Most individuals associate financial management with handling their own bank accounts, which includes paying their rent or mortgage, utilities, groceries, and sometimes even creating a monthly budget. However, commercial finance management is a far more involved endeavor. It entails managing and monitoring every dollar that comes into and goes out of the organization and taking action to maximize profitability and financial stability.
To gain a better understanding, let us dissect some of the primary objectives and roles of financial management.
What is Financial Management?
Controlling the flow of money into and out of a business is the goal of financial management. Selling goods or services, covering costs, keeping accurate records, and filing taxes are all necessities for every business. All of this is included in financial management, as are more intricate procedures like hiring staff, purchasing supplies, and filing paperwork for the government to demonstrate compliance with rules and laws.
When we discuss a company's financial management, we imply the process of supervising all these transactions. Financial management generally gets more difficult as a firm grows.
Financial management specialists are in charge of all funds entering and leaving the organization. Smaller businesses will typically employ one or more bookkeepers or accountants who collaborate with the bank to process these transactions and monitor cash flow. A chief financial officer (CFO), controller, head of finance, or someone with a position similar to these would frequently oversee whole finance teams at large corporations.
Making sure the business remains viable and never runs out of cash is the main responsibility of the finance staff, but it's not their only one. In addition, they have to manage venture capital, monitor investments, manage loans and debts, balance the books, manage public offers (i.e. selling firm stock on the open market), and handle venture money. In essence, the finance department safeguards the company's financial assets, keeps an eye on and regulates every transaction, and works to maximize profits.
Efficiency and stability can increase when an organization's financial management is in line with its aims and objectives. For the financial management cycle to be most effective, these components must cooperate.
1. Planning and budgeting
A corporation analyzes historical and present financial data to define financial targets, adjust goals, and make adjustments to the existing budget during this analytical phase of the financial management cycle. Typically, this phase would include both large-picture and granular planning; that is, a corporation will examine long-term financial plans, and daily operations, and attempt to connect financial targets to these actions.
Making a strategic financial plan for the business that is in line with goals for the following three to five years is the aim. Companies can set their specific budgets one fiscal year at a time. This is largely because a budget has a lot of moving components that can alter according to changes in the market.
2. Resource allocation
Anything a business utilizes to manufacture, produce goods, or provide services is considered a capital resource. Financial managers assess these resources and provide guidance on how best to allocate them based on factors including anticipated business development and financial objectives. Allocating resources effectively enables a corporation to establish a long-term financial plan that is centered around its goals. Professionals in financial management assist businesses by offering a framework for allocating capital resources and building a portfolio that, in light of the company's financial situation, will maximize income.
3. Operations and monitoring
This stage is essential for safeguarding against mistakes, fraud, noncompliance, and other variations in the distribution of cash, among other threats. Professionals in financial management ought to conduct routine financial analyses of cash flow and company activities. These recurring evaluations can detect other problems and assist reduce fraud. This proactive measure guarantees the uninterrupted functioning of a company's financial procedures by ensuring their authenticity and accuracy.
4. Evaluation and reporting
When necessary, financial management experts should assess an organization's current financial management system and suggest modifications. Financial data and reports are useful for evaluating the effectiveness and success of an existing system.
When assessing a financial management system, a financial management specialist may take into account factors including security, compliance, the necessity for company data, and the degree of support required. The company's size, industry, present financial status, and long-term objectives all affect these requirements.
Financial management experts should be able to provide evidence-based recommendations that can assist an organization in safely storing and handling financial data following applicable regulations, as well as utilizing such data when necessary.
How to work in finance management
You must have a bachelor's degree in business, economics, finance, or a similar discipline to work in finance management. Although not required, certification is strongly advised for professions in financial management. Employers frequently prefer to see at least five years of professional experience before making an offer for a financial management role. As a starting point in the field of finance management, typical careers include those of loan officer, junior tax accountant, personal finance advisor, or accountant.
Why is Financial Management Important?
Because it maintains a company's viability, financial management is important. Its primary objective is to prevent the company from going bankrupt. The most important problems that a firm can encounter are related to finance management, such as revenue loss (as in the case of the COVID-19 epidemic), natural disasters, strikes, wars, and so forth.
Beyond only ensuring a company's existence, sound financial management—and financial management software—can support its expansion and success. Teams in charge of finance have a wealth of resources at their disposal to support corporate expansion. Finance teams have three options when the economy is doing well and interest rates are low: they may borrow money from banks, raise money from venture capitalists, or go public by selling shares on the stock market. These funds can be used by the business to fund expansion into new markets, open additional sites, upgrade its equipment, and other initiatives. During unfavorable market conditions, such as a recession, financial management strategies could involve cost-cutting measures like terminating employees or closing unproductive sites.
Increasing profitability is a crucial aspect of managing finances. Teams in charge of finance, sales, and marketing collaborate frequently to determine the costs of the company's goods and services. To set the appropriate prices, they have to find a balance. Customers may flee to less expensive competitors if prices are too high; if prices are too low, the business may not make enough money to pay its bills. Similarly, one of the main duties of the finance team is cost control, whether it pertains to labor, rent, electricity, raw materials, or shipping prices.
Financial Management FAQs
What does financial management actually mean?
The administration of a business's finances, including all monies flowing into the company, all monies leaving, and any cash or assets held in reserve, is referred to as financial management.
What function does financial management serve?
Keeping the business solvent is the primary responsibility of financial management. Beyond that, sound financial management can support an organization's expansion and success.
What does an example of financial management look like?
When a financial management team decides how much money a business should borrow to invest in a new factory, product line, or service offering, that is an example of financial management.
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