financial management essay example

financial management essay example

The Role of Financial Management in Business Success: An In-Depth Analysis

1. Introduction to Financial Management

Financial management can be broken down into any number of functions and responsibilities, but some of its key components include identifying the costs of operating a business, creating and executing business plans, and determining how to obtain and invest funds to cover those costs in a bid to generate a profit. Not surprisingly, financial management comprises a broad range of functions that have important implications for the success of a business. This paper begins by discussing the broad role of financial management as well as its placement within an organization. Key financial management challenges and strategies are then detailed, followed by an overview of many of the key financial management functions, including assets acquisition, the management of assets, the management of funds, and investment in projects. The various kinds of risk that are the subject of financial management are then discussed in addition to the numerous tools used to manage risk, the benefits of better risk management, and the cost of risk management. The paper then turns to an examination of the revenues and structure of costs associated with a business. Finally, a summary and review of some likely future financial management techniques are provided.

2. Key Principles and Concepts in Financial Management

Purpose: This chapter presents an analysis of the important principles of financial management. Its primary focus is to develop the required fundamentals of financial management as a knowledge discipline. Such an understanding is essential for an appreciation of the linkages between financial management and the various functions within a corporation. A specific objective is to reconcile the gap often observed between the practice of finance and the development of finance as an academic subject. It further develops the link between finance and economics and presents an awareness of the really important issues that concern financial managers need to understand to be successful in their management of business. Knowledge of this nature can then act as a basis for further empirical research concerning the subject matter.

An important lesson for financial managers is the need to know the opportunities and threats their companies face from particular operating environments, and the risk and reward characteristics of the responses they make to those operating requirements. Markets for most business products are characterized by a basic unpredictability, so that companies face the potential for large stockholder return but also large losses. If stockholder wealth maximization is a business objective, then financial managers should ensure that financial decision making is consistent with recognition of this unpredictability. In this light, the job of financial management is to develop a company’s comparative advantage within the risk and reward characteristics of a competitive position.

3. The Importance of Financial Management in Business Operations

Financial management is aimed at the study of this primary objective, providing information to assist in decision-making. The other areas of the business tend to concentrate on functional tasks, although they will also need to make an informed and appropriate decision at some point. Although these personnel are primarily concerned with making, marketing and providing quality management, they will almost always require financial input at various phases, thus demonstrating that to a certain extent financial management permeates all the functions within an organization. This is even more evident in the contribution of corporate strategy to the mission and objectives of an organization.

A firm’s financial statements are value-added documents that offer an insight into its activities and health. However, if they are not used properly, the statements may prove to be a mere formality and could not contribute to a meaningful review of the firm’s financial status. This is where financial management comes into play. Financial management takes this all-important data, analyses and deciphers it, and then offers it in a way that is timely, reliable, relevant, and readable to its users, who then use it in their respective areas of activity. The aim is to assist the shareholders, analysts, creditors, and investors who use the data to make informed economic decisions.

3.1 The provision of information

The importance of financial strategy in business success

4. Strategies for Effective Financial Management

The financial manager also has to manage a company’s long-term financial requirements whether the company comes from retained income or from external sources. Legal formalities that a company must satisfy are critical influences in financial management. Optimal capital structure and low-cost form and source of long-term funds influence greatly dividends and distribution policy. It takes careful planning and strong management with a long-range point of view to juggle these operating and financial details effectively.

In formulating a strategy for a company, a financial manager has both short-range and long-range variables to consider. A number of interactions and dependencies within the firm and its environment can influence financial policy and results. Among the critical variables to be considered are: short-term cash flow considerations; the relationship between operating and financial leverage and their impacts on the company’s profits; choice of appropriate financial terms to be used in company transactions; the establishment of realistic dividend policy guidelines; the proper use of ratio performance standards; and the implementation of policies designed to limit negative effects of financial management. It is particularly important that a company seek internally consistent strategies for solving financial problems and that those strategies are compatible with nonfinancial requirements and strategies.

5. Case Studies and Examples of Successful Financial Management

Case studies and examples have long been used in professional education. The Harvard Business School was a pioneer in this field. These studies span a wide variety of management specialties, representing configurations of businesses operating in industrialized countries. Financial management of businesses just like these could prove a valuable tool in the classroom that teaches the management of businesses. This tool could also serve corporate directors, who are charged with the oversight of management and have the responsibility of hiring and firing management. Finally, the tool will serve the managers of businesses themselves, who acknowledge their lack of preparation to choose effective financial strategies for their businesses. They are often tasked with this huge responsibility, typically without the guidance of strong financial backgrounds or experiences to inform their decisions.

While theory and practice of financial management have long existed, these concepts aren’t always easy to put into practice. A look at the growing abyss between the number of bankrupt businesses and the large number of young startups shows just how hard financial management can be for businesses. In this section, we study the successful application of theoretical financial management to real-life business situations. The purpose is to help readers learn useful, applied financial management techniques.