Financial Management Explained: Objectives and Importance
In business, financial management is the ability to manage a company’s finances successfully and in accordance with the rules. This calls for a high plan and a high starting position.
What is Financial Management?
In principle, financial management is the norm when developing a business plan, and care is taken so as not to interfere with all departments. Proper financial management allows CFOs or CFOs to provide data that helps create a long-term outlook, inform decisions about where to invest and insights into financing, liquidity, profitability, flow money and so on.
ERP software can help financial teams achieve the following goals: A financial management system combines various financial functions, such as accounting, asset management, revenue recognition and payment processing. By combining these key elements, the financial management system provides a real-time view of a company’s financial position and simplifies the day-to-day operations as well as the closing process. of times.
Strategic vs. Tactical Financial Management
At the tactical level, financial management techniques control how you work from day-to-day trading, monthly financial closures, comparison of current and planned expenses, and compliance with auditors and tax requirements.
At the strategic level, financial management responds to FP&A (financial planning and analysis) and the necessary vision in which financial managers use data to assist, build opportunities and build trust with potential investment business partners.
Let’s look at both perspectives.
Importance of Financial Management
Good financial management supports the three pillars of good budget management:
A strategy, that is, determining what needs to happen financially for a company to achieve its short and long-term goals. For example, administrators need information about existing functions to create scenarios.
Make decisions or help entrepreneurs decide how best to implement their plans by providing up-to-date financial statements and information on key KPIs.
Check or ensure that each department promotes the vision and adheres to the budget and strategy.
With effective financial management, all employees know where the business is going and see progress.
Objectives of Financial Management
From this position onwards, CFOs will assist your business in a number of ways, including, but not limited to:
For example, the higher the information yield, the higher the raw material cost, which increases the value of the product.
Revenue and revenue monitoring to ensure that the company has sufficient resources to meet its obligations.
Be sure to follow state, federal, and business laws.
Market conditions should be based on the current state of the economy and forecasts that predict multiple returns based on market potential.
Work well with investors and the government.
Finally, the application of the principles of efficient and effective management to the financial structure of the company.
Scope of Financial Management
Financial management involves four main factors:
A finance manager expects how much money a company needs to make a profit, spend resources on growth or add new products or services, manage events never seen before and share this information with business colleagues.
Planning can be divided into categories, including investments, T&E and operations, and costs and operations.
The finance manager uses the company’s available resources to cover expenses such as mortgages or rent, salaries, raw materials, R&D personnel and other obligations. Ideally, there is some caveat for emergencies and new business opportunities.
Most companies have large amounts of capital and may have separate data such as cash and transactions; The capital will be the same or variable.
Managing and assessing risk
Line-of-business executives look to their financial managers to assess and provide compensating controls for a variety of risks, including:
- Market risk: Impact on the company’s investments and, in the case of listed companies, on reporting and return on shares. Industry-specific economic risks may also be reflected, such as a pandemic affecting restaurants or the shift of trade to a direct-to-consumer model.
- Credit risk: For example, the effect is that customers do not pay their bills on time and the company does not have the resources to fulfill its obligations, which can have a negative impact on authorization and compliance, leading to a loan at a good interest rate.
- Liquidity risk: Investors should monitor current finances, anticipate future economic needs and be willing to release investments when needed.
- Operational risk: This is an all-encompassing category and new to some finance teams. This can e.g. covers the risk of a cyber attack and whether or not to purchase cybersecurity insurance, how recovery and business continuity plans are established, and how crisis management practices are activated when a senior employee is accused of fraud or abuse.
The CFO sets out procedures for how the financial team securely processes and distributes financial data, such as invoices, payments, and reports. These written procedures also describe who is responsible for making financial decisions in the company – and who signs those decisions.
Business doesn’t have to start from scratch; Policy and procedure templates are available for different types of organizations, such as nonprofits.
Functions of Financial Management
In practice, the financial manager’s activities in these areas revolve around planning and forecasting and controlling costs.
The FP&A function includes the preparation of income and loss statements, the analysis of product or service lines whose profit margins are most conducive to net profitability, budget management and forecasts of financial results. the future of the company.
Cash flow management is also required. The finance manager must ensure that there is sufficient money for day-to-day operations, such as paying employees and purchasing raw materials for production. This includes tracking cash flow, because cash flow is both in and out of cash, a practice called cash management.
In addition to money management, financial management includes the recognition of income or the recognition of income of an entity in accordance with standard accounting principles. Balancing the level of debt transfer is an important part of strategic cash conservation and management. This may seem simple, but this is not always the case: in some stores, customers can pay on a Monday when they receive your service.
Finally, financial management involves examining how a company performs its financial results according to plans and budgets. Methods for doing this include analyzing the financial statements, where the CFO compares the rules to the company’s financial statements.