No matter what business organization you are involved in, finance is clearly the lifeblood of any business. It is a must that businesses also be able to meet any liabilities related to business needs. All businesses should have the right finances to run operations successfully and efficiently. If a systematic plan for financial management is in place, a business can simply follow and accomplish its objectives. Whether it is a startup or a continual success in business, you will need a good understanding of financial management.
This blog explains the detailed concept of financial management, its importance, its types, and key components.
What is financial management?
Financial management is the strategic planning, organizing, directing, and managing of the financial objectives of an organization. Financial management can be derived from the application of management principles to financial assets, which is one of the most important of all management functions. Financial management objectives may include:
Maintaining a sufficient supply of funds
Ensuring that the shareholders receive good returns for their investments
Establishing real and safe investments.
Optimal and efficient allocation of funds.
Key Components of Financial Management
Financial Planning and Analysis
Financial planning is the process of deciding on short and long-term financial objectives based on the organization’s corporate vision and goals. Financial planning involves planning revenues, expenses, also cash flows in order to allow for the availability of funds for operations and investments.
Budgeting and Cost Control
It is creating a detailed plan for predicting an organization’s expected revenues and expenses over a future time period. A budget acts as a pathway for providing revenue, controlling costs, and maintaining financial goals.
Investment Decisions and Capital Budgeting
Finance managers assess potential investments to know which particular projects or investments are likely to provide superior returns and sustained growth over the long term. These are usually examined using capital budgeting processes by selecting either net present value (NPV) analysis, internal rate of return (IRR), or payback period.
Financial Reporting and Compliance
Financial accounting and responsibility need proper preparation and reporting in a timely manner to ensure transparency, accountability, compliance, etc. Competing balance sheets, income statements, cash flow, notes, etc, help stakeholders to use them and understand the organization’s financial performance, liquidity, solvency, and debt risks.
Procedures
Procedures are another element or dimension of planning and analysis. The finance department develops procedures to process and share invoices, reports, payments, and other financial information. These written policies identify the responsible person and the authority for making decisions.
Main types of financial management
- Corporate Financial Management
This area is focused on the funding and investment decisions of an organization. This includes management of the capital structure, the proportionate use of debt and equity financing, and their investment decisions.
- Personal Financial Management
This area of financial management is focused on personal finances and the total financial resources of individuals. It is related to individuals involved in budgeting, saving, investing, protecting their assets through insurance, providing for the future through estate planning, etc.
- International Financial Management
This area involves the financing and investment of international operations, which relates to budget decisions, currency risk minimization, and foreign operations investment decisions.
- Non-Profit Financial Management
This area relates to and involves the financial management of not-for-profit organizations, like, fundraising and gaining grants.
- Public Financial Management
High focus on government entities, financial management, and planning decisions definitely correlates to budget development, revenue collection, expense management, etc.
Why is financial management important?
Management of organizational finances involves creating and adhering to financial regulations to manage the organization to achieve its goals. Effective financial management supports the decision-making process, optimization of profits, organizational stability, management of risks, etc.
Optimal Resource Allocation
The definition and purpose of financial management for organizations ultimately enable to allocation of resources to limit wastage and maximize productivity. Organizations can meet their strategic aims given their parameters of success and the envelope of their performance parameters by successfully managing resources.
Strategic Decision-Making
Effective financial management can be a good source of information for organizational levels to make strategic decisions. Information regarding financial data, performance metrics, and even rudimentary forecasting of the future allows decision-makers to maximize the strategic goals of the organization, achieve their strategic aim, and limit risk.
Stakeholder Confidence and Trust
Clear and concise financial management speaks to all stakeholders, investors, creditors, customers, employees, etc, about the soundness of the company. Being responsive to timelines and managing financial data following ethical polices is a must.
Long-Term Financial Health
A financial management strategy creates longer financial health and value for shareholders. Also, provides the monetization of shareholder wealth, attracts capital investment for development, and facilitates sustainable competitive growth advantages in market changes.
Risk Mitigation
Generally, financial management facilitates a great level of risk identification, assessment, and mitigation of threats to the financial health of an organization. Using risk management tools such as diversification, management hedging, insurance, and contingency planning, organizations can manage risk and foresee market discomfort, changes in the economy, and operational discomfort.
Conclusion
Financial management is simply called corporate finance or business finance. The business and corporate finance sector typically find it difficult to survive or be functional without understanding areas of business financial management. It is all the fronts discussed in this paper that can help in maintaining business sustainability and health. It can help take ownership of costs, maximize revenue, and rationalize and manage growth as prudently as possible. Financial management is essential to help formulate a business’s financial future.
Visit APAC Entrepreneur for more blogs.