Financial management is very important for businesses as it plays a major part in the performance and growth of companies and businesses. Proper financial management serves as a groundwork for making cooperative decisions and achieving goals and objectives as stated in the official business plan.
Financial management typically involves planning, directing, monitoring, and controlling business funds to make effective both short-term and long-term financial decisions.
What is financial management?
Financial management refers to applying monetary management procedures to budgeting and forecasting a company’s financial resources. This is to achieve business goals and objectives. This process is aimed at maximizing profit by managing the company’s money from any standpoint.
Scopes and Components of Financial Management
Financial management deals with all the areas connected to sales, expenses, and credit and comprises three essential components to help businesses organize capital and ensure that the companies adhere to all the legal requirements on financial aspects.
- Dividend decisions
- Financing decisions
- Investment decisions
1. Dividend decisions: relate to decisions that involve determining the amount of investments made with the available cash at a time. In this situation, the distribution of profit among investors is the main focus by allocating the company’s profits. Though investors always wish to claim dividends immediately, companies need to increase investments by making better decisions on dividends.
2. Financing decisions: these are decisions taken to identify effective means of procuring or raising capital and funds from current or potential financial sources and investors to the business to support future growth. These decisions usually depend on the source, associated risks, control considerations, cost of capital, time, and profit expectations for future growth.
3. Investment decisions: focus on making the right decision on where to invest, the method of investing, and what to invest in to deliver positive returns for investors. The two components of investment decisions are short-term investments and long-term investments.
Importance of Financial Management
The University of Sunderland explains that financial management serves as a tool for business owners to navigate the complexities of running a successful company. Here are why financial management is so important for businesses and companies:
1. Respond to Market Changes: A good Business and Start-up company is better positioned to respond to market changes by applying financial management skills creating a roadmap for the business’s sustainability at any point in time and ensuring generational wealth transfer.
2. Cash Flow Management: Accurate financial information empowers business owners to make predetermined decisions about pricing and other critical business activities to ensure there is enough cash to sustain day-to-day operations, pay bills, and make payroll.
3. Risk Management: Business and Start-up company owners can discover possible negative financial situations and take advanced steps to contain them. This might include ensuring that each department operates within budget and in alignment with set strategies.
4. Debt and Crisis Management: Business and Start-up company owners can use financial management procedures to determine the right debt limit and manage repayment schedules even during challenging times, since it provides insights into the business’s financial resilience, enabling business owners to navigate crises and make informed decisions.
5. Tax Planning and Legal Compliance: According to Talentedge, through financial management, tax strategies can be used to reduce tax and legal liabilities by helping business and start-up company directors stay compliant with tax regulations. thereby minimizing the risk of legal issues and penalties.
6. Investor Confidence: Monitoring financial metrics helps assess the business’s profitability and performance thereby inspiring confidence in investors potentially attracting additional funding and support.
7. Financial Reporting and Budgeting: Business owners can generate accurate financial reports to communicate the company’s financial health to internal and external stakeholders, such as investors, creditors, and regulatory authorities. Financial management also enables businesses and Start-up companies to create comprehensive budgets and financial plans by helping them focus resources efficiently, ensuring that funds are used for the right operations.
Frequently Asked Questions
What are the primary financial management strategies and goals?
The main goal of financial management is to enable business owners to evaluate investment opportunities and bring together strategic financial planning of the company’s resources, costs, and budget, and ensure they fit with the company’s mission and goals.
Is financial management a good profession?
Yes. Financial management has become one of the best careers. A degree in accountancy, finance, business, economics, management, mathematics, or statistics can be helpful and most financial managers work for brokerage firms, banks, insurance companies, or High net worth individuals wanting to keep track of their own money.
What are the basic financial management skills?
The essential abilities include strong numeracy and quantitative skills, initiative, analytical skills, and good problem-solving skills, being persuasive, making quick decisions, credible personal financial management, and sound communication skills.
Does financial management improve profitability?
Yes. The effectiveness of financial management helps businesses improve the proper utilization of funds by the organization. through budgetary control thereby improving the profitability position of the businesses.
