Financial management is essentially the process of creating a business plan and then ensuring that all departments stay on track. The CFO or VP of finance can provide data that aids in the development of a long-term plan, guides investment decisions. And provides insights into how to fund those investments, liquidity, profitability, cash runway, and more.
ERP software can assist finance departments in achieving the following objectives: Accounting, fixed-asset management, revenue recognition, and payment processing are just a few of the financial tasks that are combined in a financial management system. By integrating these critical components. A financial management system ensures real-time visibility into a company’s financial status while facilitating day-to-day procedures. Such as period-end closing processes.
Financial Management’s Importance
Three pillars of effective fiscal governance are built on the foundation of sound financial management:
- Strategizing : Identifying what financial changes must occur in order for the organisation to achieve its short- and long-term goals. Leaders, for example, want to know how things are going right now so they can plan scenarios.
- Decision-making : Decision-making, or assisting corporate executives in determining the best approach to carry out plans by providing current financial reports and data on key performance indicators (KPIs).
- Controlling : Controlling, or ensuring that each department contributes to the vision while staying within budget and on track with the strategy.
All employees know where the company is going and have visibility into progress when financial management is done well.
Financial Management Objectives
Financial managers assist their companies in a variety of ways based on those pillars, including but not limited to:
- Increasing profits by providing information about rising raw material costs. Which could lead to an increase in the cost of items sold.
- Liquidity and cash flow are monitored to ensure that the company has sufficient funds to satisfy its obligations.
- Ensure compliance with state, federal, and industry-specific regulations.
- Creating financial scenarios based on the current status of the firm and forecasts that include a wide range of probable outcomes based on market conditions.
- Dealing with investors and boards of directors in a professional manner.
In the end, it’s all about applying sound management ideas to the financial structure of the organisation.
Financial Management’s Functions
A finance manager’s activities in the following categories, in practise, revolve upon planning, forecasting, and controlling spending.
Issuing P&L statements, examining which product lines or services have the best profit margins or contribute the most to net profitability, monitoring the budget, estimating the company’s future financial performance. And scenario planning are all part of the FP&A role.
Cash flow management is also crucial. The financial manager must ensure that there is sufficient cash on hand for day-to-day activities. Such as paying employees and purchasing raw materials for manufacturing. This entails keeping track of cash as it flows in and out of the company. A process known as cash management.
Financial management comprises revenue recognition, or reporting the company’s revenue according to conventional accounting rules, in addition to cash management. A significant aspect of strategic cash conservation and management is balancing accounts receivable turnover ratios. This may appear straightforward, but it isn’t always: Customers may pay months after obtaining your service at some businesses.
What is the difference between the three types of financial management?
The aforementioned functions can be classified into three types of financial management:
- Capital planning, which is concerned with determining what has to happen financially in order for the organization to meet its short- and long-term objectives.
- Structure of capital, figuring out how to pay for operations and/or expansion Taking on debt may be the best option if interest rates are low. A company may also seek finance from a private equity firm. ell assets such as real estate, or sell equity, if applicable.
- Management of working capital, As previously mentioned, ensuring that there is enough cash on hand for day-to-day operations. Such as paying employees and purchasing raw materials for production, is critical.