Table of Contents Hide
- What is financial management?
- Importance of Financial Management
- Objectives of Financial management
- Functions of Financial Management
- Types of financial management
- Financial Management Jobs
- Financial management Pdf
- Financial management examples
Financial management is one of the most vital responsibilities of business owners. Imagine the negative impact or consequences of making one bad financial decision on your business. This article will help you have a better understanding of financial management because it contains a detailed explanation of the functions and importance of financial management.
It also includes practical examples of financial management. This is to enable you to be able to apply this knowledge in your firm or business.
What is financial management?
Financial management refers to the process of strategic planning, controlling, monitoring or directing of financial resources in an organization. This is done with the aim of achieving an organization’s financial goals and objective.
In financial management, some management principles are applied to profits, expense, cash and also credit. Any organization with a good financial management has a maximized value.
Importance of Financial Management
The importance of financial management in an organization cannot be overemphasized because there is no efficient business without proper management of finance or efficient corporate finance. This management includes acquisition, allocation and management of finance in a business. With finance being the lifeblood business its management is not left out.
Some of the importance of financial management includes;
It helps to decide the requirements of the business financially. Which means that financial planning is very important in every business. This is like the first step to take in managing finance.
Financial management is very important in because the business financial transactions will be very transparent. For a business owner, the finance sector is one of the most important sectors, they want to know the slight details of what’s going on in the business.
Therefore, with a proper management of finance, every financial information will be documented for easy reference.
Another good part of this is that mangers of other departments and some senior staffs see the company’s financial performance. This will help them to know how much effort to put in whereas, how their decisions can make a huge impact in the business.
Proper utilization of funds in a business reflects the effectiveness of their financial management. This is a major importance of financial management. Meanwhile, effective utilization of funds means that there are strategic management techniques they use; budget control, ratio analysis, financial accounting, profit analysis etc. These techniques in return will create more profit for the business.
Stronger financial controls
Finance management makes a business to have a firm financial control. There are methods, procedures, and system of finance management. Some of these might need some management software that help for a faster and better experience. For instance, there is a software that helps in financial accounting, using this certainly makes accounting easy and at the same time controls finances.
The value of a firm is tied to its finances because every investor checks the past and present cash flow of the firm before they invest. When these finances are managed properly it will attract more investors because the dividends will keep getting more attractive as a result of proper management. At this point, the value of the firm keeps increasing.
Other importance of financial management includes;
- Makes production faster
- It provides guidelines for earning maximum profit with minimized cost
- Helps to provide economic stability
- Helps the business make informed decisions in critical times
- Employees become more aware of saving funds.
Objectives of Financial management
Financial management has both long and short term goals. The major objective of financial management is to maximize profit while the major short term objective is to maintain a proper cash flow in the business.
Below are some more objectives of financial management;
Maximize shareholders wealth
This ensures regular and constant returns to investors or shareholders. This depends on how much they earn, the market prices of the shares. Every business wants to increase what their shareholders earn, will increase their value.
Availability of Funds
To make sure funds are available when needed in business is one of the objectives of finance management. No firm or business can function without funds. However, when funds are not available in times of need, it will affect the business or firms in a negative way.
To Ensure funds are Safe
This is a very vital objective of finance management. Because if the major objective is to maximize wealth then it sure needs to be safe or handled safely. Therefore, investment risks should be as minimum as possible to ensure safety on investment hereby investing in safe ventures to avoid loss of funds.
Proper Utilization of Funds
Funds should be used at maximum to minimize cost as much as possible. In as much as a firm needs funds, a person with financial literacy skills is also needed to manage the funds properly. Every firm or business needs to cut down necessary costs. For instance, renting a very large space when it’s not needed yet, or buying production materials in excess.
To have a sound capital Structure
A sound capital structure needs a combination of debt and equity capital, at most a balance. Giving too much equity will be bad for any business, whereas controlling the cost of capital can help get that balance.
Functions of Financial Management
The below functions of financial management below are what makes financial management very important.
#1. Estimate capital required
The first thing a financial manager of any business or firm should do is to make an estimate of the number of funds the business requires. Over time, the financial manager should have studied how the business runs and should be able to estimate the required amount without losing the earning capability of the business.
#2. Determining capital structure
After determining the number of capital structures need formation. It involves short and long term debt-equity. However, all these are dependent on the amount of capital the business has. The financial manager will need to strike a balance between debt and equity capital.
#3. Sources of funds
This is a very important function of financial management. Every business needs to keep raising a running capital, there are various ways to do this. One prominent way is to invest in safe ventures in order to get regular returns. Importantly, the investment decision needs to reduce cost and maximize value. That is to say, investment should be made when there is a greater possibility of earning.
#4. Allocation/ Control funds
When the business earns their net profit over a period of time, it is the job of the financial manager to allocate it properly. This is where strategic planning comes in, the decision of how much to reinvest, save, and the part to allocate to shareholders as their dividends.
