Manage all Capital as Part of the Business to Eliminate the Financial Management Problem

Financial Management is one of the top 10 problems of 20^th century management

Financial Management manages money separate from other tangible assets

The early 20^th century enterprise was concerned about managing and protecting cash. Financial management fundamentals were established to manage actual and accrued cash from the point received until the point that it is invested or spent. Financial management problems such as unknown capital worth, unknown costs, unknown value creation, and unknown return on capital investments have never been solved by traditional financial management. Financial management tends to be equated with capital management. This allows non-financial capital to be administered, rather than managed, or to be labeled as “intangible assets” and not accounted for or managed. Today, financial capital is managed largely by computers. Non-financial capital and intangible assets are an increasing percentage of enterprise worth and must be managed properly.

Financial capital must be managed with other tangible facility capital to create value in results

Financial capital must be managed as part of the business and not administered separate form the business. 21st business management utilizes financial management capabilities to manage all tangible facility assets. Financial assets and facilities are a sub-set of reusable facility equipment capital, cash is a sub-set of consumable facility supply capital, and accounts are sub-set of facility records capital.

All facility capital requires similar application of expertise to operate and maintain, to supply, and to record. In a managed business, all facility capital is supported for operation and development and for utilization to produce value in results.

The business also integrates financial parts of other results that have been separated out. Management strategy capital includes financial strategies as an integral part of management strategy solutions. Investment management results manage shareholder funds for investment, capital development, and shareholder value results.

The Financial Management Problem

20^th century financial management gives us intangible assets, unknown costs, unknown value, and unknown worth

Now, as we go into the 21^st century, there is a growing need to go beyond financial management fundamentals and change the way enterprise capital is managed:

• Cash is electronically recorded and transferred, facilitating control
• Tangible fixed and movable assets are being superseded by other assets as a growing percentage of enterprise worth and importance
• Information, business, intellectual, and management capital are becoming more important, and can no longer be ignored as ‘intangible assets’
• Recording expenditures in terms of what money is spent on has been superseded by the need to know the value and use of what was received
• The full business cycle must be financially managed to know value for money spent, subsequent value added, and value provided for money received.
• The emphasis on financial management prompts neglect in management of other capital, which now is more important and must be managed
• “Intangible assets” cost tangible money to develop and utilize. “Intangible assets” are actually unmanaged assets of increasing worth that must be managed.
• Capital management must include operation, support, and improvement of all capital to meet user needs
• Capital management must manage capital development to know the value created by development, the precise investment costs of developed capital, and the return on the capital investment
• Capital management also must manage the performance of capital in utilization to produce value and provide returns on investments

Many of the principles of financial management apply to all capital not just financial capital. It is no longer necessary to emphasize financial management over other capital management.

Traditional financial management prevents professional facility capital management

The 20^th century enterprise administers tangible equipment, supplies and accounts, rather than managing facility capital to be operated, developed, and utilized to produce value. The focus is on cash, which is managed separately, while other capital administered or neglected. Cash and other facility capital require experience with the capital and application of expertise to support and manage.

Enterprise chiefs must manage capital within their capability

There is a growing recognition of the problem of enterprise chiefs, such as Chief Information Officers, who are responsible for diverse capital, and the need to relate the capability of the chief to the category of capital that is managed. It is more important to distinguish all capital, both tangible and “intangible” by the capabilities needed to manage the capital properly. All capital must be managed from the strategic need, though investment analysis, through acquisition or development, through implementation, through utilization to gain the return, and beyond.

Emphasis on financial capital causes other capital to be neglected

All enterprise capital requires investment, has worth, and incurs costs when consumed to create value. The emphasis on conventional financial management often leads to 20^th century problems in unmanaged non-financial capital and the presence of “intangible assets” that are not financially-managed properly to produce specific value and to increase capital worth. Basic financial management problems in unknown value created across the business, unknown costs incurred in the business, unknown investment costs in specific capital utilized in the business, unknown worth of capital that builds up to unknown business net worth, and inability to manage the return on specific capital investments have remained unsolvable since the beginning of business and can only be solved by managing the business and financial capital as part of the business

The Financial Management Solution

Money is the easiest form of capital to manage, yet takes the bulk of enterprise effort. All capital can be equated to money and the enterprise is subject to loss if any capital is not managed properly. But, non-financial capital is not managed as capital to be utilized for specific benefit in the 20^th century enterprise.

Financial strategies, investments, assets, supply, and records must be integrated with other strategies, investments, assets, supply, and records

Financial strategy is part of the integrated enterprise management strategy and should not be separated out. Financial investments are the easiest investments to analyze and manage. They should be incorporated with professional investment management of all enterprise funds and cash flows, for all financial, business, and capital development investments, to produce shareholder value.

Financial assets are a subset of tangible assets in enterprise facility capital. Enterprise financial facilities are the easiest-to-manage part of reusable tangible assets or facility equipment capital. Enterprise cash in working capital is the easiest-to-manage part of consumable facility supply capital. Financial accounts must be integrated with other financial and non-financial facility records, so that complete financial and non-financial records are maintained on the business.

Financial capital is managed as a part of all capital in 21^st century business management

The solution to the financial management problem is provided by organizing and managing the enterprise business. The enterprise business organizes all capital by the capabilities required to manage the capital properly for utilization, improvement, development, and benefit.

Business management manages enterprise capital through four categories to apply the required capability:

• Business capital requires business knowledge and analysis capability to define and manage
• Human capital requires human handing and development capabilities
• Facility capital, including the financial capital subset, requires expertise in the operation, maintenance, and support of the subsets
• Management capital requires management judgment and research capabilities

All categories of capital are sub-defined into the specific capital solutions utilized to create value in specific results.

The business manages all capital to eliminate intangible assets, unknown costs, unknown worth, and unknown value creation

So, when the enterprise organizes all of its capital to be managed:

• Intangible assets become tangible
• Worth of capital in capital solutions and the enterprise worth are assessable
• Capital is managed for support, improvement, development, and utilization
• Capital is implemented to performance domains to be utilized to produce specific results
• Capital consumed in performance is managed to know all costs
• Performance costs are charged against the specific result produced by the cost
• Results produced are managed to know value created and result value added over costs
• Result value created and result value-added are attributed to each solution utilized
• Result value created by capital solution provides the return on investment to date, and indicates the solution worth in projected value creation over the remaining solution life

The business plans and measures performance costs, result value, and strategic value creation for 21^st century management. Managing finaancial capital as part of the business eliminates the unsolvable financial management problems inherent in 20^th century enterprise management.

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This entry was posted on Tuesday, October 27th, 2009 at 00:07 and is filed under:
Forums: Administration and Capital Management, Corporate Investment and Governance, Top Ten 20th Century Problems
Topics: Capital Management, Conventional Management Methods, Enterprise Worth, Investment Management, Value Management, Accounting Management, Financial Management
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