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Why Financial Capability Matters?

What is Financial Capability?

The availability, usage and management of funds have a bearing on the financial capability of an organization and ability to implement its strategies.

A financial manager has to pool, deploy and allocate financial resources taking into consideration the capital or long term investments, working capital or short-term liabilities and repayment capacities.

 

Why financial capability matters for the success of a business

Financial Capability of a firm

 

Factors that influence financial capability of an organization:

1. Factors related to source of funds: Capital structure, procurement of capital, controllership, financing pattern, working capital availability, borrowing, capital and credit availability, reserves and surplus, and relationship with lenders, banks and financial institutions.

2. Factors related to usage of funds: Capital investment, fixed asset acquisition, current assets, loans and advances, dividend distribution and relationship with shareholders.

3. Factors related to #management of funds: Financial accounting and budgeting systems, management control system, state of financial health, cash, inflation, return and risk management, cost reduction and control, and tax planning and advantages.

 

6 steps of financial pla nning

 

Typical Strengths that Support Financial Capability:

• Access to financial resources

• Amicable relationship with financial institutions

• High level of credit worthiness

• Efficient capital budgeting system

• Low cost of capital as compared to competitors

• High level of shareholder’s confidence

• Effective management control system

• Tax benefits due to various government policies

The examples given below show how strengths and weakness affect the financial capability of organizations:

• A company faced many problems due to instability in the top management, an unfavorable public image, unfavorable government relations etc., but it had inherent strengths like a huge amount- to the tune of Rs.1000 crores invested in fixed assets which the company used for funding its diversification plans.

Here we see one particular strength over-shadowing all other weaknesses which can be rectified in due course of time.

• A scooter company had collected nearly Rs.1150 crores as advance for booking of scooters, but within five years, its cash position deteriorated owing to sudden and unforeseen cancellation of bookings and withdrawal of deposits, resulting in a huge interest burden.

Had the company had a strong financial backup, it would have survived the trouble.

Swot analysis for small business

Matching strengths and weaknesses with opportunities and threats requires that a firm should direct its strengths towards exploiting opportunities and blocking threats while minimizing exposure of its weaknesses at the same time.

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