It is important to know that these decisions are not static they can be influenced by the present situation of things in the firm or business. Meanwhile, the standard and rules of that business will be maintained.
#5. Monitoring Financial Activities
It is the function of the financial manager to monitor all financial activities in the firm. Because financial activities are delicate, any little mistake can result to a great damage. Allocation of financial duties should equally be done carefully and closely monitored.
Types of financial management
Every business or firm needs management in their finance for various activities. For instance, Loan approval, employee recruit, credit ratings, cash flow management etc. All these above mentioned activities lead to the categorization of financial management into 3 primary types. However, these types of financial management work towards achieving a common goal.
Here are the 3 primary types of financial management;
#1 Treasury and Capital Budget Management
This is the process of planning in order to decide if a firms fixed assets worth fund allocation using the capitalization structure i.e. profit earnings or debt and equity. Fixed assets could be new plants or machineries. Various strategies are used in capital budgeting. For instance, payback period, net present value, equivalent annual cost, rate of return etc.
#2 Capital Structure Management
Capital structure management is a type of financial management in which the firm or business is financing while trying to balance or mix debt(bond) or equity (retained earnings) securities.
In this type of financial management, the financial managers are responsible for capital structure of a business short and long term debts, equities and stocks. This is a major aspect in capital structure.
Therefore, when you hear capital structure of a business, it most times refers to the business debt-to-equity ratio, this will give you an insight on how much value the organization has financially.
#3 Working Capital Management
This type of financial management intendsto keep full records of the business current assets using some accounting strategies like booking. These accounting strategies helps to keep track of current liabilities, cash flow, working capital ratio etc. Capital management has a primary role which is to make sure the business has enough liquid cash to enable the meet up with short-term debts and operational costs.
The team involved in this type of financial management has to make sure the firm more business maintains their working capital because it will improve the company’s earnings.
Financial Management Jobs
First, you should know that people that mange finances in a business or organizations are called financial managers. They are responsible for the financial strength of the organization. Therefore, they prepare reports or make a financial account, monitor and organize everything concerning finance in the business.
Below are some places you can work as a financial manager or where you can employ them;
Financial managers can work as branch managers in financial firms because they can oversee, customers’ accounts, shareholders, recruitment process, loans approval. Etc.
Any job that requires risk management especially when it has to do with finance can be handled by a financial manager. They use some strategies to limit financial losses especially those that stem from a price change, investments, currencies, etc.
A cash manager monitors and supervises the flow and allocation of cash in a business, which is a very essential function of financial management.
Credit managers are in control of the policies, terms and procedures in issuing out credits.
Treasurers and finance officers
They manage investments, cash management, organize cash-raising strategies. Very importantly, they make sure mergers and expansions favour the organization.
Other jobs include;
- Financial controllers
- Risk and Insurance managers
- International finance managers
Note: Some financial managers can work as consultants, freelancers and they can also take contract jobs.
Financial management Pdf
These pdfs are recommended to help you understand the management of finance better. It also contains more financial management examples for a better learning experience.
- An Overview of Financial Management
- Financial Management by C. Paramasivan and T. Subramanian
- The basics of financial management for small community Utilities.
- Financial managers for entrepreneurs
Financial management examples
Like stated above, types of financial management are based on activities of the business. For a business, financial managing examples include; project budget, recruiting a new employee, purchasing materials etc.
Example 1 of financial management;
A company, M series wants to get a loan to help them rent a working space for the business.
The financial management team, will need to analyze this decision before it turns into action. They will have to weigh their options; the will calculate the number of years they want to rent it. And then, how much they will have to invest in payments to know if investing that much in that number of years will strengthen or cripple the business.
Furthermore, they can decide to check the possibilities of even making a whole space purchase.
These are the processes M series will go through before renting a space.
Example 2 of financial management
This example of financial management is for individual or family.
For instance, If Mr. Waters wants to buy a house on mortgage loan where he will be contributing some amount of his salary, to enable him reach his goals financially.
Mr. Waters previously employed a financial manager for some consultations and the financial manager advised him to use the 50/30/20 planning strategy which means;
Firstly, He will use 50% of his salary on life necessities. Like, house rent, transport, food, groceries, basic bills etc.
Secondly, 30% of it goes to the way that suites his lifestyle. For instance, if Mr. Waters likes to eat out on weekends, attend music classes, play golf
Lastly, the last 20% will move towards planning for the future, retirement plan, investment, and debt payment.
In simple terms,
50% to wants
30% to needs
And 20% to savings and future
Due to some changes in Mr. Waters life the financial manager will need to adjust this 50/30/20 rule to be able to suit the agreed 75% of his salary.
In conclusion, from the above explanation especially on the functions and examples of financial management above. I am sure you now understand that every business, firm organization needs financial management for efficient functioning. In other words, the importance of financial management can’t be overemphasised.
However, if you don’t have any professional managing your finances, it is advised you employ a financial or consult one for better business yields.