Running Head: FINANCIAL MANAGEMENT 1

Financial management
Name
Institution affiliation
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FINANCIAL MANAGEMENT

1.Emergency fund

Significance

An emergency fund is a pool of money set aside to cover any of life`s unexpected events that

will cost money to fix (Card, 2019). They are of considerable significance to all households,

considering how life is full of unforeseen circumstances like, for example, the breakout of the

Covid-19 pandemic worldwide, which resulted in economies falling, closure of individual

businesses, and many job losses. Experts suggest having an emergency fund of between three to

six months as it is the minimum amount of time that one will be able to get back on his/her feet.

 The following are reasons why it is important: Helps to avoid an increase in debt, safety in case

of forgotten expenditures, provides security especially to those who do not have multiple sources

of income (Card, 2019).

Creation of a basic emergency fund

This is a financial goal to be achieved over time, and just like any other goal, it involves planning

and preparation. First, you will need to record your incomes and expenses down. Second, figure

out how much you want to be saved in the account towards emergencies. Next, figure out on the

various ways you could raise the amount you require could be saving a chunk from your income

or starting a venture with the sole purpose of raising cash to channel towards it (Chhablani,

2020). Finally, take action and start saving. Maintain discipline and you will achieve your goal

(Rabbani & Yao, 2017).

Fully funded emergency fund

A fully-funded emergency fund should have an amount of money that can fully sustain one`s

lifestyle for three to six months in the event of an unexpected occurrence. In the event of an
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emergency the fund should enable covering of the four basics, which include housing expenses

(rent or mortgage and the recurrent bills such as gas and electricity), food, transportation and

clothing. To know how much you will need, you will have to come up with a budget then take

steps to raise the cash. The money should be in an easily accessible account. (Card, 2019)

2. Debt snowball

 It is a strategy of reducing debt through behavior modification by paying them off from

the smallest to the largest (McAllister, 2018).

 It works: First you identify all your debt and record them from the smallest to the largest.

Second, make minimum payments to all the other debts except the smallest. Next, use the

extra money you have and channel it all towards the smallest debt. Soon you will be

clearing it all up and on to the next payment. You will repeat the same in the next until

you have scraped out all the debt you had.

 Snowball for Tony: Make minimum payments to all debts except Nordstrom`s account.

Extra money earned within the month should all be channeled towards the Nordstrom`s

account. Keep channeling it monthly to it until the smallest debt is done. Do the same to

the smallest debt among those remaining.

a) Accounting cycle It is the process of identifying, classifying and recording transactions in the

company books to be used in the preparing of the organization`s financial statements. It includes

the following processes; Transactions occur, journal entries are made, posting to the general

ledger, preparing a trial balance, errors corrections, adjusting entries, preparation of financial

statement (balance sheet, income statement, cash flow statement and changes in equity), closing

of accounts (revenue and expense account)(Kimmel et al., 2018).

 b) Accounting equation

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It states that the sum of a company`s total liabilities and owner`s equity is equal to its total assets.

Hence the need of application of the double entry system in the recording of transactions. The

debit and credit entry always need to be equal. When the assets are more than the sum of owner`s

equity and liabilities, the owner is said to have a net worth of the excess figure. If the assets are

less the owner or organization is bankrupt.

4) Cash flow analysis

It requires the company to come up with a statement of cash flow to be analyzed. Through a

cashflow analysis a business is able to keep track of money coming in and money going out of

the business (Li et al., 2017). This is really important as it enables the company know whether

they have enough cash to cater for operating expenses and pay their debts. Basically, cash flow

analysis enables the company make better informed financial decisions.

5) Role of financial managers

 Estimating the amount of capital required and decide on how to raise it if so needed

 Utilization of funds. They allocate funds to the most productive areas of the company and

where they are needed most.

 Source of funds: It is their job to evaluate the cheapest source of capital that the company

can afford.

 Determine the company`s optimal capital structure and ensure efforts are geared towards

maintaining it.

6) Sources of long-term finances

Share capital- it involves selling of units of the company to persons and organizations.

Retained earnings- this is part of the company`s profit set aside for future use 
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Debenture/bonds- these are debts advanced by the public to a company and have a coupon rate

that they gain interest with over a specified amount of time.

Lease financing- this provides a cheaper alternative to buying hence the company gets the

property it needs at a lower cost.

7) Investment opportunities in stocks and bonds

A stock is a unit of ownership in an organization. It is an investment into the company and the

company`s profit (Abramov et al., 2016). A shareholder`s return from investment is dividends on

profitable years. There are two types: ordinary shares and preference shares. The rate of return in

ordinary shares varies according to the company`s financial performance but for the preference

shares its fixed.

A bond earns interest over time. They are paid first before shareholders get their dividends. Their

coupon rate determines how much interest is earned annually. Interest earned is calculated using

the compound interest formula. There are three types of bonds: U. S treasury, municipal and

corporate bonds. Bonds are a cheaper source as they do not result in incurring of floatation cost

during issuing. 

8) Mutual funds

These are companies which pool money from various investors and use the amount raised to

invest in securities such as stocks and bonds. (Choi & Kronlund, 2018) This provides an

opportunity to small investors to enable them invest in high priced securities. The existence of

many investors enables easy and quick raising of capital when need arises.

A benefit realized from investing in a mutual fund is that through its professional administration,

better investments are made reducing the risks of making a bad investment. Also, in the case of a
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financial lose an investor is cushioned from experiencing it alone. In most cases the portfolio

invested in acts as a security making it safer to invest in a mutual fund (Press et al., 2017).

9) The Federal Reserve

Role: “It performs three primary functions: maintaining an effective, reliable payment system,

supervising and regulating bank operations and establishing monetary policies.” (West, 2019)

Purpose: It being the central bank of the united states it provides the nation with a safer, more

flexible and more stable monetary and financial system.

It supervises and regulates financial institutions and activities. This is of great importance as it

helps to avoid exploitation of the locals.

Promoting consumer protection and community development

Lender of last resort. The federal reserve acts as a source of finance to financial institutions when

they are stranded and the reserve is their last option. They offer their loans at a higher rate to

prevent them from borrowing. 

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References

Abramov, A. E., Radygin, A. D., & Chernova, M. I. (2016). Equity vs. Bonds for Long-term

Investors. Finansovyj žhurnal—Financial Journal, (3), 26-44.

Card, D. (2019). Why you need an emergency fund. Personal Finance, 2019(464), 3-4.

CHHABLANI, P. (2020). Sources of Finance (long term).

Choi, J., & Kronlund, M. (2018). Reaching for yield in corporate bond mutual funds. The Review

of Financial Studies, 31(5), 1930-1965.

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2018). Financial accounting: tools for business

decision making. John Wiley & Sons.

Li, R., Chan, Y. L., Chang, C. T., & Cárdenas-Barrón, L. E. (2017). Pricing and lot-sizing

policies for perishable products with advance-cash-credit payments by a discounted cash-

flow analysis. International Journal of Production Economics, 193, 578-589.

McAllister, E. (2018). A snowball's chance: Debt snowball vs. debt avalanche

Rabbani, A., & Yao, Z. (2017, September). Fragile Families’ Challenges for Emergency Fund

Preparedness. In 2018 Academic Research Colloquium for Financial Planning and

Related Disciplines.

West, R. C. (2019). Banking reform and the Federal Reserve, 1863-1923. Cornell University

Press. Ang, A., Green, R. C., Longstaff, F. A., & Xing, Y. (2017). Advance refundings of

municipal bonds. The Journal of Finance, 72(4), 1645-1682.