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What Is Short-Term Financial Management?

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  • Written By: K. Kinsella
  • Edited By: Shereen Skola
  • Last Modified Date: 21 November 2016
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Short-term financial management involves budgeting and making financial plans for periods of one year or less. Some long-term financial obligations such as mortgage payments have to be factored into the equation, but short-term financial management typically involves balancing short-term income and expenses. Businesses, governments and individuals have to create short-term financial plans to ensure that obligations to creditors are paid and that sufficient funds are raised to cover other upcoming costs.

Within the business arena, short-term financial management involves managers making departmental budgets that detail short-term costs such as inventory purchases, over-time costs, marketing and one-off expenses such as cash purchases of equipment or buildings. Business owners and accountants examine data related to past sales results as well as client orders and use that information to project short-term revenue. A firm may reduce the employees' scheduled hours or eliminate discretionary expenses if anticipated short-term expenses exceed projected income. In the absence of a budgets and other types of short-term financial management, firms could become insolvent because cash shortfalls would not be detected until funds were depleted.

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Loans are an important component of short-term financial management at businesses. Lenders tend to charge higher interest rates on longer term debts so many business owners attempt to keep costs low by taking out a series of short-term loans rather than one long-term debt. In some circumstances, this strategy can backfire since interest rates on short-term debt are more sensitive to economic and political events whereas rates on long-term debts are less likely to rise as the result of one event such as a stock market downturn.

Individuals create short-term budgets to cover day-to-day expenses such as food, energy and transportation costs. These costs are subject to change due to factors such as inflation so individuals cannot factor these variable expenses into long-term budgets. Payments on credit cards and other types of revolving debt are normally factored into short-term financial management plans rather than long-term plans because the balances and interest rates on these products can change on a regular basis. Commission based employees have to spend more time creating short-term financial plans than salaried employees because the commission based employees' actual wages may vary on a monthly or a weekly basis.

Funds for short-term expenses are typically kept in highly liquid accounts such as transactional bank accounts, certificates of deposit, short-term bonds or low-risk mutual funds. These types of investments are are not prone to high levels of principal fluctuation. Stocks and other types of mutual funds are much more volatile and therefore not ideal for short-term investing. Laws in some nations require banks and insurance firms to keep a certain amount of cash in highly liquid instruments so as to ensure that these institutions have sufficient funds on hand to cover short-term obligations.

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