Financial management, in business, is the process of managing a company’s finances in a manner that makes it profitable and conforms to regulations. This requires both a detailed plan and hands-on implementation.
What is Financial Management?
Financial management is at the core of financial planning. It involves creating a business strategy and then monitoring all departments to ensure they stay on track. Solid financial management allows the CFO or Vice President of Finance to provide data that supports creating a long-range view, informs decisions about where to invest and gives insight on how to fund investments, liquidity and profitability, cash runway, and other important information.
ERP Software can be used to help finance departments achieve their financial goals. A Financial Management System combines many financial functions like accounting, fixed-asset management and revenue recognition. These key components are integrated to ensure real-time visibility of the financial health of a company and allow for day-today operations such as period-end close.
Financial Management: Objectives
Financial managers build on these pillars and help their companies in a variety ways.
Maximizing profits
You can provide insight about, for example, rising raw material costs that could cause an increase of the price of goods.
Cash flow and liquidity tracking
Assure that the company has sufficient money available to fulfill its obligations.
Monitoring compliance
Follow all applicable regulations, whether they are federal or state-specific.
Developing financial scenarios
These forecasts assume many outcomes depending on market conditions and are based the current state.
Manage relationships
Effectively dealing with shareholders and the boards directors
Scope of Financial Management
There are four main areas of financial management:
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Planning
The financial manager projects how much money is needed by the company to maintain positive cashflow, to allocate funds for growth or to add new products and services, and to deal with unexpected events.
Planning can be divided into T&E, workers and capital expenses.
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Budgeting
The company’s financial managers allocate the available funds to cover costs such as mortgages or rents and salaries. In an ideal world, there would be enough money to cover unexpected expenses and fund new business opportunities.
Companies typically have a master and sub budgets. These documents may cover, for example cash flow or operations. budgets can be static or flexible.
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Management and assessment of risk
Executives in line-of business look to their financial managers for assistance in assessing and providing compensating controls to address a variety risk factors, including:
- Market riskIt can affect the business’ investment and, in the case of public companies, stock performance and reporting. It may also reflect industry-specific financial risks, such as a pandemic impacting restaurants or the shift in retail to a direct–to-consumer model.
- Credit riskFor example, customers who fail to pay their invoices on time or the business having insufficient funds to meet obligations can adversely impact creditworthiness and appraisal, which determines your ability to borrow at favorable rates.
- Liquidity dangerFinance teams should monitor current cash flow, forecast future cash needs, and be ready for any freeing up of working capital.
- Operational riskThis is a general category that finance teams may not be familiar with. It could include information about the cyber-attack risk, whether you need to purchase cybersecurity insurance, your business continuity and disaster recovery plans, and what crisis management techniques are activated if a senior manager is charged with fraud or misconduct.
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Procedures
The financial manager determines the procedures that will be followed by the finance team to process and distribute financial data. This includes invoices, payments, reports and other financial information. These written procedures define who is responsible for making financial decision at the company, and who signs off.
Companies don’t have to start from scratch. There are many templates for policy and procedure for different types of organizations, including this one for non-profits.
Functions of Financial Management
More precisely, the activities of a Financial Manager in these areas revolve around forecasting and controlling expenses.
The FP&A function includes the issuing P&L Statements, analyzing which products or services have the highest profit margins or contribute the most towards net profitability, maintaining a Budget, forecasting future financial performance, scenario planning, and forecasting.
Key is managing cash flow. The financial manager must ensure there is sufficient cash to support day-to-day operations such as paying workers or purchasing raw material for production. Cash management, which involves monitoring cash flows within the business and out, is a method of managing cash.
Accounting principles include revenue recognition. Balance accounts receivable and turnover is an important part of strategic money conservation management. Although it may sound easy, this can be difficult for some customers. When do you decide to consider that money “yours”?
Tactical and strategic approaches to financial management
Tactically, financial management procedures control how you process daily transactions and perform the monthly financial close. They also compare actual spending to budgeted amounts and help you meet tax and auditor requirements.
A more strategic level, financial management feeds in to vital FP&A activities. Financial leaders use data for line-of business colleagues to plan future investments, spot potential opportunities, and build resilient companies.
Financial Management is important
Solid financial management forms the foundation for sound fiscal governance.
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Strategizing
Identifying financial actions that are necessary to help the company achieve its short and long-term financial goals. Leaders need insight into the current performance to plan.
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Decision-making
By providing current financial reports and data about relevant KPIs, we help business leaders make the right decisions regarding how to implement their plans.
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Controlling
Assuring that every department contributes to the vision while operating within budget and in accordance with strategy.
All employees can see the future and know where they are going with financial management.
What are the 3 Types of Financial Management?
You can group the functions described above into three types of more general financial management.
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Capital budgeting
It is about identifying the financial requirements of the company to meet its short- and longer-term goals. Which areas should capital funds go to support growth
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Capital structure
How to pay for operations or growth. If interest rates remain low, borrowing may be an option. A company might consider selling assets such as real estate or equity to raise funds from a private capital firm.
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Management of working capital
As we discussed, making sure you have enough cash to pay workers and purchase raw materials is key.
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What is Financial Management?
We have covered some examples in financial management in the “functions” section. Let’s now discuss how they all work together.
Let’s say the CEO wants to create a new toothpaste product. She will call her team to estimate the costs of producing the toothbrushes. The financial manager will then determine where these funds should come from, such as a bank loan.
The financial manager will purchase those funds and ensure that they are allocated to manufacturing toothbrushes in a cost-efficient manner. The financial manager will compile data that can be used to aid the management team to decide whether to invest the profits in producing more toothbrushes, starting a line or dividends to shareholders.
Throughout this process, the financial manager will make sure the company has enough cash available to pay the workers who are producing the toothbrushes. She will also evaluate whether the company spends as well as generates as much money than she expected when she budgeted.
Startups need financial management
As a startup founder, your financial management responsibilities include creating and adhering to a budget, evaluating profits and making sure bills get paid, as well as making sure customers pay you.
As the company grows, also adds finance and accounting staff. Financial management becomes more complex. It is important to ensure that employees get paid with accurate deductions, properly file taxes, and monitor for fraud.
