Imagine you’re planning to set up your business in your favorite niche, on stationery items. But you’re not feeling confident with your finances. You are unsure where to start and how to proceed with your finances. You are skeptical about your investments. People are generally afraid of investments when they are uncertain of the return on that investment.
But everything starts somewhere!
So, if you’re worried about this issue, financial management is the answer to your worries.
But what is financial management?
- Financial management is the strategic, step-by-step planning, organization, and implementation of financial decisions. Its goal is to achieve maximum profit and minimize costs without compromising quality
Functions of financial management
It includes making and implementing wise investment plans, allocating resources efficiently, and maintaining a healthy cash flow.
Financial management is essential because it plays a game-changer in any business. Suppose you have expert guidance in managing your business’s finances. In that case, no one can stop you from giving your company a significant position in the market.
The scope of financial management has secured a place in the increasing complexity of modern business environments. But why are they getting increasingly complex?
Well, it is multifactorial. Complexities appear at various levels, whether due to rapid globalization, technological advancements (such as AI/ automation), increased market competition, disrupted supply chains due to natural disasters and trade wars, or modern consumer expectations.
In such situations, financial management can come to your rescue. It can help you plan and forecast strategically, manage risk, allocate resources, control costs, invest wisely, etc. This will help you deal effectively with the current complexities in the business environment. The functions of financial management have a direct impact on mitigating the adverse effects of increased market complexities.
These complexities sound overwhelming to deal with at times. But our specialized team at EaseUp has a solution ready for you. We have a team of financial experts to help you deal with your financial doubts and problems.
Now, let’s delve deeper into the importance of financial management in modern business environments.
Core Functions of Financial Management
While we often discuss the core functions of financial management and its scope in the current market scenario, we usually ignore something important. We might talk about how important it is to manage our finances to make fulfilling decisions, but how many of us know in detail the various financial decisions one might make for their company?
Considered as the three pillars of financial management, investment decisions, financing decisions, and dividend decisions are at the center of financial management.
Investment decisions are the ones that you make to allocate financial resources across various departments, assets, and projects. The resources invested will fetch you positive results over some time.
In financing decisions, you must decide how your company will gather funds to finance the investments. Balancing debt and equity can optimize the capital structure.
Lastly, business expansion decisions are made to distribute the profit between the shareholders and for the company’s reinvestment.
Besides the above mentioned decisions, financial management functions considerably manage risk and plan finances. You can protect your company against financial losses, improve stakeholder confidence,
enhance decision-making, and help your business maintain continuity. Effective financial planning aids in maintaining liquidity, clear direction, profitability, and efficient resource allocation.
Role of Financial Advisors
The pivotal role of financial advisors in contributing to achieving business goals is to ensure the effective utilization of financial resources to reach the company’s maximum financial potential. Financial managers have a critical input in financial decision-making and resource allocation.
In this modern business world, which is already fast and competitive, a well-informed financial expert is necessary. A financial manager fulfills that role.
The role of financial advisors in decision-making extends from capital budgeting, financing decisions, and risk management decisions to cost control and profitability.
In resource allocation, a financial advisor’s roles revolve around capital allocation, making a roadmap for budgeting, managing liquidity to cover short—and long-term obligations, assessing the cost of investing in human capital, and monitoring and evaluation.
The Importance of Financial Management
Financial management is of utmost importance. Maintaining healthy finances is a real-time challenge, especially in this time of heightened competition and technological advancement.
Proper financial management ensures business stability in the following ways: by
- Ensuring the company has sufficient liquidity to meet its financial commitments.
- Mitigating financial risks. Such risks can be credit risks, currency fluctuations, and market volatility.
- Formulating long-term goals to allocate resources for future use helps foster resilience and stability over time.
- Control the cost. This can be done by monitoring the expenses so they don’t exceed the revenue generated.
Another area that financial management serves is profitability. It ensures that revenue generation is far more than the cost invested. It can be done by
- By allocating resources to the most profitable projects/ investments/ products that maximize the ROI.
- By Helping to analyze the pricing structure so that the profit margins are adequate.
- By Ensuring that the company’s capital is utilized efficiently to generate profits.
Finally, business growth can be mastered using financial management by-
- Expanding the company’s market share and overall size.
- Assessing the company’s capital required to raise the necessary funds to finance new projects and expand operations.
- Forecasting future needs, revenue, and expenses, thus preventing over-expansion and preventing financial strain.
Impact of Poor Financial Management (PFM)
I’ve been talking a lot about the positive side of the coin. But we must also know the darker side, considering occasional poor financial management. It’s essential to manage finances, but it’s more important to manage it properly, reducing the risk of losses.
Poor financial management can have severe consequences, leading to decline or failure. Let me sum that up as follows:
- PFM can reflect on a shortage of cash flows. This means that the company cannot meet its daily financial obligations—like paying its employees, suppliers, etc. This can damage the relationship between you and your employees and stakeholders. Sounds pretty terrible, right?
- This brings us to the next point: Uncontrollable PFM expenses lead to reduced profitability, often resulting from poor cost control and budgeting.
- It’s inevitable that reduced profitability over time can result in stunted growth, lack of funds for expansion, and missed opportunities.
- All the above points clearly show that the inability to maintain proper financial management can lead to severe consequences. This outlines that all these can happen only when the risk management strategies have failed the system.
- All these consequences can lead to a decline in the business’s value, as shareholder wealth is eroded and they lose confidence in your company.
Conclusion
Thus, we can conclude that effectively managing our finances (at home or in business) is crucial to navigating the complexities of modern business. Let’s sum that up.
- Effective financial management can help you fight the immense competition and globalization in a global market.
- You can also expand your business into new markets by controlling costs and maximizing profit.
- Finally, financial management can provide accurate insight into the company’s data, forecasts, and analysis to promote sustainability and a fair amount of profitability.
Visit EaseUp, and don’t hesitate to seek help immediately. We care for you and your needs. We are just a click away!
