Financial Management: Scope, Objectives, and Importance

Financial Management in business is the art of managing a company’s finances to be successful and comply with regulations. It requires both a plan at the top and hands-on execution.

What is Financial Management?

Financial Management, at its core, is the process of creating a business plan and keeping all departments on track. Solid financial Management allows the CFO/VP of finance to create a long-term vision, inform decisions about where to invest and provide insights into how to fund these investments, liquidity, profitability and cash runway.

ERP software is a tool that finance teams can use to achieve their goals. A financial system integrates several financial functions such as accounting, fixed asset management, revenue recognition, payment processing, and accounting. A financial management system integrates these key components to provide real-time visibility into a company’s financial status and facilitate day-to-day operations like closing periods.

Tactical vs. strategic financial Management

Financial management procedures are the tactical basis of how you handle daily transactions, perform monthly financial closes, compare actual spending with what was budgeted, and ensure that you comply with auditor and tax requirements.

Financial Management is a strategic function that feeds into vital FP&A (Financial Planning and Analysis) and visioning activities. Finance leaders use data to assist line-of-business colleagues in planning future investments, identifying opportunities, and building resilient businesses.

Let’s take a look at each angle.

Financial Management is important.

Solid financial management is the foundation of solid fiscal governance.

Identifying what financial actions are necessary to help the company achieve its short-term and long-term goals. For example, leaders need to understand current performance to plan.

Decision-making – Helping business leaders make decisions and execute plans. We provide up-to-date financial information and data about relevant KPIs.

Controlling or ensuring that each department contributes to the vision, is within budget, and aligns with strategy.

Employees can see where the company is going and see its progress with effective financial Management.

Financial Management Objectives

Financial managers can help their company by building on these pillars in many ways.

Maximizing Profits By providing insight on, for instance, rising raw material costs that could trigger an increase in goods sold,

It tracks liquidity and cash flow to ensure that the company has sufficient money to meet its obligations.

Ensuring compliance to state, federal, and industry-specific regulations.

Developing financial scenarios using the current state of the business and forecasts that can assume many outcomes depending on market conditions.

Effectively dealing with Investors and the Boards of Directors.

It’s all about applying sound management principles to its financial structure.

Scope of Financial Management

Four major areas of financial management are:

Plan

The financial manager projects the amount of money the company will require to maintain positive cash flow, grow, add new products, or deal with unexpected events. He shares this information with his business colleagues.

You can break down planning into three categories: T&E, workforce, capital expenses and indirect and operation expenses.

Budgeting

The company’s financial manager determines how much money is available to pay for expenses such as rents or mortgages, salaries, wages, T&E, and other obligations. The ideal situation is to have some money left over for emergencies and help fund new business opportunities.

Assessing and managing risk

Financial managers are the ones that line-of-business executives turn to provide compensating controls for a range of risks.

• Market Risk: This affects a business’s investments, reporting, and stock performance. This may also be a sign of financial risk specific to the industry. For example, a pandemic affects restaurants or the transition to a direct-to-consumer model.
• Credit risk – The consequences of customers not paying their invoices in time and the business has no funds to meet obligations. This can adversely affect creditworthiness and value, determining your ability to borrow at attractive rates.
• Liquidity Risk: Finance departments must monitor cash flow and estimate future cash requirements, and be ready to release working capital when necessary.
• Operational Risk: This category is catch-all and new to some finance departments. This could include the possibility of a cyber-attack, whether to buy cybersecurity insurance and what disaster recovery and business continuity plans are in effect. It also includes crisis management procedures activated if a senior executive has been accused of fraud or misconduct.

Procedures

The financial manager establishes procedures for how the finance department will distribute and process financial data such as invoices, payments, and reports with accuracy and security. These procedures outline who is responsible for making financial decisions for the company and who signs off on them.

There are many policy and procedure templates that companies can use to help them avoid starting from scratch.

Functions of Financial Management

A financial manager’s activities within the above areas are more practical and revolve around controlling and planning expenditures.

The FP&A function involves:

• The issuing of P&L statements.
• Analyzing what product lines or services have a high-profit margin or contribute to net profitability.
• Maintaining a budget.
• Projecting the company’s financial performance in the future and planning for it.

Cash flow management is another important aspect. Cash flow management is also important. The financial manager must ensure that there is enough cash available for daily operations like paying workers or purchasing raw materials. Cash management is controlling cash flow within and outside the company.

Financial Management also includes revenue recognition. This is reporting revenue to the company according to standard accounting principles. The key component of strategic cash management and preservation is the balance of accounts receivables turnover ratios. It may seem simple, but this is not always the case. Customers might pay for your services months later than you expect. At what point should you consider the money “yours” and report the good news about your service to investors?

The final step in managing financial controls is to analyze how its finances compare with its budgets and plans. Financial ratio analysis is a method of comparing line items in the company’s financial statements.

What are the Three Types of Financial Management

These functions can be combined into three types of financial management.

Capital budgeting is a process that identifies what financial actions are necessary to help the company achieve its long- and short-term goals. To support growth, where should capital funds go?

Capital structure – How to pay for growth and operations. If interest rates are low, taking on debt may be the best option. A company might also look for funding from a private equity firm. In this case, it may consider selling real estate and equity.

As we’ve discussed, working capital management makes sure that there’s enough cash available for daily operations like paying workers or purchasing raw materials.

What is Financial Management?

In the “functions” section, we have already covered financial management examples. Let’s now see how they all interact.

Imagine that the CEO of a toothpaste company wants to launch a new product, toothbrushes. Her team will estimate the cost of making the toothbrushes, and the financial manager will determine where the funds should be coming from.

The financial manager will secure those funds and make sure they produce toothbrushes in the best cost-effective manner. If the toothbrushes are successful, the financial manager will collect data to assist the management team in deciding whether to use the profits to produce more toothbrushes or start a line of mouthwashes, pay dividends to shareholders, or take other actions.

The financial manager will ensure that the company has enough cash to pay new employees who produce the toothbrushes. She will also examine whether the company is spending and generating as much cash as she anticipated when she budgeted.

Startups: Financial Management

Financial Management is a responsibility that startups have from the beginning. This includes establishing and maintaining a consistent budget with the business plan, evaluating how profits will be used, and making sure that bills are paid, and customers pay you.

As the company expands, it hires more finance contractors and staff to manage its finances. Ensure that your employees are paid correctly, file taxes and financial statements accurately and avoid fraud.

All of this relates to the discussion about balancing tactical and strategic. You can answer the big question: Are our products and services profitable? Can we afford to hire new employees or launch a new product? What will the next 12-18 months bring for the company?

Solid financial Management gives you the tools and processes to answer these questions.