What is Financial Management and Why its Importance?

In business, financial management is the practice of managing a company’s finances in such a way that it is successful and compliant. This requires both a high-level plan and on-site execution.

Let’s find out more, What Is Financial Management and Why Is It Important?

What is financial management?

Financial Management means planning, organizing, directing, and controlling financial undertakings in an organization or an institute. It also includes applying management principles to the financial assets of an organization, while also playing an important part in fiscal management.

At its core, financial management is about creating a business plan and then making sure all departments stay on track. Solid financial management enables the CFO or VP of Finance to provide data that will help build a long-term vision, make decisions about where to invest, and gain insights into how those investments will be funded, liquidity, profitability, cash runway, and more.

Importance of Financial Management

Solid financial management forms the basis for three pillars of sound fiscal governance:

Strategic planning or identifying what needs to happen financially for the company to achieve its short and long-term goals, For example, managers need insights into current performance for scenario planning.

Decision-making or assisting business leaders in deciding how best to implement plans by providing up-to-date financial reports and data on relevant KPIs.

Controlling or ensuring that each department contributes to the vision and works within budget and alignment with strategy.

With effective financial management, all employees know where the company is headed and have visibility into progress.

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

Objectives of Financial Management

Financial management generally deals with the procurement, allocation, and control of a company’s financial resources. The objectives can be:

  • Ensuring a regular and appropriate supply of funds to the concern.
  • Ensuring a reasonable return for the shareholders, which depends on the profitability, the stock exchange price of the share, and the expectations of the shareholders.
  • To ensure optimal use of funds. As soon as the funds raised, they should use in the maximum possible way at least cost.
  • To ensure investment security, i.e., Funds should invest in safe ventures for a reasonable return.
  • Plan a solid capital structure – There should be a solid and fair composition of capital to maintain a balance between debt and equity capital.
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Functions of Financial Management

1. Calculation of Capital Requirements: A finance manager needs to make calculations with regard to the company’s capital needs. It depends on the firm policies regarding expected expenses and profits. Estimates must make reasonably in order to increase the profitability of the company.

2. Formation of Capital Structure: Once the firm capital requirements have been estimated, a capital structure must be created. This includes a debt-equity analysis in the short and long term. This depends on the amount of capital the company owns and the amount that needs to be raised from external sources.

3. Choice of sources of funds: In order to raise additional funds, a company has many options, such as:

  • Issue of shares and debentures
  • Loans to be taken from banks and financial institutions
  • Public deposits to be drawn like in form of bonds.

The choice of a factor depends on the relative pros and cons of each funding source and funding period.

4. Investment of funds: Every organization or firm needs to invest money to raise more capital and generate regular returns. Therefore, the finance manager must decide to invest funds in profitable ventures in order to ensure safety on investment and regular returns.

5. Allocation of profits: Once the organization has a good net profit, it is the finance manager’s duty to allocate it efficiently. This can be done in two ways:

  • Dividend declaration – It includes identifying the rate of dividends and other benefits like bonus.
  • Retained profits – The volume must be determined, which depends on expansion, innovation and diversification plans of the company.

6. Management of Cash: The finance manager must make decisions related to cash management. Money is needed for various purposes in the firm, such as paying salaries and bills, maintaining stock, meeting liabilities, and purchasing materials or equipment.

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7. Financial control: The financial manager has to plan, raise and use the funds, and control and analyze the firm’s finances in the short and long term. This can be done through many techniques such as ratio analysis, financial forecasting, risk management, cost and profit control, etc.

Why is Financial Management important?

This form of management is important for many reasons. Check out some of these reasons:

  • Helps organizations with financial planning;
  • Supports organizations in planning and raising funds;
  • Helps organizations to effectively use and allocate funds received or acquired;
  • Supports organizations in critical financial decisions;
  • Helps improve the profitability of organizations;
  • Increases the overall value of the company or organization;
  • Provides economic stability;
  • Encourages employees to save money, which will help them with personal financial planning.

Why study financial management?

1. Diverse career opportunities: Studying financial management opens up a wide range of career opportunities. It can be in the private or public sector. Some of the career options include investment banking, entrepreneurship, financial analysis, financial and operational accounting, and strategic financial management. It is also beneficial for those interested in starting their own business. A course in financial management or a degree in finance can help people get promotions or better jobs in accounting. 

2. Improve interpersonal skills: Taking a course in this area can help you build better communication and teamwork skills through developing relationships with your colleagues.

3. Builds personality: A course in this area will also help improve your soft skills. Because people who want to work in this sector have to be extroverted and should be able to talk about finances for hours. This helps in improving their personality, knowledge, and communication.

4. Greater job prospects: According to the US Bureau of Labor Statistics (BLS), the demand for jobs for financial managers in the US has increased due to “a growing supply of financial products and the need for in-depth knowledge of geographic regions.” This is also evidenced by the demand for careers in financial management increased by 14%, for careers in financial advisory increased by 32%, and for careers in financial analysis increased by 23%.

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5. Higher salary packages: People who work in this sector are usually very well paid at the entry-level or the management level. In addition, this is a highly skilled job that is always in demand even in recessions.

6. Career growth: There is always an opportunity to develop your professional skills and climb the corporate ladder. This is an area where you can quickly acquire in-depth knowledge of financial management systems and financial management software. If you have that knowledge and a high level of aptitude, this area is perfect for you.

Scope of studying Financial Management

A finance-related management degree or a finance degree offers excellent career opportunities. Check out some of these diverse career opportunities:

  • Corporate manager;
  • Investment banker;
  • Financial examiners;
  • Financial managers;
  • Budget analysts;
  • Financial advisor;
  • Financial analyst;
  • Personal financial planners;
  • Investor relations associate or executive;
  • Credit analyst.

FAQs.

What is Financial Management?

Financial Management means planning, organizing, directing, and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to the financial resources of the enterprise.

What is The Defination of Financial Management?

Financial management may be defined as the area or function in an organization which is concerned with profitability, expenses, cash, and credit, so that the “organization may have the means to carry out its objective as satisfactorily as possible;” the latter is often defined as maximizing the value of the firm for stockholders.

What is the Role of Financial Management?

Financial managers are responsible for the financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization. Help management makes financial decisions.