Suppose you have set up your business, your employees on board, a well-planned infrastructure, and the legal proceedings all set, but something’s still worrying you. You have already guessed it right. It’s the finances. It’s your or your company’s financial management, the critical component of determining your growth in the market.
But What is Financial Management?
Financial management is strategy-based planning, organizing, controlling, and implementing financial operations and activities in an organization or one’s personal life. The scope of Financial management is multifold.
It tailors the application of general management skills or practices on financial resources. This will enable the organization or individual to meet the financial objectives and maintain stability, ensuring liquidity and maximizing profitability.
The role of a financial manager in financial management is very crucial. The primary duties are:
- Financial planning and analysis.
- Investment decisions.
- Risk and liquidity management.
- Cost control.
- Financial reporting.
- Compliance and regulation.
- Strategic decision-making.
The role of a financial manager is widely seen in enhancing the scope of financial accounting. This can be done by recording transactions, preparing financial statements, reporting externally, etc.
The importance of financial management in achieving economic stability, growth, and strategic objectives is multifaceted. One gets to maximize profits by getting a clear insight into the financial functioning.
You can track your company’s liquidity and cash flow well, which will help you meet your financial obligations.
Financial objectives must be met for the company to hold a significant position in the market.
These financial objectives can be stated as functions of economic management. We will discuss the five core functions of financial management. Those are- Planning and budgeting, Financial analysis and control, Investment decisions, Financing decisions, and Risk management.
And when you have EaseUp at your service to help you reach your financial goal, why look for other Financial Advisory Services?
But what is Financial Advisory Services?
Financial accounting advisory services (FAAS) are those financial advisory services that experts cater to help businesses deal with complex accounting and financial reporting challenges.
But have you ever wondered about the relationship between capital markets and financial advisory services?
Capital markets and financial advisory services share a link. This specialized area of financial advisory services deals with raising capital, managing financial risks, executing strategic transactions, and complying with requirements.
Core Functions of Financial Management
Financial Management serves a wide array of functions, but primarily the following five core ones-
Planning and Budgeting
The financial manager again comes into play in planning and budgeting.
In planning, you must monitor the financial objectives you’re setting, the revenue and expense forecasting, and finally, the resource allocation. In doing so, the financial manager can ensure the amount of money the business might require to sustain a positive cash flow.
In setting the financial goals, you must first consider the short-term/immediate goals you aim to achieve within one year. This could involve reducing costs without compromising quality, increasing revenue, and improving the cash flow. The long-term goals are achieved relatively over a more extended period.
This could involve the expansion of market shares, sustainable growth, and sometimes entering new markets.
Forecasting isn’t associated only with weather updates. Financial forecasting, be it expense or revenue, helps predict future costs and sales. This helps in planning for production, workforce distribution, and how much a company needs to invest to achieve revenue goals.
Finally, resource allocation will ensure proper fund allocation to different departments. This aligns with the company’s strategic goals, offering the highest return on investment (ROI).
Coming to budgeting. This involves allocating or distributing the company’s resources to meet various costs. These costs range from mortgages or rents to raw materials, employee salaries, and other financial obligations.
Financial Analysis and Control
To evaluate the economic health of an organization, you can use various types of economic analysis. This will enhance your financial decision-making and planning. Some of those types are-
Ratio analysis- Requires using various financial ratios to gather knowledge about profitability, efficiency, liquidity, and solvency.
Trend / Horizontal analysis: This requires data analysis by tallying financial statements over time to identify trends, patterns, and movements in performance.
Variance Analysis: It makes use of a comparison between actual financial performance and planned performance. This facilitates identifying deviations and their reasons so that corrective measures can be taken.
On the other hand, financial control mechanisms help to monitor financial performance. It also ensures that the resources are utilized effectively through- financial reporting, internal audits, KPIs, cost and risk management, capital allocation, and investment decisions.
Investment decisions involve selecting investment opportunities considering the objectives, goals, and risk tolerance in the company’s finances. It has a critical role in capital allocation. It determines how resources will be distributed among various projects to maximize the ROI. It further contributes to growth strategies by driving expansion in the market and adapting to new market changes through sustainable growth. Financial opportunities must be evaluated to determine which opportunities are worth pursuing. Two such methods are-
Net Present Value (NPV)- Evaluate profitability by comparing the values of cash inflows and outflows.
Internal Rate of Return (IRR)- This shows the expected return rate on investment, making the NPV equal to zero of the investment.
By making sound investment decisions, you can achieve- growth and expansion, resource allocation optimization, risk management, competitive advantage, financial stability, and resilience.
Financing Decisions
In case of choosing financial options, you can make use of- Equity financing (involves selling ownership stakes in the form of shares), Debt financing (Involves borrowing money in the form of loans and bonds, to be repaid later with interest), and Hybrid Instruments (involves a combination of both equity and debt financing).
Risk Management
Risk management is crucial for maintaining any business’s long-term stability and viability to protect its financial health. It involves- market risks (potential threats a company can encounter due to adverse changes in market conditions), credit risk (potential loss due to a borrower’s inability to meet contractual obligations), and liquidity risk (risks involving inability to meet short-term commitments caused due to failure in converting assets into cash quickly).
Some Risk Management Strategies Involve
diversification (spreading investments across various assets to reduce the exposure to a single risk), hedging (involves protection against losses by balancing the risk exposures), and insurance (the company pays an insurance provider to cover up against specified risks).
Importance of Financial Management
Each function discussed above has its fair share of contribution towards financial management. Be it through planning and budgeting, making appropriate decisions, implementing them, and finally managing the risks, financial management has it all covered. Proper capital allocation, investment strategies, cash flow management, and financial reporting will help your business reach heights in the market.
In most cases, these functions interconnect at a level to facilitate a business’s overall growth and sustainability. Let’s see them through some examples-
- Your work plan (financial planning) will be based on your company’s strategic goals. This lays the foundation for strategic financial management.
- The way you decide about your capital structure has a direct impact on your investment strategies. It will determine how much funds are available for investment opportunities.
- The way you regulate the cost control will directly facilitate you in managing financial risks. It ensures how well the resources and costs are used efficiently.
- The data obtained from financial analysis will give you an estimate of the success of the economic health of your company. It will further help you in the process of financial decision-making that aligns with the company’s financial objectives.
Conclusion
Thus, so far, financial management functions work together to reach a company’s financial goals.
The scope of financial management is very well visible in our personal lives. For example- proper financial planning and budgeting will serve a multi-fold purpose: it will help you allocate your financial resources, meet your immediate needs, save for the future, and eliminate debt (if any).
So, it’s high time that you consider the importance of expert financial advice and how to achieve it through available tools. It’s time you take control of your business’s financial health with the best financial advisory services available.
Regarding the best financial advisory services, EaseUp’s virtual CFO services can efficiently cater to your financial needs to help you reach your full potential.
EaseUp’s customized advice will give you the support you need to succeed.
So, what’s holding you back? Visit our website and unlock the key to your financial success with our virtual specialized tool.
