MATRIC NO: 15/66MA152

NAME: RAIMI MORIAMO

COURSE: FIN202(Financial

Administration)

TOPIC: Problems of

Financial Administration

LECTURER: Mr Jimoh
INTRODUCTION

Finance is needed to meet the requirements of business concerns in the economic world. It is

often regarded to as the “life blood of every business”. Irrespective of the size of a company,

Finance plays an important role in appropriating the rent, the staff and the materials which are

necessary for the functioning of any start-up, enterprise, industry, corporation, or company.

Financial administration is the fuel for all administrative activities in a firm and all

undertakings in the firm depends on finance. This term refers to some sort of accountability,

regularity, well-ordered method and rule of revenue and expenditure. It is a vital part of

business because it is concerned with an organisation’s resources. Regardless, it is not without

its shortcomings. This paper makes an effort to first, explain the concept of Financial

Administration, and thereafter point out some of the problems of financial administration.

FINANCE

According to the English dictionary for Windows Phone, “Finance is the commercial activity

of providing funds and capital”. Finance is a broad term that describes two related activities;

The study of how money is managed and the actual process of acquiring needed funds. The

field of finance can be considered to comprise three categories: Financial Management,

Investments and Financial Institution. Business or corporate finance is concerned with

Budgeting, Financial forecasting, Cash Management, Credit Administration, Investment

Analysis and Fund Procurement of a business concern. It is also the activity that deals with

Planning, Raising, Controlling and Administering funds used in business. It involves the

acquisition and conversation of capital funds in meeting financial needs and overall objective

of a business enterprise. Finance is simply having two parts Private Finance and Public

Finance. The former involves Individuals or Firms to meet their requirements, While the latter
includes revenue and disbursement of government such as Central Government, State

Government and Local Government.

FINANCIAL ADMINISTRATION

According to the Cambridge dictionary, Financial Administration is the job of managing

financial tasks such as, controlling the budget, writing financial reports, and providing money

for projects, for a company or organization. In general terms, financial administration implies

administration in relation to the fiscal management, accounting, and financial reporting for

running a company. The economic progress of a firm as well as its regression, both depend

upon the fitness of its financial administration. The centre part of financial administration is

the presentation of budget - a logical estimate of income and expenditure during a financial

year. It is the duty of Financial administrator to see that funds earmarked for bankrolling the

operations of the company are properly utilised and the purpose of the allotted funds are being

properly utilised.

FINANCIAL ADMINISTRATOR

This is some employed personnel of a firm who is responsible for developing the firms budget

and allocating to each department, the funds it has need of based on the requirements of the

business. He/she prepares financial reports of a firm and is involved in directing the investment

activities of such firm by providing relevant information on the company’s finances or by

developing and maintaining an investment portfolio; managing the accounts receivables and

payables of the firm; planning the firms long term financial goals and protecting its assets;

preparing financial statements to establish accountability in the firm. The financial

administrator manages cash controls in the organisation, ensuring that money is properly

applied to the business’ goals.

The nature of financial administration refers to the set of characteristics with which the

administration of a company can be recognised. They are;

 Traditional View conceives Financial Administration as a sum total of activities

undertaken in pursuit of Generation, Regulation and Distribution of monetary resources

needed for sustenance and growth of an organisation. It emphasizes upon the set of

administrative functions in organisations which relates to an arrangement of flow of

funds as well as to regulating mechanisms and processes which ensure proper and

productive utilization of these funds.

 Modern View considers Financial Administration as an integral part of the overall

management process of organisations rather that one of raising and disbursing funds. It

rejects the value-neutral stand of the traditional theory.

PROBLEMS OF FINANCIAL ADMINISTRATION

Problems of financial administration are challenges faced by the operation of an administrative

system in a company. In discussing problems of financial administration, a firm must be viewed

as a going concern rather than as a corporation in process of organization or reorganization.

