Define the components of financial management

Following are the components of financial management −


  • This is the agreement between the donor (who donates the funds) and the receiver (who accepts the funds). Mostly, the receiver may be an organization or a company.
  • This document is very important for the accounting department.
  • It contains deliverables (quantity and quality of deliverables), budget breakup (allocated funds for specific activities), deadlines, period of reporting, funds schedule, demarcation of both financial and non-financial aid.

Transactions and accounts

  • Finances are through bank accounts and transactions.
  • It consists of bank accounts (opening an account), signatories, wherein depending on the board, one can have one or more than one signatories, who are authorized for all banking transactions.

Handling of cash

  • Small cash transactions are made on a daily basis.
  • It consists of cash transactions (depending upon country’s law limit of cash), cash balance (closing balance), cash withdrawals, payments (through vouchers), verification (designated person/department will verify the monthly records.
  • If any rectification/correction is needed, they will make necessary corrections/rectifications and enter into books.

Petty cash

  • Some amount is kept aside, which will be used in a certain period or whenever required. This amount is called petty cash and is maintained under the imprest system.
  • It can replenish and has a limit to keep petty cash. Accountant will handle this petty cash.

Book maintenance

  • It contains cash receipts, payments, bank deposits and withdrawals of an organization.
  • There are various ways of maintaining a book such as single column and double column.
  • Corrections are made by passing an entry which has to be rectified.
  • Cashbooks are maintained on a daily basis and the respective authorities will check and sign the book.

Stock management

  • Excess purchases and wastage can be reduced by maintaining the required stock. Sort, straighten, shine, standardize and sustain will help organizations in reducing wastages. Stock inventory is audited and monitored.
  • Needs for goods and services are identified and costs to cover products after mutual agreement between supplier and organization goods, services are purchased. Hence, the respective accounts are prepared.
  • By credibility and cost effectiveness, potential suppliers are identified. Suppliers should follow rules and regulations stated by the government/local bodies. Generally, more than two suppliers are identified and chosen among them.
  • Stock register maintains all the records of goods and services purchased. Records will be updated whenever new stock arrives.

Updated on: 13-Jul-2021


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