MSPM 624



1.0 Introduction
Objectives
Main Content
1.1 What is Financial Management?
1.2 Importance of Financial Management in Projects
1.3The finance function and its relation with other business functions
1.4 Project financial management cycle
1.5 Good practice systems: the building blocks of financial
management
1.6 Key supporting policies and standards



In this unit, we will attempt to explain the nature of
project financial management.
The unit also examines the objectives of project
financial management.
It also explores the functions of the finance /roles of
project financial management.




At the end of the unit, you should be able to:
1. Define project financial management
2. State the objectives of project financial
management
3. Describe the functions of the finance/roles of
project financial management

Financial Management is that part of management
which is concerned mainly with raising funds in the
most economic and suitable manner; using these
funds as profitably (for a given risk level) as possible;
planning future operations, and controlling current
performance and future developments through
financial accounting, budgeting, statistical analysis
and other means





Financial management is the process of planning and
controlling of the financial resources of a firm.
It includes the acquisition, allocation and
management of firms’ financial resources.
It is concerned with how best to manage an
organization’s resources in order to make sure that the
resources are maximized fully.
The finance functions in all their facets are concerned
with decisions about investment, financing and
appropriation of profit.
The quality of decision taken in these aspects –
investment, financing and profit distribution has a lot
of implications for the success of a business.



Financial management is the process of planning
and controlling of the financial resources of a firm.
It includes the acquisition, allocation and
management of firms’ financial resources.
It is concerned with how best to manage an
organization’s resources in order to make sure that
the resources are maximized fully.


According to the World Bank Financial
Management Manual:
“Financial management is a process which brings
together planning, budgeting, accounting, financial
reporting, internal control, auditing, procurement,
disbursement and the physical performance of the
project with the aim of managing project resources
properly and achieving the project’s development
objectives”.



The major objective of management is to maximize
the shareholders’ wealth.
The shareholders’ wealth is the present value of
future cash flows or present value of future dividends
payable to the shareholders infinitely.
The Shareholders wealth maximization is gradually
becoming the single and narrow objective of firms
pursued by financial managers making it the most
fashionable objective of the firm.






This is being achieved through a combination of
goals such as:
i. Increase in the market share of the firm
ii. Increase in reported profits
iii. Continuous survival of the business
iv. Provision of valued services to customers
v. Ensuring public acceptability of the firm and its
products/services coupled with both social
acceptability and legal acceptability.
This form of management is important for various reasons.
1.
Helps organizations in financial planning;
2.
Assists organizations in the planning and acquisition of
funds;
3.
Helps organizations in effectively utilizing and
allocating the funds received or acquired;
4.
Assists organizations in making critical financial
decisions;
5.
Helps in improving the profitability of organizations;
6.
Increases the overall value of the firms or organizations;
7.
Provides economic stability;
8.
Encourages employees to save money, which helps them
in personal financial planning.


Most companies experience losses and negative cash flows
during their startup period. Financial management is
extremely important during this time. Managers must make
sure that they have enough cash on hand to pay employees
and suppliers even though they have more money going out
than coming in during the early months of the business. This
means the owner must make financial projections of these
negative cash flows so he has some idea how much capital
will be needed to fund the business until it becomes profitable.
As a business grows and matures, it will need more cash to
finance its growth. Planning and budgeting for these financial
needs is crucial. Deciding whether to fund expansion
internally or borrow from outside lenders is a decision made
by financial managers. Financial management is finding the
proper source of funds at the lowest cost, controlling the
company's cost of capital and not letting the balance sheet
become too highly leveraged with debt with an adverse effect
of its credit rating.



In its normal operations, a company provides a product or
service, makes a sale to its customer, collects the money and
starts the process over again. Financial management is
moving cash efficiently through this cycle. This means that
managing the turnover ratios of raw materials and finished
goods inventories, selling to customers and collecting the
receivables on a timely basis and starting over by purchasing
more raw materials.
In the meantime, the business must pay its bills, its suppliers
and employees. All of this must be done with cash, and it
takes astute financial management to make sure that these
funds flow efficiently.
Even though economies have a long-term history of going up,
occasionally they will also experience sharp declines.
Businesses must plan to have enough liquidity to weather
these economic downturns, otherwise they may need to close
their doors for lack of cash.