All organizations, including nonprofit institutions, cope with challenges that accompany

efficient operations. Government regulations, State of the economy, Securities exchanges and

borrowing costs are part of the factors affecting financial administration. The problems

encountered or to be encountered by controllers, corporate treasurers and financial

administrators are numerous, some of which is discussed in this paper:

FINANCIAL LEVERAGE
One of the most critical aspects of management pertains to the funding of a firm. The pressing

issues in financial administration is the company’s ability to raise cash for the financing of the

business, not just for a department or two but for the company as a whole. So, the management

has to procure the capitals needed to get the business off the ground. Cash is needed to provide

working capital, make payroll to employees, expand sales, cover monthly and daily operational

expenses and grow. Although, operating revenue and the sale of assets can generate money for

a firm, financing problems can also occur when there isn’t enough cash for the uninterrupted

operation of the business and or when it has a lot of debt to pay up.

With equity, managers raise capital by either selling common shares in the firm, whereby,

investors provide the firm with new investment capital in exchange for ownership rights in the

firm; by selling preferred stock of the firm with which investors are paid a stated dividend

amount and can offer the opportunity for a later conversion into common shares, known as a

convertible preference stock; or by selling warrants or rights. Warrants are securities that grant

its holders the right to purchase a fixed number of ordinary shares in the same firm at a specified

price for a specified period of time. While rights are simply similar to warrants, the firm issues

additional ordinary shares to raise new capital, the shareholders are issued right in proportion

to the shares held by them.

With debts, the financial managers can source funds that can be used to finance the firm for

short and long-term. For the former, Loans of varying sizes can be borrowed from financial

institutions such as banks, finance companies and other financial lenders to alleviate temporary

cash flows. For the latter, Debentures which are debt securities in which investors become

creditors of the firm in exchange for the right to receive payments of interest at regular interval,

are used to finance long term loans. All organization borrow funds to harness the occasional

cash shortfall. The debt ratio can vary from corporation to corporation depending on the Capital

structure of the business and its reliance on debt. If a company is highly geared it may struggle
to meet interest payments, leading to a higher risk of being liquidated and the firm may find it

harder to get further loans, since investors will be put off by the high gearing level. Yet, a lower

geared company runs the risk of paying regular dividend payments since the higher ratio of

Shareholder funds entails that the company will now be owned by its shareholders more

relatively.

DEBT REPAYMENT

After the successful borrowing of funds, a company must find adequate avenues to invest it

into, in order for the principal and whatever interest that accrues on it be regained as raising

cash for corporate activities goes together with financial long-term initiatives. Financiers prefer

lending money to companies with track records of responsible fiscal management and often

decline loans to businesses that have prospects of defaulting repayments. When loan payments

are not made on time, the companies’ credit rating can be ruined and borrowings in the future

might be difficult or impossible as over a period of time this idea influences the goodwill of

the firm in the market because the more the firm borrows, the higher the risk becomes to the

lender so a higher interest rate is required on each subsequent loan. In financing a company

with debts, agreeing to provide collateral to the lender could put some business assets at

potential risks. Financial managers continue to fight against non-repayment of debt as too

much debt can permanently sink a business because anytime debt financing is adopted, the firm

is running a risk of bankruptcy. Solvency refers to a borrower’s ability to repay a loan and steps

the debtors takes to maintain a strong balance sheet. This is very important to investors as it

helps guide them when making investment decisions. Financial managers must take corporate

solvency serious as it is central to financial success. The company’s sole obligation to the lender

is to make payments even if the business fail, here, the lenders will have a claim to repayment

before any equity investors if the company is forced into bankruptcy.

STATEMENTS

Transactions recording require adequate and accurate record keeping. The inability of

managements to lay groundwork for long-term profit monitoring may be caused by incorrect

financial data. Competent financial management involves meticulous bookkeeping and proper

planning. An incorrect prime entry equates to an incorrect financial statement which will

certainly not be complete and in line with accountings conventions and concepts. Challenges

arise when companies are under pressure to present partially accurate financial reports,

accounts will be an abridged truth; not all the facts will be revealed. Firms want to avoid putting

too much detailed information in the public domain, as it then becomes available to their

competitors. Some companies employ the skill of Window dressing whereby company

accounts are presented in the best possible, or most, flattering way. In public companies, this

type of "creative accounting" can amount to fraud. Financial managers should always strive to

make sure their accounting data abides with the relevant governing standards like GAAP

(Generally accepted accounting principles) or IFRS (International financial reporting

standards).

