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University of Sunderland

What are the principles of financial management?

Posted on: June 28, 2024
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Understanding commercial financial principles is essential for all professionals, no matter what area of the business you work in. As you progress into more senior positions, it’s likely you’ll be given a budget and a credit card for your team which aligns with the overall financial goals of the business. 

Your role is to align your team’s actions with the overall business decisions, and ultimately positively impact the growth and success of the company you work for. By understanding key principles of financial management, you’re more able to make effective decisions and create a good return on investment.

In this blog, we’ll help you to understand the principles of financial management, giving you the essential knowledge all professionals in leadership positions need to progress in their careers and make a positive impact.

What is financial management?

To start, it’s important to understand what financial management is for a business. This term refers to the strategic planning, organising, and controlling of financial undertakings in an organisation.

Some of the objectives individuals in charge of financial management may be tasked with include maintaining the supply of funds to the business, ensuring shareholders get good returns on their investments, optimising the use of funds, and creating good investment opportunities.

Understanding the basic principles of cash flow

Cash flow is a corporate finance measurement of the amount of cash coming into and going out of a business within a particular period of time. Positive cash flow is when you have more cash coming in than going out. Negative cash flow is when you have more cash going out than coming in.

Some different types of cash flow include:

  • Operating cash flow: The net cash generated from day-to-day business activities.
  • Investing cash flow: The net cash generated through investment activities.
  • Financing cash flow: The net cash generated from financial activities such as debt payments, shareholders’ equity, and dividends payments.
  • Free cash flow: The net cash left over after tax liabilities are paid, depreciation, amortisation, and changes in working capital are accounted for, and capital expenditures such as property, equipment and technology, are subtracted.

What are the benefits of financial planning?

Financial planning is essential for business success. By forecasting how much cash flow you have and budgeting your spend, you’re more able to manage financial resources effectively and ensure your business is profitable and successful in a sustainable way not just in the short-term. 

Understanding a business’s allocation of spend and expected returns is important for all organisations, from startup to established business.

Efficient financial planning enables a business to make strategic business decisions as it offers insights into the financial implications of potential investments, can evaluate any risks in current or potential spending plans, and can identify opportunities for growth.

How does the time value of money principle impact financial decision making?

The time value of money (TVM) is a core financial principle, for both businesses and personal finance. It is a concept which suggests a certain sum of money is worth more now than it will be in the future due to its earning potential in the interim. The sum has the potential to grow by investing it, so delaying the investment is considered to be a lost opportunity.

The basic formula for TVM takes into account the present value of a sum of money, the interest rate, the number of compounding periods, and how long it will be invested for. It then calculates the rate of return to predict the sum’s future value.

The sooner invested cash can be used, the more valuable it is. This principle is used when calculating the valuation of a company by discounting any future cash flows to reflect their present-day values.

How does risk management play a role in financial management principles?

The financial principle of risk management is centred around the concept of needing to take calculated risks in order to see financial returns. 

As well as investments as we think of them, such as locking money away in high-interest accounts, a company may also need to weigh the risk and potential return on investment (ROI) on items such as software or assets. If a piece of software is expensive, spending money on it is a risk. The company needs to assess whether the amount of money it will generate as a result of using this software is enough to outweigh the risk of the initial investment.

Undertaking risk management before all large financial transactions are finalised ensures the business is being smart about where it spends its money, and is only taking risks when they have a high chance of paying off.

Why study financial management?

Whether you work for a financial provider or not, studying financial management will give you valuable skills and knowledge which will help you to progress into leadership positions.

Managers across all departments of a business are often key stakeholders in implementing a budget within their team. Understanding financial statements to ensure your team spend is on track will enable you to manage your team budget effectively. 

By knowing what you’re spending and strategically calculating risks, you can increase overall return on investment. Having the ability to make efficient strategic business decisions in this way will make you highly sought-after with employers.

Gain essential business skills with the University of Sunderland

If you’re looking to take your career to the next level, our 100% online MSc Management with HR will give you a thorough grounding of essential business skills that employers look for in candidates.

Taught part-time, you can fit your studies around your current role and apply what you learn as you go. All course content is accessible on the go, so you can carry out your studies whenever and wherever you like, fitting your degree around your current commitments and continuing to earn while you learn.

For further information on this career-changing master’s course, to see what topics you’ll explore in more detail, and to find out more on the entry requirements, head over to our MSc Management with HR course page.

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