What Is Financial Management?

At its core, financial management is the practice of making a business plan and then ensuring all departments stay on track. Solid financial management enables the CFO or VP of finance to provide data that supports creation of a long-range vision, informs decisions on where to invest, and yields insights on how to fund those investments, liquidity, profitability, cash runway and more.

ERP software can help finance teams achieve these goals: A financial management system combines several financial functions, such as accounting, fixed-asset management, revenue recognition and payment processing. By integrating these key components, a financial management system ensures real-time visibility into the financial state of a company while facilitating day-to-day operations, like period-end close processes.

Importance of Financial Management

Solid financial management provides the foundation for three pillars of sound fiscal governance:

Strategising, or identifying what needs to happen financially for the company to achieve its short- and long-term goals. Leaders need insights into current performance for scenario planning, for example.

Decision-making, or helping business leaders decide the best way to execute on plans by providing up-to-date financial reports and data on relevant KPIs.

Controlling, or ensuring each department is contributing to the vision and operating within budget and in alignment with strategy.

With effective financial management, all employees know where the company is headed, and they have visibility into progress.

Objectives of Financial Management

Building on those pillars, financial managers help their companies in a variety of ways, including but not limited to:

Maximizing profits by providing insights on, for example, rising costs of raw materials that might trigger an increase in the cost of goods sold.

Tracking liquidity and cash flow to ensure the company has enough money on hand to meet its obligations.

Ensuring compliance with state, federal and industry-specific regulations.

Developing financial scenarios based on the business’ current state and forecasts that assume a wide range of outcomes based on possible market conditions.

Dealing effectively with investors and the boards of directors.

Ultimately, it’s about applying effective management principles to the company’s financial structure.

Scope of Financial Management

Financial management encompasses four major areas:

Planning

The financial manager projects how much money the company will need in order to maintain positive cash flow, allocate funds to grow or add new products or services and cope with unexpected events, and shares that information with business colleagues.

Planning may be broken down into categories including capital expenses, T&E and workforce and indirect and operational expenses.

Budgeting

The financial manager allocates the company’s available funds to meet costs, such as mortgages or rents, salaries, raw materials, employee T&E and other obligations. Ideally there will be some left to put aside for emergencies and to fund new business opportunities.

Companies generally have a master budget and may have separate sub documents covering, for example, cash flow and operations; budgets may be static or flexible.

Managing and assessing risk

Line-of-business executives look to their financial managers to assess and provide compensating controls for a variety of risks, including:

Market risk: Affects the business’ investments as well as, for public companies, reporting and stock performance. May also reflect financial risk particular to the industry, such as a pandemic affecting restaurants or the shift of retail to a direct-to-consumer model.

Credit risk: The effects of, for example, customers not paying their invoices on time and thus the business not having funds to meet obligations, which may adversely affect creditworthiness and valuation, which dictates ability to borrow at favourable rates.

Liquidity risk: Finance teams must track current cash flow, estimate future cash needs and be prepared to free up working capital as needed.

Operational risk: This is a catch-all category, and one new to some finance teams. It may include, for example, the risk of a cyber-attack and whether to purchase cybersecurity insurance, what disaster recovery and business continuity plans are in place and what crisis management practices are triggered if a senior executive is accused of fraud or misconduct.

Procedures

The financial manager sets procedures regarding how the finance team will process and distribute financial data, like invoices, payments and reports, with security and accuracy. These written procedures also outline who is responsible for making financial decisions at the company—and who signs off on those decisions.

Companies don’t need to start from scratch; there are policy and procedure templates available for a variety of organization types, such as this one for nonprofits.

Original text link: https://www.netsuite.com.au/portal/au/resource/articles/financial-management/financial-management.shtml