Understanding Financial Management: Definition, Varieties, and Operational Mechanisms
Understanding Financial Management and having a grasp of it crucial for both finance managers and business owners when it comes to making informed decisions about money management. In this article, we’ll delve into the fundamentals of financial management and offer an outline of its significant domains.
Scope of Financial Management
Financial management in a company is guided by the principle of protecting the economic interests of investors and shareholders while ensuring business growth. In addition to safeguarding their interests, financial managers are also responsible for delivering a greater return on investment (ROI) that generates more wealth for all shareholders. The financial management scope and functions are clearly outlined by specific objectives that experts and business leaders universally accept.
What is financial management?
Financial management is the process of planning, organizing, directing, and controlling a company’s financial resources to achieve its objectives. It entails the proper management of a company’s financial resources, which includes making investment decisions and implementing cash management strategies to increase profitability and minimize risk.
Financial managers have specific and highly impactful objectives that they aim to achieve, including:
Evaluating Capital Requirements
Financial managers are required to assess various factors such as the expenses of current and fixed assets, marketing costs, the need for additional capital, long-term operations, and personnel expenses. Well-run businesses have well-defined projections for short-term and long-term financial requirements in place.
The determination of a company’s capital structure
This involves establishing a framework that guides decisions regarding the short-term and long-term debt-equity ratio
Establishing Effective Financial Policies
Financial management involves creating effective policies that guide various financial activities such as cash control, lending, borrowing, and others
Financial managers who excel at their job are capable of optimizing available financial resources to navigate through different scenarios, reducing cash burn, and increasing cash churn to generate maximum return on investment.
What are the different types of financial management?
Corporate financial management
This involves making decisions related to financing and investment in an organization. It entails managing the capital structure, determining the optimal mix of debt and equity financing, and making investment decisions.
Personal financial management
This involves managing an individual’s financial resources. It encompasses activities such as budgeting, saving, investing, and protecting assets through insurance and estate planning.
Public financial management
This pertains to the financial operations of government entities. This includes activities such as budget preparation, revenue collection, and management of expenditures.
International Financial Management
pertains to managing the financial operations and investments of companies that operate across international borders. It includes making decisions related to foreign exchange rates, currency risk management, cross-border financing, and foreign investment decisions.
Non-Profit Financial Management
Financial management in non-profit organizations involves overseeing the financial resources and activities related to fundraising, budgeting, and grants management.
Roles and Responsibilities of Financial Managers and Advisors
One of the critical functions of financial managers and advisors is fundraising. In order for businesses to grow and establish a good market reputation, having sufficient cash and liquidity is crucial. Therefore, financial managers and advisors make decisions on raising funds through equity or debt financing. They aim to maintain a healthy balance between debt and equity to ensure the company’s financial health is not adversely impacted.
Allocation of Funds
Effective allocation of funds is just as crucial to a business’s financial well-being as fundraising.
Financial managers must conduct due diligence on factors such as business size, growth potential, and the nature of assets (short-term or long-term) before allocating funds in the most optimal way
Generating profits is one of the primary objectives of any business except for social organizations. The profits earned by a company determine its financial health and future growth. Hence, it is essential to use the generated profit efficiently. Financial managers are responsible for deciding whether the profits should be reinvested to acquire assets and expand coverage, spent on marketing, acquiring other businesses, or invested as a buffer resource.
Comprehending Capital Markets
The shares of a company are traded on stock exchanges, and their value, along with the changes in the company’s market capitalization, is continuously fluctuating. Effective financial managers must be knowledgeable about the dynamics of the capital market and the associated risks. Determining whether to give dividends to shareholders when the company earns profits or to reinvest them in the business is one of the essential decisions that can impact shareholder sentiment and the company’s reputation.
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