What Is Financial Management?

 

Objectives of Financial Management

In addition to these pillars financial managers support their businesses by assisting them in various ways, which include but are not just:

Maximizing profits

Give insight into the rising prices of raw materials that could increase the price of the goods that are sold.

Liquidity and cash flow

Make sure the business can afford the funds to cover its obligations.

Ensuring conformity

Stay up-to-date with a specific state, federal, and industry regulations.

Developing financial scenarios

They are based on the company’s actual condition along with forecasts, which take into account the possibility of a variety of outcomes based on the possibility of market conditions.

Create relationships

Being able to effectively communicate with investors as well as the boards of directors.

In the end, it’s about applying the right management practices to the organization’s financial structure.

Financial management is comprised of four major areas:

Planning

The financial analyst estimates how much cash the business will require to keep cash flow positive or allocate funds to increase or develop new services or products and handle unexpected events. He also shares this information with business associates.

Planning could be broken down into categories, including capital costs, T&E, workforce, and operational and indirect expenses.

Budgeting

The financial manager distributes the funds of the business to cover expenses, like rents or mortgages and salaries, raw materials employees’ T&E as well as other commitments. It is ideal to have some remaining to be saved to meet unexpected needs and to finance potential business ventures.

Businesses generally have a master budget, and might have sub-documents that cover, for instance, cash flow and operations; budgets may be dynamic as well as flexible.

Static and dynamic. Flexible Budgeting

Static Flexible
It remains the same regardless of significant modifications to the assumptions that were made during the making of plans. Adjusts according to changes in assumptions made in the process of planning.

The management and assessment of the risk

Line-of-business executives depend on their financial managers to evaluate and implement compensating controls to mitigate a variety of risks that include:

Risk of market

Influences the business’ investment and for public companies, the reporting process and performance of stock. Also, it could reflect financial risks specifically for the industry, like a pandemic that affects restaurants, or the transition of retail to the directly-to-consumer approach.

Risk of credit

The consequences are, for instance, the consequences of customers not paying their bills on time and the business lacking funds to fulfill obligations. This can negatively affect creditworthiness as well as appraisal, which affects the ability to borrow at favorable rates.

Risk of liquidation

Finance teams need to monitor the flow of cash, forecast the future needs for cash, and are ready to release working capital when needed.

Operational Risk

The term “catch-all” refers to a classification that is new to certain finance teams. It can include, for instance, the possibility of cyber-attacks and the need to buy cybersecurity insurance and what disaster recovery and continuity plans are in place, and what the best crisis management procedures are activated if a top executive gets suspected of misconduct or fraud.

Procedures

The finance manager establishes procedures for how the finance department will handle and distribute financial data such as invoices, payments, and reports, in a manner that is secure and precise. These procedures are also a guideline for who is accountable for making business decisions regarding finances and who is the person who signs to approve those decisions.

Businesses don’t have to start with a blank slate; there are templates for policy and procedure available for all kinds of organizations, like this one for non-profits.

Functions of Financial Management

In addition, a financial manager’s responsibilities in these areas are centered around planning, forecasting expenditures, and controlling them.

The FP&A function entails the issuance of P&L statements and analyzing which lines of product or services offer the greatest profit margins or contribute to the highest net profit, maintaining the budget, and forecasting future financial performance as well as scenario planning.

The management of cash flow is important. Financial managers must ensure there’s sufficient cash in the bank to support day-to-day activities, such as hiring workers or purchasing raw materials to make products. This means monitoring the flow of cash within as well as out of the company and out, which is known as cash management.

Alongside cash management, financial management also includes revenue recognition, which is the process of reporting the revenue of the business by standard accounting practices. The balancing of the ratios of turnover in accounts receivable is an essential element of strategic cash conservation and management. This might sound easy however, it’s not always so simple for all companies. customers may pay for months after they have received your service. What is the point at which you decide to consider the cash “yours” — and do you report that positive information to your investors?

5 Tips to Improve Your Accounts Receivable Turnover Ratio
Invoice frequently and accurately. If invoices aren’t paid in time, the money may not be received at the right time.
Always specify the terms of payment. It is impossible to enforce policies that aren’t disclosed to customers. If you change your policy then make sure you announce them.
Provide multiple options payment options. The B2B payment options are now on the way. Have you thought about using the possibility of a payment gateway?
Set follow-up reminders. Don’t wait until the customer is in arrears before you begin the collection process. Make sure you are proactive but don’t be irritating, by sending reminders.
Offer discounts on cash or prepaymentsCash(less) can be the king in retail and can cut down on AR costs by making it easier for customers to make prepayments instead of using your standard credit terms for customers.
Find out more about maximizing the ratio of your AR turnover.

Additionally, controlling financial controls requires analyzing how the business is doing financially in comparison to its budgets and plans. Methods for the analysis are to use financial ratios which is where the financial manager examines the line items in the financial statements of the company.

Strategic Vs. Tactical Financial Management

At a tactical level, the financial management processes control how you manage daily transactions, conduct your monthly close of financials, evaluate the actual expenditure to plan and make sure you’re meeting the tax and audit requirements.

At a higher strategic level Financial management is a key component of crucial financial planning and analysis (financial analyses and planning) and visioning activities in which finance managers make use of data to assist line-of-business colleagues to make investments for the future to identify opportunities, and create strong companies.

Importance of Financial Management

A solid financial management system is the basis for three foundations of good fiscal governance:

Strategizing

The process of determining what must be accomplished for the business to meet its long-term and short-term objectives. Leaders require insight into their current financial performance for planning scenarios such as.

Decision-making

Assisting business leaders in determining which is the best method for executing their plans by providing the most current financial reports and information regarding relevant KPIs.

Controlling

ensuring that each department contributes to the strategy and is working within the budget and aligned with the strategy.

Through effective financial management, everyone knows what direction the company is taking and have a clear view of the direction of progress.

What Are the Three Types of Financial Management?

The above-mentioned functions can be classified into three broad types of financial management

Capital budgeting

It is about determining the things that need to be done financially to help the company achieve its short and long-term objectives. What are the places where capital funds should be spent to boost growth?

Capital structure

Decide how to finance expansion or operations. When interest rates are at a low level, then taking on debt may be the most efficient option. The company could also solicit the funding of private equity firms Consider selling assets such as real estate, or, if appropriate selling equity.

Management of working capital

As we’ve discussed, it’s making sure that you have sufficient cash in the bank to support day-to-day activities, such as hiring workers or purchasing raw materials needed for production.

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