Every business is responsible for providing reports of
its operations. Shareholders want regular
information about the return and security of their
investments. State and local governments need
reports so that they can collect sales tax. Business
managers need other types of reports, with key
performance indicators, which measure the activities
of different parts of their businesses.
As well, a comprehensive financial management
system is able to produce the various types of reports
needed by all of these different entities.


The government is always around to collect taxes.
Financial management must plan to pay its taxes on
a timely basis.
Financial management is an important skill of every
small business owner or manager. Every decision
that an owner makes has a financial impact on the
company, and he has to make these decisions within
the total context of the company's operations.



Project Financial Management(PFM) determines how the
project will be financed, including the processes to
acquire and manage the financial resources for the
project. It is more concerned with revenue sources and
monitoring net cash-flows for the construction project
than with managing day-to-day costs.
Therefore to continuously monitor the project finances
and to ensure the company's financial capacity to
complete the project are the most critical finance
manager jobs.
This also includes the assessment and monitoring of
financial risks and the implementation of suitable
financial risk management strategies.



Finance functions have been acknowledged as major
in most organizations.
They are identified as raising funds, investing them
in assets and distributing returns earned from assets
to shareholder/owners.
This exercise is known as financing decision,
investment decision and dividend decision.

When a firm endeavors to balance the cash inflows and
outflows while performing the above functions, it is called
liquidity decision. Hence, the list of important finance
functions includes:

Long term asset-mix or investment function
Capital-mix or financing function
Profit allocation or dividend function
Short-term asset-mix or liquidity function
A business organization performs finance functions
simultaneously and continuously in the normal course of its
activities. The occurrence may, however, not be in sequence.
Finance functions require skill and professional planning,
control and execution of an organization’s activities.








Investment decisions involve capital expenditures which are referred
to as capital budgeting decision. This is the decision of allocating
capital to long-term assets that will bring in beneficial yield (cash
inflow) in the future.
There are two important aspects of investment decisions:
a) The evaluation of the prospective profitability of new investment;
and

b) The measurement of a rate against the prospective return of new
investments could be compared.

Risk in investment, as would be explained in the next unit, arises
because of uncertainty in returns. Investment proposals should,
therefore, be analyzed and evaluated in terms of both expected
return and risk.



This is another vital function in an enterprise. The
financial manager has to identify the time, place and the
technique for acquiring adequate funds to meet the
enterprise’s investment needs. The central issue here is
the determination of appropriate proportion of internal
(equity) and external (debt) finance required by the
enterprise. The mix of the two is known as the capital
structure of the business organization.
The Financial Manager strives to obtain and sustain the
best financing mix, to optimize the capital structure,
which forms the base of financing. The capital structure
is said to be optimum when the market value of shares is
maximized.


This is the other major financial decision which affects
the shareholders and the business as a whole – the
decision to distribute all profits or retain same. The
proportion of distribution of profit and the balance
retained is subject to the firm’s policy, decision of the
board of director or economic situation as applied. The
proportion of profits distributed as dividend is called the
dividend-payout ratio.
The retention ratio is the retained portion of profits. The
dividend policy is determined by its impact on the
shareholder’s value.



Liquidity and profitability affect investment in current
assets in business organizations. Liquidity of an
enterprise is affected by the level of management of
current asset. Risk of illiquidity (lack of liquidity), in
extreme situations, can lead to a business insolvency.
Current assets if properly/efficiently managed would
safeguard the business organization against risk of
illiquidity. The firm needs to invest sufficient funds in
current assets in order to become liquid.
It would lose profitability, if more of available current
assets are not utilized to earn any revenue.
Financial procedures involve a lot of measures to achieve
effective execution of finance function. Some important
routine finance functions are:
 Supervision of cash receipts and payments and cash
balances safeguarding.
 Custody and safeguarding of securities, insurance
policies and other valuable papers.
 Taking care of the mechanical details of new outside
financing.
 Record keeping and reporting.
 In recent years, the scope of finance function has
widened.




Finance is related to many other disciplines in that it can
act as a “tool” for decision making in disciplines like
administration, management, educational
administration, science and technology, law, economics,
etc.
This is due to the fact that finance has evolved from a
purely descriptive course to a normative one. That is,
finance focuses on statements which enunciate rules that
help to attain specified goals. Thus, each discipline
makes use of the finance rules.
Finance is a special functional area of business
administration.



