What is financial management?
Financial management is the process by which a business’ finances are properly allocated to meet its goals and objectives over time. Financial management aims to ensure profitability and company longevity by identifying risks and making smart business decisions.
Why is financial management important in business?
According to the U.S. Small Business Administration, effective financial management is important because it helps promote several areas of your business. For example, being on top of your financial management can:
- Enhance profitability by determining the best investments to make and new markets to participate in.
- Help save money by implementing cost-saving measures across each department, such as budget cuts.
- Improve overall business value by demonstrating smart financial practices that enhance profitability and reduce liabilities.
- Ensure prioritization of cash flows by analyzing which areas would benefit the most from additional funding.
- Create structure and leadership by creating financial strategies and policies for each company department to adhere to.
- Encourage a forward-thinking business mindset by implementing policies and procedures that will aid financial planning.
Related: Business Loan Rates: Key Considerations
Types of financial management activities
Financial management is made up of several tasks and practices. Here are some of the key types of financial management activities:
Financial analysis and decision-making
Those in charge of financial management within a company use their experience and background to conduct processes like:
- Profit and loss analysis
- Ratio analysis
- Financial forecasting
These findings allow you to make evidence-based decisions about your company’s finances overall. For example, you might reduce department budgets by 50% if the analysis points to an economic recession in the coming months.
Financial management professionals review financial documents like income statements and balance sheets to determine the amount of money your company has to put toward activities that the company deems of the utmost importance, such as hiring new employees, investing in a new product or buying property.
Financial management professionals are responsible for compiling financial data into balance sheets, income statements, cash flow statements and more for review by company officials and stakeholders. This can help upper management determine the current financial situation of their company, and stakeholders can decide whether they want to continue supporting the company and its efforts.
Risk management and assessments
Those involved in the financial management of your company are responsible for assessing potential risks to your financial stability. For instance, if you consider expanding your locations and hiring 10 more employees to work there, your finance team may take the time to conduct a risk analysis on whether it would benefit your company long term.
Capital structure and requirements
Financial management professionals are responsible for reviewing financial statements, liquidating assets and moving around funds to ensure that the company has equal amounts of assets, liabilities and working capital at a given time.
Cash flow management
Those involved in financial management have a responsibility to know the amount of money the company is bringing in compared with the amount being taken out to pay employers or cover operational costs and other expenses. This helps you determine whether you’ll be able to pay off your current liabilities.
Surplus identification and disposal
The financial management professionals within your company monitor department budgets to identify surplus cash at the end of each quarter. They take these surpluses and decide where to place them. They may decide to put each surplus back into department budgets for the next quarter, or they may add it to a savings account for emergency cash needs.
Roles that can help manage business finances
Here are some roles that can help you manage your finances:
Accountants are responsible for the general organization of company finances and recording of those finances in digital spreadsheets. They may also be expected to manage financial transactions and calculate payroll expenses ahead of payday.
Similar to accountants, bookkeepers work to record and update the company’s general ledger, which includes balance sheets, income statements and cash flow. They may also be responsible for checking for errors to the general ledger that could affect an organization’s financial clarity.
Corporate managers oversee a range of departments within an office setting. A large portion of their financial responsibilities include setting department budgets in accordance with feedback from members of the finance department. They also may be responsible for overseeing projects and ensuring productivity to create revenue for the company.
Financial planners work to determine what policies and procedures they can implement now to help an organization meet its financial goals later on. This may include conducting risk analysis, analyzing historical financial data of the company and meeting with upper management regularly.
Finance managers are responsible for upholding a company’s financial stability by overseeing the finance department, developing strategies for increased profits, engaging with upper-management and monitoring company finance in comparison to outside markets.
Budget analysts work with finance professionals and department heads to devise a budget that helps a department meet its goals while also ensuring profitability for the company. They may also receive, review and either approve or deny department budget proposals based on what they know about an organization’s financial health.
Investment bankers are responsible for acting as advisors to organizations who need stock or loans to increase revenue or pay off debts in lieu of cash flow. They can also act as advisors to companies when they experience mergers or acquisitions.