Financial management is crucial to any business’s success and development. It entails the efficient management of the business’s financial resources. So, what is it? And how important is it to businesses’ success? And what are the key components of financial management?
What Is Financial Management?
Financial management is planning, organizing, directing, and controlling the business’s financial resources to achieve its goals in the most efficient way possible. (1)
It aims to maximize shareholder wealth while ensuring the businesses’ long-term sustainability and growth. (1)
Financial management encompasses many activities, such as: (1)
- Budgeting
- Forecasting
- Cash-flow management
- Risk management
- Financial Reporting
- Investment decisions
Financial management objectives
Financial managers play a pivotal role in businesses’ growth. They help their companies in multiple ways including: (2)
1.Maximizing profits
Financial management gives insight into many market variables, such as the rising cost of raw materials, which might cause an increased cost of the sold goods. (2)
2.Ensuring compliance
Financial managers are usually responsible for keeping up to date and complying with state, federal, and industry laws and regulations. (2)
3.Tracking liquidity and cash-flow
One of the key objectives of financial management is to ensure there is enough cash flow on hand to meet the company’s needs and obligations. (2)
4.Manage relationships
Financial managers ensure the appropriate and effective interaction with investors and directors alike. (2)
5.Developing financial scenarios
This is typically based on the business current state and forecasts that assume multiple outcomes relying on the possible conditions of the market. (2)
Financial Management Importance
Financial management is key to the sustainability and success of any organization. Here are the main reasons: (3)
·Resource allocation
Financial management helps in directing resources to the most profitable areas, contributing to the company’s overall growth. (3)
·Goal achievement
Financial management aligns the company’s objectives with its mission and vision. It also provides a framework for setting and achieving these objectives, which are pivotal components for the success of any business. (3)
·Risk management
Financial management entails risk mitigation and assessment. This includes identifying potential financial risks, implementing strategies to minimize them, and preparing emergency plans.(3)
· Decision-making support
Financial management provides accurate and valuable data promptly to help managers make informed decisions regarding investments, strategic initiatives, and operations. (3)
In conclusion, solid financial management is an integral part of businesses’ long-term success and sustainability.
References:
(1) What is Financial Management? Its Nature & Scope (emeritus.org)
(2) Financial Management Explained: Scope, Objectives & Importance | NetSuite
(3) 10 Essential Principles of Financial Management (theknowledgeacademy.com)
