Short-term financial management involves budgeting for periods of one year or less, balancing short-term income and expenses, and factoring in long-term obligations. Businesses, governments, and individuals create short-term financial plans to ensure obligations are paid and future costs are covered. Short-term financial management involves creating departmental budgets, examining past sales data, and using loans to keep costs down. People create short-term budgets for everyday expenses and hold funds in highly liquid accounts.
Short-term financial management involves budgeting and making financial plans for periods of one year or less. Some long-term financial obligations, like mortgage payments, need to be factored into the equation, but short-term financial management typically involves balancing short-term income and expenses. Businesses, governments, and individuals must create short-term financial plans to ensure that obligations to creditors are paid and enough funds are raised to cover other future costs.
Within the business realm, short-term financial management involves managers creating departmental budgets that detail short-term costs, such as inventory purchases, overtime costs, marketing, and one-time expenses, such as cash purchases. of equipment or buildings. Business owners and accountants examine data related to past sales results, as well as customer orders, and use that information to project near-term revenue. A company may reduce scheduled employee hours or eliminate discretionary expenses if anticipated short-term expenses exceed projected revenue. In the absence of budgeting and other types of short-term financial management, companies could become insolvent because cash shortfalls would go undetected until funds run out.
Loans are an important component of short-term financial management in companies. Lenders tend to charge higher interest rates on longer-term debt, so many business owners try to keep costs down by taking out a series of short-term loans instead of one long-term debt. In some circumstances, this strategy can backfire as interest rates on short-term debt are more sensitive to economic and political events, while rates on long-term debt are less likely to rise as a result of a event, such as a stock market crash.
People create short-term budgets to cover everyday expenses, such as food, energy, and transportation costs. These costs are subject to change due to factors such as inflation, so people cannot include these variable expenses in long-term budgets. Credit card payments and other types of revolving debt are typically considered in short-term financial management plans rather than long-term plans because the balances and interest rates on these products can change dramatically. regular. Commission-based employees have to spend more time creating short-term financial plans than salaried employees because the actual salaries of commission-based employees can fluctuate on a monthly or weekly basis.
Funds for short-term spending are generally held in highly liquid accounts, such as transaction bank accounts, certificates of deposit, short-term bonds, or low-risk mutual funds. These types of investments are not prone to high levels of principal fluctuations. Stocks and other types of mutual funds are much more volatile and therefore not ideal for short-term investments. Laws in some nations require banks and insurance companies to hold a certain amount of cash in highly liquid instruments to ensure that these institutions have sufficient funds available to cover short-term obligations.
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