Explaining Financial Management: Its Purpose, Goals, and Objectives | Financial Management

December 4, 2023 Career Mantra

Explaining Financial Management: Its Purpose, Goals, and Importance in 2023

The technique of managing a business’s finances in a way that enables it to be profitable and compliant with rules is known as financial management. That requires both a comprehensive strategy and hands-on implementation.

Financial Management: What Is It?

Financial management fundamentally creates a business plan and ensures that all departments follow it. A long-term vision may be made with the help of data that the CFO or VP of finance can supply. This data also helps with investment decisions and provides information on how to finance those investments, as well as liquidity, profitability, cash runway, and other factors.

These objectives can be accomplished by finance teams using ERP software: Accounting, fixed-asset management, revenue recognition, and payment processing are just a few of the financial tasks combined in a financial management system. A financial management system ensures real-time visibility into the company’s financial situation while streamlining daily operations, such as period-end close procedures.

Financial Management’s Goals

Financial managers support their companies in several ways based on those pillars, including but not limited to the following:

Increasing profits

Describe how, for instance, rising raw material costs could increase the price of the commodities sold.

Monitoring cash flow and liquidity

Make sure the business has sufficient funds on hand to fulfil its responsibilities.

ensuring adherence

Observe local, national, and sector-specific regulations.

Creating financial simulations

These are based on the existing state of the company and predictions that make various assumptions about potential outcomes from market conditions.

controlling relationships

effective communication with the boards of directors and investors.

In the end, it comes down to incorporating sound management practices into the financial framework of the business.

Financial Management’s Purpose

The four main components of financial management are as follows:

Planning

The financial manager calculates the amount of cash the business will require to maintain a positive flow of cash, which allocate funds for expanding or the addition of upcoming goods or services, and deal with unforeseen events, and then communicates this information to other business associates.

Planning can be divided into different categories: capital costs, T&E and workforce, and indirect and operating costs.

Budgeting

The company’s financial management divides the available funds to pay for expenses such as mortgages or rent, salaries, raw supplies, T&E for employees, and other commitments. Ideally, money will be left over to set aside for unexpected expenses and finance new company ventures.

Businesses often have a master budget and additional documents covering specific topics like cash flow and operations. Budgets can be rigid or flexible.

Risk management and assessment are Line-of-business leaders which depend on their finance managers for identifying risks and they implement compensatory measures for them, such as:

Investments usually made by the respective company, as well as the reporting and stock performance for public corporations, are all impacted by market risk. It may also indicate industry-specific financial risks, such as a pandemic affecting restaurants or the retail transition to a direct-to-consumer model.

Credit danger

repercussions of, for instance, clients not paying invoices on time and the company not having the money to meet obligations may negatively influence creditworthiness and valuation, which determines the ability to borrow at advantageous rates.

Availability risk

Accounting and finance teams must monitor current cash flow, predict future cash requirements, and be ready to release working capital as necessary.

Operational hazard

This is a broad category that several financial teams are unfamiliar with. It might cover topics like the possibility of a cyberattack, whether or not cybersecurity insurance should be purchased, the existence of the disaster may recovery and business continuity plans, and the crisis management procedures that should be used if a senior executive is accused of fraud or misconduct.

Procedures

The financial manager establishes policies for how the finance staff will accurately and securely process and communicate financial data, such as invoices, payments, and reports. These written policies also specify who in the organisation is in charge of making financial decisions and who approves those decisions.

Policy and procedure templates are available for various organisations, such as NGOs, so businesses don’t have to start from scratch.

Financial Management’s Purposes

A financial manager’s responsibilities in the domains above centre on budgetary planning, forecasting, and management.

The FP&A role entails producing P&L statements, determining which product or service lines have the highest profit margins or contribute the most to net profitability, managing the budget, and projecting the company’s future financial performance and scenario planning.

Controlling the financial flow is also crucial. The financial manager is responsible for ensuring adequate money is available for daily tasks like paying employees and buying supplies for production. This entails managing the inflow and outflow of cash, a process known as cash management.

Financial management also includes revenue recognition or reporting the business’s revenue by generally accepted accounting rules. Strategic cash management and conservation include balancing accounts receivable turnover ratios, a critical component. Although it may seem straightforward, it isn’t always: Customers may pay at some businesses months after obtaining your service. When do you declare that money “yours” and inform investors of the good news?

Lastly, monitoring financial controls entails comparing the company’s financial performance to its plans and budgets. The financial manager can compare the line items on the company’s financial statements using techniques like financial ratio analysis.

Finance: Strategic vs Tactical Management

Financial management procedures control the tactical level of executing daily transactions, completing the monthly financial close, comparing actual expenditures to budgeted amounts, and ensuring you abide by auditor and tax regulations.

Financial management contributes to crucial FP&A (financial planning and analysis) and visioning activities on a more strategic level. Finance leaders use data to assist line-of-business colleagues in making future investment decisions, spotting opportunities, and creating resilient businesses.

Financial Management’s Value

Three pillars of strong fiscal governance are supported by sound financial management:

Strategizing

They are figuring out what financial changes are necessary for the business to meet its short- and long-term objectives. For example, leaders need insights into existing performance while preparing a scenario.

Decision-making

delivering current financial reports and information on pertinent KPIs to assist business leaders in making decisions regarding the best approach to accomplish goals.

Controlling

ensuring that each department works within its budget, by plan, and by contributing to the overall vision.

All employees have visibility into developments and know where the company is headed, thanks to efficient financial management.

What Three Forms of Financial Management Exist?

The tasks above can be divided into three different categories of financial management:

Identification of the financial requirements for the company to meet its short- and long-term objectives are related to capital budgeting. Which capital investments should be made to support growth?

capital arrangement

Decide how you will finance operations and expansion. While interest rates are low, taking on debt might be the wisest action. A business may think about selling assets like real estate or equity, or it may seek finance from a private equity firm.

working capital administration

Making sure there is adequate money on hand for daily operations, such as paying employees and buying raw materials for production, is essential, as was previously described.

What Is a Financial Management Example?

In the section titled “functions,” we discussed a few illustrations of financial management. Let’s discuss how they all interact now:

Let’s imagine that the CEO of a toothpaste firm wishes to launch a new toothbrush line. She will ask her staff to assess how much it will cost to make the toothbrushes and the financial manager to decide where the money should come from, such as a bank loan.

The financial manager will secure that money and ensure they are used in the most cost-effectively feasible way to produce toothbrushes. Assuming the toothbrushes are successful, the finance manager will compile information to assist the management team in deciding whether to use the proceeds to launch a line of mouthwashes, produce more toothbrushes, or pay a dividend.

The financial manager will make sure the business has enough money on hand at all times to pay the new employees who are making the toothbrushes. She’ll also assess if the company is making and spending as much money as she anticipated when she created the project’s budget.

Managing Money for Startups

Making and adhering to a budget that aligns with the business plan, determining what to do with revenues, and ensuring that your bills and customers pay you are all initial financial management tasks for startups.

Financial management becomes more difficult as a company expands and hires more finance and accounting contractors or employees. You must ensure that your employees are paid accurately with deductions taken out, file your taxes and financial accounts accurately, and keep an eye out for fraud and errors.

All of this brings us full circle to balancing tactical and strategic goals. You can find out the big questions, like, “Are our goods and services profitable?” by creating a plan. Can we afford to make that hire or introduce a new product? What might the next twelve to eighteen months hold for the company?

The systems and procedures needed to respond to those inquiries are provided by sound financial management.