What is financial management?
Financial management is defined as the strategic planning, control and organisation of a business’s financial dealings.
These financial management 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.
For a deep dive on this topic, check out our guide to financial management.
What is a financial management strategy?
A financial management strategy is a general principle by which businesses can reap maximum benefits from financial systems and processes. A business can customise these financial management strategies to meet their specific goals and needs.
The primary goal that often drives financial management strategies is wanting to maximise the business’s financial value.
Financial management strategies will evaluate several activities that could have an impact on important decision-making for the business, such as financial performance and a forecast of future performance.
Strategies to improve financial management can act as a roadmap for businesses to follow to manage how finance is used, how available sources are and how funds are allocated. They will work to align financial management with the business’s corporate objectives.
Why are financial management strategies important?
Effective financial management strategies lie in how they help the business to develop a successful vision for the future. Executing this will give you a set of controlling principles that you can use to optimise your business operations.
Fundamentally, a financial management strategy is necessary for the development of an overarching business strategy. The objectives you set for your current business income, current cashflow position and annual tax payments, for example, are pivotal to your overall business vision.
Financial strategies help businesses to check that the goals they are setting are realistic, overcome any unexpected challenges and identify where the money is going.
The benefits of having a financial management strategy in place
Having a financial management strategy is crucial for the success and sustainability of any business. Here are some key benefits of having a financial management strategy in place:
- Improved cash flow management: A financial management strategy helps in forecasting cash flow, ensuring that the business has enough liquidity to cover its expenses and investments. By optimising cash flow, a business can better manage its working capital, reduce the need for borrowing, and avoid cash flow shortages that may hinder operations.
- Better decision making: A clear financial management strategy provides business leaders with the necessary information and insights to make informed decisions. By analysing financial data and performance metrics, management can identify areas of improvement, allocate resources effectively, and prioritise initiatives that drive growth and profitability.
- Risk mitigation: An effective financial management strategy will include risk assessment and mitigation measures to protect the business from potential threats and uncertainties. By identifying and addressing these risks, such as market fluctuations, regulatory changes, and cybersecurity threats, a business can minimise any potential disruptions and safeguard their assets and reputation.
- Optimising the allocation of resources: With a financial management strategy in place, businesses can allocate resources, such as capital, personnel, and technology, more efficiently. By prioritising investments and projects that align with strategic objectives, a business can maximise returns, leading to improved profitability and competitiveness.
- Enhanced financial performance: A well-executed financial management strategy contributes to improved financial performance, including increased revenue, profitability, and shareholder value. By monitoring key financial metrics and performance indicators, businesses can track progress towards their goals, identify areas for improvement, and make timely adjustments to stay on course.
- Compliance and accountability: A financial management strategy ensures that the business complies with legal and regulatory requirements, as well as internal policies and procedures. By establishing clear financial controls, reporting mechanisms, and accountability structures, businesses can maintain transparency, integrity, and trust with stakeholders.
- Sustainable business growth and expansion: By effectively managing finances, businesses can sustainably grow and expand their operations, markets, and offerings. With a solid financial foundation, businesses can pursue strategic opportunities for growth, while minimising risks and maximising returns.
Types of financial management strategies
In this section, we’ll outline several examples of financial management strategies you may be able to adopt within your business:
A dividend strategy
A dividend strategy is a type of financial management strategy used to balance both current returns and capital gains. It is used to determine the percentage of profits that is distributed amongst business shareholders after they have retained a portion of profits as a surplus for future investment opportunities.
A dividend strategy will usually be employed to maximise a shareholders’ return while at the same time generating the necessary capital to make future investments. It’ll also aim to ensure the least amount of risk and capital costs.
Capital structure planning
Capital structure strategies can be used by businesses to balance the advantages and risks associated with their equity and debt capital.
Investment planning
Investment planning (also known as capital budgeting) is a financial management strategy that determines how to invest in capital. Its aim is to establish, expand, diversify and modernise businesses.
Investment planning will also include practices for disinvestment, such as selling or replacing long-term assets that are either old or outdated.
Working capital planning
Capital planning strategies are a type of financial management strategy that can help to manage cash in your business, including why it is needed, how it is procured, how it is allocated and what the future of cash flow in your business looks like.
Capital planning strategies are responsible for how your working capital is managed. They also help maintain the availability of the adequate working capital that is needed to operate both daily and routine business activities.
Challenges to financial management strategies
Overall, financial management strategies are closely tied to the health and success of businesses. What makes or breaks a financial management strategy is its ability to hold up under scrutiny. Solid financial planning can help your business to oversee any challenges as they arise.
Here are several common financial management strategy challenges you may experience:
- Internal business changes: As your business expands or diversifies over time, you may find that your original financial management strategy becomes outdated and needs revising. Examples of these internal business changes may include shifts in focus, business model changes, client base expansion or diversification and workflow changes.
- Changes external to the business: Evolving competition, market shifts, and changing laws or regulation are all environmental shifts that can complicate even the most robust financial management strategy and require you to reevaluate.
Luckily these challenges are easy to overcome by preparing for every contingency and drawing up a detailed plan of possible scenarios, so that your business can be proactive and tactical in the face of unexpected circumstances.
In summary
Effective financial management strategies are essential for the success of businesses operating in a fast-paced and competitive environment.
By understanding cash flow dynamics, making strategic investments, and implementing proactive risk management strategies, businesses can position themselves for sustainable growth and profitability.
Priortising a financial management strategy and embracing a culture of fiscal responsibility can set your business up for greater success.
When it comes to executing financial management strategies, choosing the right finance management software can go a long way in determining how well-equipped your finance teams will be in the design and management of your financial strategies.