The Importance of Financial Management
Financial management is one of the most important aspects of business. To start up or even run a successful business, you will need excellent knowledge of financial management. So, what exactly is this form of management and why is it important? Read on to find out more.
What is financial management?
Financial management refers to the strategic planning, organising, directing, and controlling of financial undertakings in an organisation or institute. It also includes applying management principles to the financial assets of an organisation, while also playing an important part in fiscal management. Here are some of the objectives involved:
- Maintaining enough supply of funds for the organisation
- Ensuring shareholders of the organisation get good returns on their investment
- Optimum and efficient utilisation of funds
- Creating real and safe investment opportunities
Financial management is also made up of certain elements. These include:
- Financial planning: This is the process of calculating the amount of capital that is required by an organisation and then determining its allocation. A financial plan includes certain key objectives which are:
- Determining the amount of capital required
- Determining the capital organisation and structure
- Framing of the organisation’s financial policies and regulations
- Financial control: This is one of the key activities in financial management. Its main role is to assess whether an organisation is meeting its objectives or not. Financial control answers the following questions:
- Are the organisation’s assets being used competently?
- Are the organisation’s assets secure?
- Is management acting in the best financial interests of the organisation and the key stakeholders?
- Financial decision-making: This involves investment and financing with regard to the organisation. This department makes decisions about how the organisation should raise finances, whether they should sell new shares, or how the profit should be distributed.
The financial management department of any firm is handled by a financial manager. This department has numerous functions such as:
- Calculating the capital required: The financial manager has to calculate the amount of funds an organisation requires. This depends on the policies of the firm with regard to expected expenses and profits. The amount required has to be estimated in such a way that the earning capability of the organisation increases.
- Formation of capital structure: Once the amount of capital the firm requires has been estimated, a capital structure needs to be formed. This involves debt-equity analysis in the short and long term. This depends on the amount of capital the firm owns and the amount that needs to be raised via external sources.
- Investing capital: Every organisation or firm needs to invest money in order to raise more capital and gain regular returns. Hence, the financial manager needs to invest the organisation’s funds in safe and profitable ventures.
- Allocation of profits: Once the organisation has earned a good amount of net profit, it is the financial manager’s duty to efficiently allocate it. This could involve keeping a part of the net profit for contingency, innovation, or expansion purposes, while another part of the profit can be used to provide dividends to the shareholders.
- Effective management of money: This department is also responsible for effectively managing the firm’s money. Money is required for various purposes in the firm such as payment of salaries and bills, maintaining stock, meeting liabilities, and the purchase of any materials or equipment.
- Financial control: Not only does the financial manager have to plan, organise, and obtain funds, but they also have to control and analyse the firm’s finances in the short and long term. This can be done using financial tools such as financial forecasting, ratio analysis, risk management, and profit and cost control.
Why is financial management important?
This form of management is important for various reasons such as:
- Helps organisations in financial planning
- Assists organisations in the planning and acquisition of funds
- Helps organisations in effectively utilising and allocating the funds received or acquired
- Assists organisations in making critical financial decisions
- Helps in improving the profitability of organisations
- Increases the overall value of firms or organisations
- Provides economic stability
- Encourages employees to save money, which helps them in personal financial planning
Examples of financial management
Example 1: Suppose you decide to start your own business along with seven partners. You choose to rent a small office in New York, USA. You may ask the following questions:
- Is New York best suited for my office location?
- Should I opt for an independent office or a co-working space?
- What is the office rent in New York per annum?
- What if I buy the office property? What return on investment can I get from such a deal 15 years from now?
A financial manager and real estate specialist would be able to solve these issues with ease. They would provide you with the clarity you need to understand where your funds must go and what your business goals should look like for increased profitability.
Example 2: Let’s assume that you are a small bookstore business that has received funding to take your business online.
Given the new financial disposition, your new areas of interest would be:
- What should I do to achieve my business goals?
- What investments should I make to take the business online?
- What is my current market value proposition and how can I increase that?
- What is my finance strategy for doubling the capital I have right now?
- Where do I see myself in the next five years as a business?
- How do I repay my business loans and meet the business goals to receive my next funding?
A financial manager would answer all these questions and point you in the right direction in each case through their business and financial expertise.
Why study financial management?
- Diverse career opportunities: Studying financial management opens up a lot of diverse career opportunities. It could be in the private or public sector. Some of the career options include investment banking, entrepreneurship, financial analysis, financial and managerial accounting, and strategic financial management. It is also beneficial for those people who are interested in starting their own business. Doing a financial management course or obtaining a finance degree can help people get promotions or better accounting jobs.
- Improve interpersonal skills: Doing a course in this field will allow you to build better communication and teamwork skills through developing relationships with your colleagues.
- Builds personality: Doing a course in this field will also improve your soft skills. People who wish to work in this sector should be excited to talk about finance for hours on end, showing that they’re passionate about their careers. This makes them appear more personable and more knowledgeable in their field.
- Greater job prospects: According to the USA’s Bureau of Labour Statistics (BLS), there has been a spike in demand for finance manager jobs in the US due to a “growing range of financial products and the need for in-depth knowledge of geographic regions”. This is further proven by the fact that the demand for careers in financial management has increased by 14%, careers in financial advising by 32%, and careers in financial analysis by 23%.
- Higher salary packages: People working in this sector are usually paid very well, whether it is at entry or management level. This is a highly skilled job role that is always in demand, even during recessions.
- Career growth: There is always an opportunity to develop your professional skills and climb the career ladder. You can quickly acquire in-depth knowledge of financial management systems and financial management software once in this field. If you possess this knowledge and great aptitude skills, this field is perfect for you.
Scope of studying financial management
Doing a management course related to finance or gaining a finance degree offers excellent career opportunities. Here are some of the diverse career options available:
- Corporate manager
- Investment banker
- Financial advisor
- Financial analyst
- Financial examiner
- Financial manager
- Personal financial planner
- Budget analyst
- Investor relations associate or executive
- Credit analyst
If you are interested in doing a course in this field, the London School of Business and Finance (LSBF) offers a number of courses in this field such as a Postgraduate Certificate in Finance, an Online MA in Finance & Investment as well as short courses in finance.
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