Financial management is the business function concerned with profitability, expenses, cash and credit, so that the “organization may have the means to carry out its objective as satisfactorily as possible;” the latter often defined as maximizing the value of the firm for stockholders. Financial managers
Financial managers (FM) are specialized professionals directly reporting to senior management, often the financial director (FD); the function is seen as ‘Staff’, and not ‘Line’.
Finance is one of the crucial prerequisites to start any business. Further, a sufficient corpus of funds and efficient financial management is required throughout a business’s lifetime and even when a company is sold or wound up. Therefore, funds need to be managed, regulated as per procedures, and monitored at every step of the business lifecycle. Financial managers
Any business that manages its finances better experiences exponential growth, and businesses that mismanage their financial resources and activities usually undergo losses or make lower profits. Let’s delve deeper into the world of financial management.
Financial management is generally concerned with short term working capital management, focusing on current assets and current liabilities, and managing fluctuations in foreign currency and product cycles, often through hedging (see Corporate finance § Financial risk management). The function also entails the efficient and effective day-to-day management of funds, and thus overlaps treasury management. It is also involved with long term strategic financial management, focused on i.a. capital structure management, including capital raising, capital budgeting (capital allocation between business units or products), and dividend policy; these latter, in large corporates, being more the domain of “corporate finance.”
- Profit maximization happens when marginal cost is equal to marginal revenue. This is the main objective of Financial Management.
- Maintaining proper cash flow is a short run objective of financial management. It is necessary for operations to pay the day-to-day expenses e.g. raw material, electricity bills, wages, rent etc. A good cash flow ensures the survival of company; see cashflow forecast.
- Minimization on capital cost in financial management can help operations gain more profit.
- Estimating the Requirement of Funds: Businesses make forecast on funds needed in both short run and long run, hence, they can improve the efficiency of funding. The estimation is based on the budget e.g. sales budget, production budget; see Budget analyst.
- Determining the Capital Structure: Capital structure is how a firm finances its overall operations and growth by using different sources of funds. Once the requirement of funds has estimated, the financial manager should decide the mix of debt and equity and also types of debt.
Relationship with other areas of finance
Two areas of finance directly overlap financial management: (i) Managerial finance is the (academic) branch of finance concerned with the managerial significance of financial techniques; (ii) Corporate finance is mainly concerned with the longer term capital budgeting, and typically is more relevant to large corporations.
Investment management, also related, is the professional asset management of various securities (shares, bonds and other securities/assets). In the context of financial management, the function sits with treasury; usually the management of the various short term financial legal instruments (contractual duties, obligations, or rights) appropriate to the company’s cash- and liquidity management requirements. See Treasury management § Functions.
The term “financial management” refers to a company’s financial strategy, while personal finance or financial life management refers to an individual’s management strategy. A financial planner, or personal financial planner, is a professional who prepares financial plans here.
Financial management systems
Financial management systems are the software and technology used by organizations to connect, store, and report on assets, income, and expenses.
Importance of Financial Management
The financial management of an organization determines the objectives, formulates the policies, lays out the procedures, implements the programmes, and allocates the budgets related to all financial activities of a business. Through a streamlined financial management practice, it is possible to ensure that there are sufficient funds available for the company at any stage of its operations. The importance of financial management can be assessed by taking a look at its core mandate:
- Availability of sufficient funds
- Maintaining a balance between income and expenses to ensure financial stability
- Ensuring efficient and high ROI
- Creating and executing business growth and expansion plans
- Safeguarding the organization against market uncertainties through ensuring buffer funds
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