In business, the way in which we manage money influences company performance, with a strong impact on financial sustainability and long-term success. Good financial management is what makes the difference between a profitable and an unprofitable business. In order for a business to prosper, it needs a well-designed budget plan constantly monitored and managed by top management experts.
Financial management is one of the most important and difficult responsibilities faced by entrepreneurs. If you are of the same opinion, you have come to the right place. We will explain you everything you need to know on financial management at a theoretical level, so that you can form a foundation on the subject and start making informed decisions.
Let’s start with the basics:
What is financial management in business?
Financial management is the process of managing money flows in and out the company. It involves planning, distributing, controlling and monitoring the organizational budget in order to make effective financial decisions.
In essence, financial management is intended to draft a profitable budget plan, which all company departments are familiar with and respect. This budget plan should reflect the organization goals and provide a clear view of the financial resources available to each department.
A financial manager must ensure that all resources are efficiently distributed and closely monitor budget implementation, optimizing processes according to market dynamics and to organizational needs.
The importance of financial management
Financial management is essential for any organization, as it reflects the way it plans and manages its budget. This process helps leaders achieve their set goals, make good decisions based on financial statistics and ensure that all departments are operating within their budget.
Basically, financial management contributes to business stability and success. It also provides information for everyone to understand where the company goes and how financial resources can be wisely used.
Financial management objectives
Financial management objectives reflect the objectives which the company aims to achieve on a short, average or long term in financial resources management. The objectives involved in financial management include:
- Optimal and efficient use of funds
- Increase profitability and value of shareholder investment
- Maintain financial balance between debt and equity
- Create real and safe investment opportunities
- Manage cash flows to cover current financial obligations
- Identify and manage financial risks to minimize their impact
- Improve operational efficiency by optimizing financial processes and reporting systems
Types of financial management
Within an organization, there are several types of financial management, used in day-to-day activities to effectively manage the company’s finances:
Cash Flow Management (Cash Flow Management): manage a company’s cash inflows and outflows.
- Processes: cash flow projections, daily monitoring of available cash, management of payments and collections.
- Analyses: cash flow analysis, identification and evaluation of cash sources and uses, analysis of variances reported to the cash budget.
- Documents: cash budgets, cash flow statements, cash monitoring reports, cash forecasts.
Working Capital Management (Working Capital Management): manage current assets and liabilities to maintain an optimal balance between liquidity and profitability.
- Processes: inventory management, receivables and payables management, supplier and customer relationship management to optimize cash conversion cycles.
- Analyses: inventory turnover analysis, receivables, payables, current liquidity analysis
- Documents: inventory reports, accounts receivable and payable reports, cash cycle analyses.
Financial Risk Management (Financial Risk Management): identify, assess and manage the financial risks faced by a company.
- Processes: identify and assess financial risks, develop and implement risk management strategies, monitor risks on an ongoing basis to detect changes or new potential threats.
- Analyses: sensitivity analyses, scenario analyses, credit risk assessments, interest and currency risk assessments.
- Documents: risk management policies and procedures, risk analysis reports, periodic risk assessments.
Investment Management (Investment Management): manage a company’s investment portfolio to maximize its returns.
- Processes: evaluation of investment opportunities, selection of investment portfolio, monitor and review investment performance.
- Analyses: fundamental and technical analysis of stocks, valuation analysis and comparison of investment projects.
- Documents: investment minutes, investment prospectuses, investment performance evaluation reports.
Financing Management (Financing Management): manage a company’s funding source to ensure access to adequate funding and to optimize its capital structure.
- Processes: identify financing needs, select and obtain financing sources, structure and manage debt and equity.
- Analyses: cost of capital analysis, capital structure assessment and financial return analysis.
- Documents: financing plans, financing agreements, financial and accounting reports.
Budgetary Management (Budgetary Management): draw up, monitor and control budgets for various departments and projects, ensure an efficient use of financial resources.
- Processes: develop operating and capital budgets, monitor and review financial performance against established budgets.
- Analyses: analysis of budget variations, comparison of actual results with budgeted ones, analysis of variations causes.
- Documents: operating and capital budgets, budget and performance monitoring reports, revised budgets.
Financial management functions
Budgeting: Calculate the required capital amount based on the company’s policies regarding anticipated expenses and profits.
Example: Estimate the amount required to drive the company’s earnings growth.
Capital Structuring: Analysis of debt and equity to form a capital structure, influenced by the amount of capital held and the amount needed from external sources.
Example: Decide how to allocate capital between existing and external sources.
Investment Analysis: Invest funds in safe and profitable ventures for capital growth and earn regular profits.
Example: Evaluate investment opportunities to select most beneficial projects or assets.
Profits distribution: Efficient distribution of net profit, for contingency for example, for innovation, expansion or dividends to shareholders.
Example: Establish profit percentages distributed for various purposes according to the organization needs.
Effective money management: Effective management of financial resources to cover current expenses and avoid solvency problems.
Example: Plan and control money use in various departments of your business.
Financial control: Monitor and analyse company’s finances using tools such as financial forecasting, ratio analysis and risk management.
Example: Use ratio analysis to evaluate financial performance and make informed decisions.
Financial performance evaluation: Regular monitoring and evaluation of the company’s financial performance reported to established objectives.
Example: Identify strengths and correct weaknesses based on reported financial performance.
Compliance: Maintain company compliance with financial and tax regulations to avoid penalties and legal issues.
Example: Implement measures required to comply with financial regulations and rules in force.
How can ELFWISE help you manage your business finances?
Financial management can seem difficult at a first glance (and even at a second or third one). But we, the ELFWISE team, are here for you, speaking both the language of money and the language of your business. If you need someone to explain your business financial situation and offer you the best strategy to optimize your management, you can rely on us.
With ELFWISE, you get:
- Quick access to financial experts with extensive experience
- Exclusive focus on company performance and its financial component
- A complex approach to your business financial architecture
- Personalized training for your team of the internal financial-accounting department
- Optimize costs and direct resources to growth and development
We are committed to providing you with clarity and certainty in your decision-making process, adapting to the specific needs of your business
Frequent questions about financial management
What is financial management?
Financial management is the process of planning, organizing, controlling and monitoring all financial resources of an organization in order to achieve a set of business objectives.
What roles does a financial manager play?
The roles of a financial manager include financial planning, financial performance monitoring, managing financial risks and making strategic financial decisions in order to ensure the organization’s stability and development.
What is the purpose of financial management?
The purpose of financial management is to ensure good management of money and of financial resources of an organization in order to create a solid financial position on the market.