The technique of managing a business’s finances in a way that enables it to be profitable and compliant with rules is known as financial management. That requires both a comprehensive strategy and hands-on implementation.
What Is Financial Management?
Financial management is fundamentally the process of creating a business plan and ensuring that it is followed by all departments. A long-term vision may be created with the help of data that the CFO or VP of finance can supply. This data also helps with investment decisions and provides information on how to finance those investments as well as liquidity, profitability, cash runway, and other factors.
These objectives can be accomplished by finance teams using ERP software: Accounting, fixed-asset management, revenue recognition, and payment processing are just a few of the financial tasks that are combined in a financial management system. A financial management system ensures real-time visibility into the company’s financial situation while streamlining daily operations, such as period-end close procedures.
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Financial Management’s Goals
Financial managers support their companies in a number of ways based on those pillars, including but not limited to:
Increasing profits
Describe how, for instance, rising raw material costs could lead to an increase in the price of the commodities sold.
Monitoring cash flow and liquidity
Make sure the business has sufficient funds on hand to fulfill its responsibilities.
Ensuring adherence
Observe local, national, and sector-specific regulations.
Creating financial simulations
These are based on the existing state of the company and predictions that make a variety of assumptions about potential outcomes from market conditions.
controlling relationships
effective communication with the boards of directors and investors.
In the end, it all comes down to how the financial structure of the business is managed effectively.
Scope Of Financial Management
Financial management is divided into four categories:
1. Planning
The financial manager forecasts how much money the company will need to sustain positive cash flow, allocate funds to grow or add new products or services, deal with unexpected events, and distributes that information with business partners.
Planning can be divided into categories such as capital expenses, T&E and workforce, and indirect and operational expenses.
2. Budgeting
The financial manager allocates the company’s available finances to fulfill costs such as mortgages or rents, salaries, raw supplies, employee T&E, and other obligations. Ideally, there will be some money left over for emergencies and new company ventures.
Companies often have a master budget as well as sub-budgets covering topics such as cash flow and operations; budgets can be static or changeable.
3. Risk management and risk assessment
Line-of-business leaders rely on their finance managers to assess and offer compensating controls for a wide range of risks, including:
- Market risk
Market Risk has an impact on corporate investments as well as reporting and stock performance for public firms. Financial risks specific to the business, such as a pandemic hitting restaurants or a move in retail to a direct-to-consumer model, may also be shown.
- Credit risk
The consequences of, for example, clients failing to pay their invoices on time, resulting in the firm lacking finances to meet obligations, which may have a negative impact on creditworthiness and valuation, which affects the ability to borrow at favorable rates.
- Risk of liquidity
Finance teams must monitor current cash flow, forecast future cash requirements, and be ready to release working capital as needed.
- Operational risk
This is a broad category that is new to some finance teams. It could involve the danger of a cyber-attack and whether to get cybersecurity insurance, what disaster recovery and business continuity strategies are in place, and what crisis management techniques are activated if a senior executive is accused of fraud or misbehavior.
4. Procedures
The financial manager establishes protocols for how the finance team will securely and accurately collect and communicate financial data such as invoices, payments, and reports. These written rules also specify who is in charge of making financial decisions at the company and who approves such decisions.
Companies do not have to start from scratch; there are policy and procedure templates available for a wide range of organizations kinds, including this one for NGOs.
Financial Management Functions
In practice, a financial manager’s actions in the aforementioned categories focus on budgeting, forecasting, and regulating spending.
The FP&A department is responsible for producing profit and loss statements, determining which product lines or services have the highest profit margins or contribute the most to net profitability, monitoring the budget, estimating the company’s future financial performance, and scenario planning.
Cash flow management is also essential. The financial manager must ensure that there is enough cash on hand for day-to-day activities, such as paying employees and purchasing raw materials for manufacturing. This entails monitoring cash as it flows in and out of the business, a procedure known as cash management.
Finally, monitoring financial controls entails examining how the company’s financial performance compares to its plans and budgets. Financial ratio analysis, in which the financial management evaluates line items on the company’s financial statements, is one method.
Tactical vs. Strategic Financial Management
Financial management procedures regulate how you conduct daily transactions, perform the monthly financial close, compare actual expenditure to budgeted spending, and guarantee you fulfill auditor and tax obligations.
On a more strategic level, financial management feeds into critical FP&A (financial planning and analysis) and visioning operations, in which finance leaders use data to assist line-of-business colleagues in planning future investments, identifying opportunities, and building resilient businesses.
The Value of Financial Management
Solid financial management serves as the foundation for the three pillars of good fiscal management:
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Strategizing
Identifying what has to happen financially in order for the organization to meet its short- and long-term objectives. Leaders, for example, want insights into present performance for scenario planning.
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Decision-making
By delivering up-to-date financial reports and data on critical KPIs, we assist business executives in determining the best method to execute on goals.
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Controlling
Assuring that each department contributes to the vision while staying within budget and in line with strategy.
All employees know where the company is going and have visibility into progress when financial management is effective.
What Are The Three Types Of Financial Management?
The functions listed above can be classified into three types of financial management:
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Capital budgeting
refers to determining what financial events must occur in order for the company to meet its short- and long-term objectives. Where should capital money be spent to stimulate growth?
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Structure of capital
Determine how to fund operations and/or expansion. Taking on debt may be the best option if interest rates are low. A company may also seek capital from a private equity firm, explore selling assets such as real estate, or sell equity, if applicable.
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Working capital management
As previously noted, involves ensuring that there is enough cash on hand for day-to-day activities such as paying employees and purchasing raw materials for production.
This can also be a major Types Of Financial Management.
- Investment decisions
- Financial Decisions
- Dividend Decision
Further Explanation Of Investment Decisions: An investment decision is a well-planned action that allocates financial resources to obtain the highest possible return. The decision is made based on investment objectives, risk appetites, and the nature of the investor, for example, whether they are an individual or a firm.
Further Explanation Of Financial Decisions: Financial decisions are those made by managers concerning a company’s finances. These are critical decisions for the company’s financial well-being. These decisions can pertain to asset acquisition, financing and fundraising, day-to-day capital and expenditure management, and so on.
Further Explanation Of Dividend Decision: A Dividend Decision is the portion of profits distributed to shareholders. The decision at stake here is how much of the company’s profit after taxes is to be distributed to shareholders.
What Is an Example of Financial Management?
In the “functions” section above, we discussed various examples of financial management. Let’s look at how they all operate together now:
Assume the CEO of a toothpaste firm want to launch a new product: toothbrushes. She’ll ask her team to estimate the cost of making the toothbrushes, and the financial manager to decide where the funding should come from, such as a bank loan.
The financial manager will obtain that money and guarantee that they are used to produce toothbrushes in the most cost-effective manner feasible. Assuming the toothbrushes sell well, the finance manager will collect data to assist the management team in deciding whether to use the proceeds to manufacture more toothbrushes, launch a line of mouthwashes, pay a dividend to shareholders, or take some other action.
Throughout the process, the financial manager will make certain that the company has enough cash on hand to pay the new employees who will be producing the toothbrushes. She will also examine if the company is spending and making as much money as she anticipated while budgeting for the project.
Startup Financial Management
To begin, financial management tasks inside a company include developing and adhering to a budget that coincides with the business plan, determining what to do with revenues, and ensuring that bills are paid and customers pay you.
Financial management becomes more sophisticated when the company expands and hires finance and accounting contractors or employees. You must ensure that your employees are paid accurately, that taxes and financial accounts are filed correctly, and that errors and fraud are avoided.
