What Is Financial Management?
The definition of financial management is the strategic planning, control and organisation of a business’s financial dealings. These plans will determine how a business will earn, spend and invest money, and sound financial planning would typically involve all relevant areas of the business. Financial management teams are generally led by a financial manager who ultimately decides what money goes where and allocates funds in such a way as to optimise the financial stability of the business while also planning for short and long term growth.
A major component of financial management is financial planning.
Financial planning
Determining how much money a business needs to operate and then deciding how those funds will be distributed. Major short, medium and long term decisions will be made by financial planners regarding:
- Budgeting – are there sufficient funds to keep the business afloat and allocating those funds to be used to optimum advantage?
- Cash flow – is cash flowing in and out of the business in the right amounts at the right time?
- Risk assessment – for credit/liquidity, market and operational risk
- Security – are the business assets and investments secure?
- Profit allocation – how will net profits be divided, how much will be put aside as contingency and what will be invested back into the business or set aside for potential growth opportunities?
- Capital raising and management – how and why capital will be raised and how will it be used?
- Working capital – the day to day money a business needs to operate
- Investments – investing on behalf of the business while also ensuring shareholders receive the expected returns on their investments
- Borrowing money – will capital be raised via loans through traditional lenders or private financing and how will debt affect the business?
- Debt financing – how will loans be repaid?
Financial planning begins with tracking all money flowing in and out of the business. Accounts are prepared by either in-house or outsourced accountants and will show the business owners the financial health of their business. These accounts will include:
- profit and loss statements
- balance sheets
- cash flow statements
- budgets, and;
- other relevant financial data
In the past, accounts were done by hand using physical ledgers and calculators, making it easy for errors to be missed. Luckily, that’s no longer the case with modern businesses having access to the latest financial management systems and software. These systems have revolutionised not only finance teams, but the businesses they support, with real time reporting and data at their fingertips.
Financial control
A crucial element in financial management is financial control which includes tracking money as it moves within the different areas of a business as well as analysing financial data to determine short and long term financial management strategies. Financial control will determine if a business is meeting its objectives by answering the following three questions:
- Are business assets being used efficiently?
- Are they secure?
- Are the best financial interests of the business and key stakeholders at the centre of management decision making?
Financial decision-making
Decisions must be made regarding business investments and financing. The financial management team decides, among other things, how the business will raise finance and how profit should be distributed.
What Is the Importance of Financial Management?
Robust financial management is important to a business throughout the many lifecycles it has to go through. In fact, the objectives of the financial management team and how it plans to manage the finances will determine many things including:
- Overall business objectives
- Short and long term strategies
- How programs are implemented
- Business policies and procedures
- Budget allocations.
Establishing a streamlined financial management system ensures funds are available to the business, no matter what stage it’s currently working through – start-up, growth or standard operations (BAU). While not every business will have the same experience, there are times when strong financial management could be the difference between failure and success.
The start-up period
A tough time for a lot of new businesses and unfortunately, financial management may be overlooked as it’s not yet deemed a priority. But this could prove to be a costly mistake. This is the time a business is likely to experience negative cash flows, and even some losses, as it finds its feet and place in the market, making a strategic financial management plan even more important.
A financial manager can help up a start-up business by ensuring there’s enough money to pay employees and suppliers, even though there’s more money going out than coming in. They can make financial projections and plan ahead for negative cash flows. They can also forecast how much capital will need to be injected into the business before it becomes profitable.
Growth period
A growing business needs funds to finance its expansion so planning, forecasting and budgeting are critical. This financial management team needs to decide if the business will be funded internally, with a fresh cash injection, or externally by borrowing money from lenders or other financiers. The objective here would be to source funds with the least financial impact, controlling existing business capital and finally, not allowing the balance sheet to dip too far into debt territory.
Standard or normal operation period
The risky start-up period is over, the business is running smoothly, and things are ticking over nicely. The business is doing what it was meant to do – selling the product(s), getting paid and moving the funds into the areas of the business, as per the pre-determined financial management strategy. Hopefully, money is coming in and going out of the business as planned.
Overall, the objectives of financial management are to provide:
- strategy
- decision-making, and;
- control.
To ensure the following:
- Keep track of cash flow and liquidity
- Capital management – an appropriate balance between equity and debt is maintained
- Funds are used in the best possible interest of the business
- Shareholders are offered suitable returns on their investment
- Business investments are safe and secure
- Improve the profitability of the business
- Increase the businesses overall value and economic stability
Scope of Financial Management
The scope for financial management will depend on the business. But in general, there are three main types of financial management.
1. Planning
The finance manager will determine how much money will be needed for day-to-day operations and then how the money will be allocated. They will also determine the business’ short, medium and long term objectives and goals. Planning will be broken down into the appropriate categories as determined by the needs of the business.
2. Budgeting
The financial management team will work out budgets for the various areas of the business. There may be one main budget, with smaller budgets as needed. They will also ensure there are funds set aside for contingency or emergencies and growth opportunities.
3. Risk assessment
Risk assessment is an important part of the financial management system and shouldn’t be overlooked. Some areas where a business will need to perform a risk assessment include:
Credit/liquidity risk – can the business meet its financial obligations, even if things don’t go to plan? For example, a customer is unable to pay an invoice on time or unexpected delays with a shipment mean you’ve paid but have no product to sell.
A business failing to meet its financial obligations runs the risk of cash flows problems and potentially, if the issue is ongoing, a mark against them on their credit report, impacting credit worthiness and borrowing ability.
Market risk – how your business is perceived in the market – if you’re a trading company – or if there’s certain market risk that could adversely affect your business, such as extended lockdowns during a pandemic.
Operational risk – may encompass a few different things such as:
- A major weather event such as a big storm that leaves the business without power for a week or a flood where staff cannot access the office.
- In the world of cloud based tech, the threat of a data breach or cyber attack is constant and must be addressed.
- Crisis management, e.g. a CEO, CFO or staff member is accused of fraud, misconduct or other event that can trigger public or business backlash.
The scope of the financial management team also covers who is ultimately responsible for making the financial decisions for the business as well as processes and procedures, particularly for how they will supply financial data accurately and securely.
The role of technology in financial management
There’s no denying the impact technology has played in the business world and financial management software has come a long way since the arrival of the clunky spreadsheet and online calculator. For a start, cloud based tech means your people can work from anywhere in the world they have access to the internet and a browser.
Access Financials is a comprehensive and modern accounting solution, bringing together your accounting operations into one central place. This will make your financial management team more efficient, more in control and will give you real-time visibility and insight across your entire business.
As your business grows, outdated processes and disconnected systems can cause inefficiencies, adding unnecessary costs, risks and delays. It’s time to move beyond the workarounds, access greater financial control and harness the power to grow with confidence. Rich in functionality, Access Financials delivers a full suite of financial management modules and core accounting functionality. The modular design allows you to build an integrated finance system, capable of managing the needs of your business.