves the company as purchased a product and contribute to profits only when their sale puts money into the cash register. In a literal sense, inventory refers to stocks of anything necessary to do business. These stocks represent a large portion of the practice’s investment and must be well managed in order to maximize profits. In fact, many hospitals cannot absorb the types of losses arising from poor inventory management. Unless inventories are controlled, they are unreliable, inefficient and costly.