Financial Management?

Financial management is all about monitoring, controlling, protecting, and reporting on a company’s financial resources. Companies have accountants or finance teams responsible for managing their finances, including all bank transactions, loans, debts, investments, and other sources of funding.

Purpose of financial management

 

The purpose of financial management is to guide businesses or individuals on financial decisions that affect financial stability both now and in the future. To provide good guidance, financial management professionals will analyze finances and investments along with many other forms of financial data to help clients make decisions that align with goals.

Financial management can also offer clients increased financial stability and profitability when there’s a strategic plan for where, why, and how finances are allocated and used. How financial management professionals help clients reach goals will depend on whether the client is a company or an individual.

Types of financial management

Finance management professionals handle three main types of financial management for companies. These types involve various aspects of the internal decisions a company will likely need to make about cash flow, profits, investments, and holding debt. Many of these decisions will depend significantly on factors like company size, industry, and financial goals. Financial management professionals help companies reach financial goals by guiding in these areas of financing, investment, and dividends.

Financial

Financial management professionals assist companies in major decisions that involve acquiring funds, managing debt, and assessing risk when borrowing money for purchases or to build the company. Financing is also required when raising capital. Companies can make better, more strategic financing decisions to raise capital or obtain funds when they have information on cash flow, market trends, and other financial stats on the health of a company.

Investment

Financial management professionals can help companies choose where to invest, what to invest in, and how to invest. The financial professional’s job is to determine the number of assets (both fixed and long term) a company will need to hold and where cash flow goes based on current working capital. In essence, this type of financial management is about assessing assets for risk and return ratios. Financial managers will consider a company’s profits, rate of return, cash flow, and other criteria to assist companies in making investment decisions.

Dividend

Companies should have a dividend disbursement plan and policy in place, with guidance from a financial management professional who can create and implement that plan, suggest modifications when needed, and monitor payouts if and when they occur. Any time a financial decision is made, it’s essential to consider dividend payments since you may hold dividends to fund certain financial decisions within the company.

It’s also important to have a flexible long-term plan that can grow with the company. Some more mature companies may pay out dividends at certain times or once a year; the payout schedule depends on many factors. Other companies may retain or reinvest dividend payments back into the company if the company is in a growth phase.

What is the financial management cycle?

The financial management cycle is a financial planning process critical to a company’s growth and development. It includes:

 

• Planning and budgeting
• Resource allocation
• Operations and monitoring
• Evaluation and reporting

 

Effective financial management aligned with an organization’s goals and objectives can lead to greater efficiency and stability. These parts of the financial management cycle must work together to be the most effective.

 

1. Planning and budgeting

During this analytical phase in the financial management cycle, a company uses past and current financial data to set financial targets, modify objectives, and make changes to the current budget. This phase will typically involve detailed planning as well as a big picture one, meaning a company will look at day-to-day operations, long-term financial plans, and try to link financial targets to these activities.

The goal is to create a strategic financial plan for the company that aligns with objectives for the next three to five years. When setting specific budgets, a company may budget for one fiscal year at a time. A big reason for this is that a budget involves many moving parts that are subject to change by market fluctuations.

2. Resource allocation

Financial managers assign value to capital resources ( anything a company uses to manufacture/produce goods/services) and offer advice on allocating these resources based on criteria like projected company growth and financial goals. Resource allocation is important because it allows a company to have a long-term financial plan focused on its business objectives. Financial management professionals help companies by providing a framework for using capital resources and creating a portfolio that will generate the most revenue, given the company’s financial status.

3. Operations and monitoring

This phase is critical to protect against fraudulent activity, errors, compliance issues, or other variances in the allocation of funds, etc. Financial management professionals should run regular financial reviews of business operations and cash flow. These periodic reviews can help mitigate fraud and identify other issues. It is a preventative step that ensures the continuity of business operations by securing the validity and accuracy of a company’s financial processes.

4. Evaluation and reporting

Financial management professionals should evaluate a company’s current financial management system and propose changes when necessary. Financial reports and financial data can be helpful when assessing the efficiency and success of an existing system.

Some criteria a financial management professional may consider when evaluating a financial management system include security, compliance, company data needs, and level of support needed. These criteria vary by the company’s size, industry, current financial situation, and long-term goals.

Financial management professionals should be able to offer research-based suggestions that can help a company securely store and manage financial data in compliance with relevant laws and harness that data when needed.

How to work in finance management

To work in finance management, you’ll need a bachelor’s degree in business, economics, finance, or a related field. While there’s no mandatory licensure for careers in financial management, certification is highly recommended. In many cases, employers like to see at least five years of professional experience before hiring into a financial management position. Typical jobs that individuals may pursue as an entry point to finance management may include loan officer, junior tax accountant, personal finance advisor, or accountant.