Financial Management is one of the most important aspects for individuals and organisations in this rapidly growing world. It is no longer about saving money; it is about managing and growing money. To run a business efficiently and effectively and achieve business goals, one needs to have a good knowledge and understanding of financial accounting and management.
- What is Financial Management?
- Importance of Financial Management
- Objectives of Financial Management
- Elements of Financial Management
- Functions of Financial Management
- An Example of Financial Management
- FAQs
What is Financial Management?
According to the Financial Experts Guthman and Dougal,
“Financial management is the activity concerned with planning, raising, controlling and administering of funds used in the business.”
It manages the finances in a way where the business/organization is profitable and scalable in the near future.
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Importance of Financial Management
Financial Management is vital for businesses and organisations as it lays the right pathway to achieve business goals and objectives. Here are some of the reasons why financial management is essential in a business:
- Helps in Financial Planning
- Assists in acquiring and managing funds
- Helps in funds allocation
- Provides insights to make critical financial decisions
- Cuts down financial costs
- Improves profitability and value of the organization
- Makes employees aware of financial savings and investments
- Helps in planning the future growth of the organization
- Helps in achieveing economic stability
Objectives of Financial Management
Just like we all used to save money during our student life and be mindful about it while spending, organisations need to manage the finances effectively to scale and be successful. Here are some crucial objectives that organisations need to be kept in mind:
1. Profit Maximisation
One of the most critical objectives is to ensure maximum profits in both the short and long run. A finance manager should consider this on top of his priority list and ensure that outcomes related to business performance are profitable.
2. Proper Mobilization
Just like you do not waste your savings all in one go to buy something and have nothing in hand, managing funds is crucial for any business. Financial managers need to evaluate and make vital decisions on the allocation and utilization of various funds. Whether it is shares, products, or investing in small companies, all the critical factors must be considered before investing.
3. High Efficiency
Financial Management tries to increase the efficiency of all the departments of the company. Proper distribution of finances or funds to all the departments considering the resources and work involved increases the organization’s efficiency as a whole.
4. Reduce Risks
There are always risks involved in running a business, especially with the uncertainties that come along. Financial managers need to avoid high-risk situations/opportunities and take calculated risks under the consultation of experienced leaders and subject matter experts.
5. Business Survival
Amidst the competitive world, the survival of the business is a primary goal. Darwin said, “Survival of the fittest” in Biology, which is applicable for companies. Companies need to make decisions intuitively. They can always take the help of expert consultants if needed.
6. Balanced Structure
Like they say – Balance is key to everything. This applies not just in life but to businesses too. Financial managers need to prepare a robust capital structure considering all capital sources. This balance is vital for liquidity, flexibility, economy, and stability.
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Elements of Financial Management
Financial Management is made of the following key elements. These are:
1. Financial Planning
Financial Planning is a way of calculating the capital required by an organization and adequately allocating resources accordingly. To do this effectively, one needs to have answers to the following questions:
- Do you have well-established business goals and objectives?
- What is your long-term plan as a brand?
- What is the capital required for the organization to sustain itself?
- What are the different policies and regulations involved in your business?
Answers to each of these questions and many more are all related to Financial Management. So, it is crucial to plan things properly that help you achieve your business goals.
2. Financial Control
It is a pivotal activity to ensure the business is working to meet its objectives. It is more about setting proper KIPs rather than reducing costs. It is essential to ensure everyone in the team is aware of both financial and business goals.
3. Financial Decision-making
Once you have a proper plan and understanding of all the financial aspects, decision-makers should access and decide on fundings, resource allocations, profit distributions, and many more.
Functions of Financial Management
The financial management team in any organization is led mainly by the Finance Manager or someone from the Core Leadership team. Here are a few functions which the team generally is responsible for:
1. Capital Estimation
A finance manager has to estimate the capital required for the company. This will include expected costs, profits, future programs, and expected losses, if any. The estimate had to be made in such a way that the earning capability of the company increases steadily.
2. Deciding Capital Structure
Once the estimate has been made, it is now time to form the capital structure. This includes debt analysis in both the short and long term and is dependent on the capital the firm owns and raised external fundings(if any).
3. Choice of Funds
When significant funds are required, the capital structure needs to be expanded. The organization can take options like Bank Loans and Issues of Share and Debentures. It is essential to evaluate these options considering the interest rates, returns and risk involved. A pro and con list of each of these options will be helpful.
4. Investments
The organization cannot just sit on funds or profits. Growing money is more important than saving money for sustainable growth. The finance Manager needs to allocate funds into profitable ventures or make investments that give reasonable returns with safety on the investment made.
5. Profit Allocation
Profit allocation plays an important role. Once the business makes profits, it is essential to allot them properly. Various factors to be considered here are – employee bonuses, dividends, returns to investors, funds for future growth, and other basic cashflows. It is essential to plan and allocate profits to achieve business objectives.
6. Money Management
The team is also responsible for money or cash management. Cash is required for various purposes such as salaries, electricity and water bills, real estate bills, buying raw materials, storage costs, etc.
7. Financial controls
The finance manager has to plan and utilize the funds and needs to have complete control over the finances considering both short term and long term. This can be achieved using risk analysis and mitigation tools, financial forecasting, ratio analysis, cost reduction, and profit control.
An Example of Financial Management
Now you have had a fair idea of Financial Management, let us look at an example of Financial Management.
Suppose you decide to start your own business along with 4-5 partners. You choose to rent a small office in Bengaluru, Karnataka. You will need to consider the following:
- Which area is best suited for office locations?
- Should I go for a small independent office or go for a co-working space?
- What will be the rent cost per annum?
- What if I buy the property? What will be the evaluation 15 years from now? Will it be lesser than the rental cost for the next 15 years?
You might not have answers to all these questions and might decide to consult a real estate agent. Basis his advice, you might also consult the finance team on how much % of the funds should be invested in real estate so that it does not affect business profitability.
So basis all this financial information, you might decide whether to rent an office or buy a property. Even Work from Home is an option during the initial stages until the team grows.
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Frequently Answered Questions
1. What are the different types of job roles in financial Management?
- Financial Manager
- Investment Banker
- Corporate Manager
- Budget Analyst
- Financial Planner
2. What is the average salary of a Finance Manager in USA?
The average salary of a Finance Manager in USA is $1,03,000/yr.
3. What is the average salary of a Finance Manager in India?
The average salary of a Finance Manager in India is ₹11,00,000/yr.
4. What are the courses available to learn Financial Management?
There are several courses available online. You can go for free short-term courses to kick-start your financial management journey and later pick up a PG Program or an MBA in Finance. Here are a few courses for you:
- Business Finance Foundations
- Basic Accounting Certificate
- Executive PG Program in Management
- Online MBA Degree
Quick Read: Scope of MBA Finance in 2021: Top Job Roles, Skills & Opportunities
