what is financial management

what is financial management

Understanding the Fundamentals of Financial Management

1. Introduction to Financial Management

Let us take a look at a few roles that financial managers play in today’s business world. The financial management is generally concerned with procurement, utilization and distribution of funds with a view to maximizing economic value of the firm. The resultant benefits of a financial management system include opening avenues for more funds at lower cost and setting in place a mechanism to ensure that funds are used efficiently and effectively in line with the firm’s overall strategic goals. With a systematic approach to addressing key decisions that affect financial matters, future earnings, and profit expectations, the firm should possess the ability to adapt to changing conditions that require financial choices. The position of financial manager is identified by a number of positions in an organization, such as a controller, treasurer, credit manager, cash manager, and risk and insurance manager. An important function of the financial manager is that of cutting losses and managing risk effectively. Although we can’t predict the future with enough certainty to avoid all losses, we can use optimal financial strategies to either make the best of the risk and reward tradeoffs or avoid excessive financial risk. Finally, an important finance function deals with fiscal planning, control, and transfer of funds. Financial planning is concerned with what kinds of assets and supporting investments are needed, and where the money will come from to acquire them. Financial managers can review spending for fiscal control by ensuring that planned spending is the most productive and cost-effective approach to achieving the firm’s goals. The financial manager decides how to use the cash surpluses generated. To make better financing and investment decisions, financial management should be expressed in terms of cost and profitability measures and also the resulting risk associated with it.

What is financial management? One answer is that it’s the art and science of managing money. The principles of financial management maximize the value and minimize the risk of the assets of the firm. No matter what profession you pursue, better decisions are made when you understand the financial issues and problems of your firm.

2. Key Concepts and Principles in Financial Management

In medium and large-sized organizations, roles have become highly specialized. Financial management is an emerging field in educational institutions because of its increasing importance in the business world. Most of the students who want to be financial managers nowadays have good opportunities for employment. In addition, the income received by them is relatively high. Financial management has broad applications, but underlying these different activities are the same set of questions and practices. Principles of financial management apply to all activities associated with the stewardship and effective functioning of business or nonprofit tax-exempt organizations. These principles include the organization’s long-term investment in assets, the expectations of the firm’s investors or donors, the role played by financing and its cost, and the income expected from the investment in current and long-term assets. There are a number of underlying principles and criteria that are shared by various areas of financial management.

Financial management is closely related to other activities in an organization. In accounting, the business transactions are primarily measured in monetary terms and reported in the financial statements. These reports are used as a basis for the preparation of tax returns. Accountants are primarily involved in the processing of business transactions, and the accounting report is used by individuals both inside and outside the organization. In contrast, financial management involves planning and control. It receives and utilizes accounting financial reports. Corporate management is the study of how to add the most value to a firm. This means that financial management decisions are business decisions and not just accounting decisions. Financial management is not a separate activity from the other functions; rather, it is an integral part of these functions because economic performance is the major factor affecting corporate managers. The main concern of financial managers is to provide goods and services at low costs to the customer by using, acquiring, and trading assets. Roles of management accountants have changed substantially since the 1980s. Several factors have been driving these changes. Many organizations have found that information in the accounting system generally reflects the past or the current state of the organization. Managers need financial management techniques. A new reason for the change was the increased role of information technology during the 1980s and 1990s. Information technology played a key part in the implementation of JIT, MRP, and ERP. The information need of internal decision-makers has continued to grow. Management accountants have become more involved with decision-making.

3. Tools and Techniques for Financial Decision Making

In analyzing corporate financial performance, we need to be familiar with a set of financial reporting and accounting tools including financial statements and cash flows, costs, break-even analysis, and taxes. Basic principles of accounting and analysis of financial statements have been discussed. Subsequent discussion in this chapter assumes that the student is familiar with the basic components of a balance sheet and an income statement, a statement of cash flows, a statement of changes in equity, and a statement of retained earnings. We stress that more detailed knowledge of accounting principles and procedures is not covered in this course, but the interested student may opt to enroll for a course in Advanced Financial Accounting. However, we present in outline form, possible techniques for financial decision-making models or tools.

The financial manager is involved in the acquisition, utilization, and care of funds within the business. Management must therefore put in place an effective financial framework for acquisition, utilization, and care of funds. There is a need, therefore, for the application of tools of analysis and decision making. A wide range of techniques and tools exist for financial decision making. In this section, we present some of the fundamental tools and techniques, allowing them to acquire a feel of their practical applications.

4. The Role of Financial Management in Business Strategy

They also deliver what’s needed to ensure that everyone can participate successfully with other functional areas in the organization and collaborate in setting direction and developing plans, budgets, and rolling financial forecasts. Good financial management shifts thinking from how to control the business to how to form and implement strategies and execute tactical plans in the best interest of the organization. It means developing business acumen, customer focus, and the ability to build relationships. Financial managers need to be a champion for their businesses. To address this challenge, you can move the finance team up the value ladder by expanding the role it plays in decision-making processes at every stage, from formulating business strategy through planning, identifying and evaluating performance enhancement initiatives, reviewing financial results, and formulating rights-centric financial policies. From being simply a reporting service, finance becomes a true partner in decision-making.

By playing the role of a finance business partner, financial professionals help develop the business strategy – taking existing and forming new strategies – that benefit the organization. Financial professionals can quantify the risk of strategic initiatives, thereby maximizing the chances of good outcomes. They can also drive accountability for strategic initiative results and make the organization collectively responsible for delivering value. Good financial management isn’t only about monitoring and controlling financial operations. It’s much broader than that. Financial professionals help the organization understand the financials, explicitly linking what everyone does with the objectives and strategies of the business. They work to ensure that everyone knows not only what they need to do, but how their work influences collective success in their business.

5. Current Trends and Future Directions in Financial Management

Steering, however, is a different matter. When the service side of these functions has been shifted, the users of computer services have been unable to extract the full potential from their electronic computer capabilities. Under this scenario, it has already been evidenced that the outsourcing of information processing facility leads to an efficient outlay of funds. For most organizations, the provision of data processing service falls outside the mainstream of the organization’s mission. The mainstream is to provide a service, to administer the activities of the organization, and to produce financial statements. The reason for the existence of a data processing center is that volumes are so vast that converting the data processing function into a separate activity should be offset against the cost of direct processing. Beginning with such functions as payroll and welfare programs, the processing load on the computer center expands as the machine’s ability and use improve. The function of data processing has become one of the machine’s biggest users. Nowadays, one of the significant trends in the finance function is the processing facility. In particular, finance accounting is the principal in-house user of computer time, and data processing is being recognized by the hierarchy as a vested interest of the finance function.

According to a recent survey, several important trends are affecting the role of the finance function. These include the popularization of the outsourcing of day-to-day transaction activity, the increasing use of information technology, and the increased importance of the internal control function. Several decades ago, the finance function revolved around tickets, buttons, and paper accounting. This was the era when ticket accounting was in its heyday: returns were usually posted by manual balance, transactions were posted by manual entry using the ticket, lead schedules were used for audit scrutiny, totals and balances were done by pulling tickets. Manual buttons had to be pressed to report data on Sugarman machines or EAM tabulators, and posting machines and sorting machines were required to handle the manual cards. With the advent of technology, the ticket accounting systems began to give way to paper accounting, and the function of pressing the buttons on the manually operated machinery gave way to electronic data processing. Soon, teletypes and batch processing to punch cards replaced ticket accounting. These machines required in-house processing with an in-house computer department. In the present time, the service side of action has begun to make inroads. Ticket accounting is now being replaced by online input/output, which makes the use of terminals and centralized electronic data processing facilities feasible.