The importance of financial management in businessPosted on: August 5, 2022
Managing money is at the root of all major decisions in business. As such, good financial management transcends sector, industry and business type, making it one of the most-important responsibilities of business leaders and directors.
Activities across every area of a business – from SMEs to global corporations – have an impact on financial performance. Financial performance, in turn, has an impact on financial sustainability, which has an impact on a company’s current and future success. In order for a business to thrive, its finances – and its financial management – must be closely evaluated and controlled by senior management.
What is financial management?
Financial management is the specialised process of managing money in order to achieve business goals. Undertaken by senior management – typically chief financial officers (CFOs) or vice-presidents of finance, among others – it involves planning, directing, monitoring and controlling organisational funds in order to make effective financial decisions. In essence, it seeks to apply management principles to the financial structure of a business.
While ensuring a business is both successful and profitable are the main aims of financial management, it also seeks to:
- support compliance and regulation adherence
- maximise profits, stakeholder returns and overall company value
- track liquidity and cash flow
- provide economic stability
- enable up-to-date financial reporting and supplies financial information and data to inform KPIs
- develop financial scenarios to support forecasting
- uphold risk management efforts
While many organisations have in-house financial teams and managers, many also enlist the help of financial institutions and other professionals to assist them with financial management.
Main types of financial management
All types of financial decision-making have the potential to affect a company’s assets, liabilities, revenue generation, and profit margins. Ultimately, they can impact capital structure and how well a business performs on a broader scale. As such, financial planning must focus on both the short-term and long-term objectives of a business.
Critical decisions must be made in order to support financial wellbeing, including:
- identifying resources
- establishing procedures
- acquiring assets
- raising funds
- managing day-to-day capital
- expenditure and allocation management
To achieve these ends, financial management is divided into three main categories of financial decision-making: investment decisions; financing decisions; and dividend decisions.
Investment decisions focus on making the most-prudent investments in different assets in order to deliver the highest-possible returns for investors. Leaders must factor rate of return, project cash flow and investment criteria into any decision making. Decisions can be short-term or long-term, and require finance professionals to assess investment opportunities to identify the best options:
- Long-term investment decisions (also known as capital budgeting decisions): these are concerned with the management of fixed capital. As they are often large investment amounts, concerning periods of anything from one year to upwards of 10 years, they are difficult and costly to reverse, and so require thorough evaluation. These investments directly affect a company’s earning capacity, valuation and profitability, as they affect the size of assets, competitiveness, and scale of operations. Examples of long-term investment decisions include: introducing a new product line; opening a new factory, warehouse, office or shop; taking over an existing firm; and investing in machinery and plant equipment.
- Short-term investment decisions (also known as working capital decisions): these are concerned with the daily activities and operations of a business. Effective decisions must be made in this area as they help to ensure healthy working capital, and they affect short-term profits and liquidity. Short-term investment decisions relate to aspects such as inventory management, management of cash, and receivables.
Whether short-term or long-term, investment processes must include formulating investment objectives, ascertaining risk profiles, and monitoring investment performance.
Financing decisions involve identifying the best ways in which to raise finance from both short-term and long-term financial sources. Alongside calculating the financial risks associated with any options and the cost of capital, these decisions take into account what amount of funding will be raised from borrowed funds and shareholder funds. Leaders must weigh up factors such as: cost – generally selecting the cheapest financial sources; risk; floatation costs; cash flow positions; fixed operating costs; control considerations; and state of capital markets.
Dividend decisions relate to balancing the distribution of profit shares – the dividends – among shareholders, with the amount of profit retained in the business to support future growth. Deciding how to apportion this money is influenced by a number of factors, such as: earnings and earning stability; dividend stability; growth opportunities; cash flow positions; shareholder preference; taxation policy; stock market response; access to financial markets; and legal and contractual constraints.
Pursuing a career in financial management
As there are different routes into careers in financial management, there are different entry requirements.
An honours degree in accountancy, finance, business, economics, management, mathematics or statistics can be helpful – as well as offering exemptions from some professional examinations – however graduates of all disciplines are welcome. While relevant postgraduate courses can be useful, such as an MSc Financial Management, they aren’t essential. Many individuals pursue professional qualifications and accreditation – either full-time or part-time – through institutions such as the Institute of Financial Accountants (IFA) or the Association of Chartered Certified Accountants (ACCA). Professional accountancy training must be completed – and is offered by some employers – in order to progress to management positions.
To be a financial manager, there are a number of key skills that are required, including numeracy and technical skills, problem-solving ability and initiative, an analytical approach, and good commercial awareness, among others. Relevant work experience placements are a great way to gain industry insight, an awareness of financial management roles, and competitive advantage in the job market.
There are also plenty of related careers within financial services and corporate finance, such as management accounting, financial consultancy and financial analysis.
Boost the financial wellbeing and prospects of your organisation
Keen to take the next step in your career? Ready for more advanced, strategic and cross-cultural roles? Gain the expertise to underpin effective financial decision-making of all types – and use your skills for business success – with the University of Sunderland’s online International MBA programme.
Our flexible programme prepares you to make an impact in fast-changing, technology-driven, global business environments. You’ll become adept at identifying opportunities, navigating change and guiding businesses in all manner of scenarios. Through flexible, online modules, you’ll explore operations management, financial accounting, international marketing, global trade and strategy, leadership, organisational behaviour and much more.