Finance is more or less technical economics in that its
principles are derivatives of economic principles. It is
also related to mathematics in that it adapts
mathematical equations or relationships to formulate
models and its systematic principles.
Finance also provides the basis for accounting. In other
words, without finance, accounting as a course may not
be as extensive as it is today and may in fact not have
existed.
There are also financial laws showing the relationship
between finance and law as a discipline (commercial law,
law relating to banking etc). Laws are normally used to
regulate financial practices and such laws are normally
incorporated in the law discipline.
The project cycle is the framework used to design,
prepare, implement, and supervise projects.
 The duration of the project cycle is long by commercial
standards. It is not uncommon for a project to last more
than four years; from the time it is identified until the
time it is completed.
 A World Bank project consists of six stages:
 Identification
 Preparation
 Appraisal
 Negotiation/Approval
 Implementation/Support
 Completion/Evaluation











Project financial management planning is the initial phase of
financial management. It identifies and provides all financial
requirements for the project and assigns financial
management roles and responsibilities.
The goals of this financial management process:
Identification of sources of funds and alternatives,
Investigation of possibilities of short-term financial
fluctuations,
Examination of the economic environment,
Development of financial analysis tools,
Evaluation of the most suitable legal entity,
Evaluation of contractual requirements,
Examination of financial impact risk factors,
Tax and other financial factors planning.











Good financial management involves the following four building blocks:
1. KEEPING RECORDS
The foundations of all accounting are basic records that describe your earnings
and spending. This means the contracts and letters for money you receive and the
receipts and the invoices for things that you buy.
These basic records prove that each and every transaction has taken place. They
are the cornerstones of being accountable. You must make sure that all these
records are carefully filed and kept safe.
You must also make sure that you write down the details of each transaction.
Write them down in a 'cashbook' - which is a list of how much you spent, on
what and when.
2. INTERNAL CONTROL
Make sure that your organization has proper controls in place so that money
cannot be misused.
Controls always have to be adapted to different organizations. However, some
controls that are often used include:
Keeping cash in a safe place (ideally in a bank account).
Making sure that all expenditure is properly authorized.
Following the budget.








Monitoring how much money has been spent on what every month.
Employing qualified finance staff.
Having an audit every year.
Carrying out a 'bank reconciliation' every month - which means checking that
the amount of cash you have in the bank is the same as the amount that your
cashbook tells you that you ought to have.
3. BUDGETING
For good financial management, you need to prepare accurate budgets, in order
to know how much money you will need to carry out your work.
A budget is only useful if it is worked out by carefully forecasting how much
you expect to spend on your activities.
The first step in preparing a good budget is to identify exactly what you hope to
do and how you will do it. List your activities, then plan how much they will
cost and how much income they will generate.




4. FINANCIAL REPORTING
The fourth building block is writing and reviewing financial reports. A financial
report summarizes your income and expenditure over a certain period of time.
Financial reports are created by adding together similar transactions. For
instance, this might mean adding together all the money you spent on fuel, new
tyres and vehicle insurance and calling them "Transport Costs".
Financial reports summarize the information
Keeping Records
Internal Controls
Budgeting
Financial Reporting

1.
2.
3.
4.



A good policy is:
Easily understood and has a definite purpose for its creation
and is linked to strategy
Is flexible, can adapt to change and is suited to the culture of
the organization
Is developed through the involvement of employees and
interested stakeholders
Is communicated to all relevant people.
To develop a policy you must:
Discuss (including consultation with board members, employees,
volunteers and service users as applicable) and agree on the final
version
In the case of board policy, ensure the entire board ratifies the
document and builds in a date for review.




Sound financial management involve long-term
strategic planning, and short-term operations
planning.
This financial planning should become part of
organization's ongoing planning process.
Sound financial management is one of the most
important policy development and monitoring areas
of a board of directors.
Financial policy is developed to reflect these
different roles and responsibilities facing these two
main types of boards
Policies and procedures should start with the Boards’
financial responsibilities.
 The following areas are some of those that would
benefit from written policies and be included in a
financial management manual:
i.
Board Members financial responsibilities
ii.
Controls on Expenditure- who can spend
what and with whose authority.
iii.
Controls on Income
iv.
Controls on Financial Accounting
v.
Controls on Human Resources
vi.
Controls on Physical Assets

THANK YOU