FINANCE FOR PROCUREMENT
OVERVIEW OF FINANCE FOR PROCUREMENT
Definition of terms
Financial Management is a branch of economies concerned with the generation and allocation of scarce resources to the most efficient user within the economy (or the firm). The allocation of these resources is done through a market pricing system. A firm requires resources in form of funds raised from investors. The funds must be allocated within the organisation to projects that will yield the highest return. Financial management: involves raising and allocating funds to the most
productive end user so as to achieve the objectives of a business or firm.
Hence we can define finance as the application of and optimal utilization of scarce resources. The discipline of finance applies economic principles and concepts in solving business problems.
Working capital refers to a firm’s current assets and current liabilities. The financial manager has to ensure that the firm has adequate funds to continue with its operations and meet any day to day obligations. Maintaining an optimal level is therefore important.
Capital structure refers to the mix of long term debt, such as debentures, and equity such as reserves and retained earnings. The financial manager aims at employing the source of funds that will result in the lowest possible cost to the company.
Goals of an Organisation
Financial goals
Profit-Maximization
Traditionally, this was considered to be the major goal of the firm. Profit maximization refers to achieving the highest possible profits during the year. This could be achieved by either increasing sales revenue or by reducing expenses. Note that:
Profit = Revenue – Expenses
The sales revenue can be increased by either increasing the sales volume or the selling price. It should be noted however, that maximizing sales revenue may at the same time result to increasing the firm’s expenses. The pricing mechanism will however, help the firm to determine which goods
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