BUDGET

Central to good financial administration is forecasting and planning. It is important for a firm

to have a business plan and a financial budget as a guide to raising and spending money. A

budget helps in handling financial surpluses and shortfalls. Failure of a company to properly

research their business environment, overspend or underestimate competitions will lead to

risking the profitability and viability of the business and their inability to meet revenue goals.

Not paying close Attention to the firm’s business plan and budget may not efficiently help in
ensuring a positive cash flow neither in keeping expense in check. A successful budget prevents

the types of shortages or surpluses that can result in financial crisis, such as inability to pay

creditors or purchase additional inventory to meet production needs. Lack of proper planning

results in heavy drainage of funds and thus there is serious financial problems in the wake. It

is seen that in most administrations there is no serious budgeting system. Prepared budgets are

not for implementation but just a smoke screen to obtain funds from government. Budgets

estimates are very unrealistic which is why there exist a very wide variance between standard

budgets and actual expenditure, likewise, expenditures are not linked with standard budgets

and actual expenditure. Similarly, expenditures are not linked with targeted performance and

targets achieved.

CURRENT ASSET AND CURRENT LIABILTY

MANAGEMENT

Managing current assets starts with managing cash, receivables and inventory. Cash

management is tricky for many firms as cash provides liquidity needed to meet daily

obligations and is a necessary component of everyday operations. Although cash is a

nonearning asset, corporations spend considerable time and resources in cash management.

Receivables management involves determination and implementation of a firm’s credit policy

on how long customers are allowed to pay for goods or services. Receivables are money owed

to the firm that has not yet been collected, they represent an important investment for the firm.

Real costs are associated with these issues and inability of managers to find appropriate

tradeoffs results in both low sales and little profitability. Inventory management involves

decision of managers to either coordinate production with sales patterns or maintain production

regardless of current high or low demands, negotiated credit lines are utilized to access capital

to maintain needed inventory levels.

commercial paper and bank loans. The longer a firm takes to pay its creditors, the longer it

maintains access to and has the use of funds, therefore, managers pay outstanding bills as

slowly as possible, however, this might prove disastrous if abused.

Managers usually run into problems, when they do not successfully manage their current assets

and liabilities, incapability to maintain a cash conversion cycle that provides the firm with

liquidity and profitability and correspondingly avoiding cash flow problems that so often result

in financial stress.

CONCLUSION

Whether a financial administration is working successfully or is not should be linked with its

performance. Financial administration is faced with many problems, it is criticized everywhere

simply because there are no standard means on which performance is tested. Some of these

problems focus around the delivery of cash for current needs and disposal of surplus funds in

the most beneficial mode, while some are based on the perception of the organisation by

external factors which strongly have control over the administration of the company in one way

or another. Foremost attention should be paid to the treasury that is why we must understand

the immense value attached to this concept. A balanced and precise financial administration is

the base as well as the means to attain successfully all goals of development as well as growth

of a business. It is imperative for anyone who wants to set up a company to have a good basic

understanding of this concept.

REFRENCES

Morris A. Copeland (1920) Seasonal problems of financial administration. journal of political

economy, vol 28, no. 1(Dec., 1920), pp. 793-826. The University of Chicago Press.
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sons, Inc., Hoboken, New Jersey.

Hubspages (2013) Understanding Finance. November 11, 2013. http://www.hubspages.com

OrangeField (2015) What is Financial Administration. May 5, 2015. http://

www.orangefield.com

Howard Finch (2006) Encyclopaedia of Management of Financial Issues for Managers. Aug

17, 2006. http://www.advameg.com

Jade Wimbledon (2016) The Importance of Good Financial Management. 1 March, 2016.

http://simplybusiness.com

Investopedia (2015) What Impact Does Government Regulation Have on the Financial

Services Sector? March 3, 2015. http://www.investopedia.com

Craig Grella (2017) Money and Debt: Financing a Business: Business Financing Problems

http://www.houstonchronicles.com