What is financial management?
Receipts must exceed expenses and revenues must exceed expenses. Until then, it's very simple. On the other hand, it is not so simple for management to guarantee the liquidity necessary for its activity. Financial management instruments are invaluable in this regard. We present here the most important instruments. The following tools are the essential bases of financial management and controlling:
Accounting provides management with useful bases for decision-making and helps them control finances. It makes it possible to enter and monitor cash flows and services systematically. The resulting data are used for financial management, planning, and management of the company. Accounting also provides information to external target groups such as donors or the auditors.
It is an integral part of the operating accounts and documents all the processes in concrete figures. It calculates the overall result of the company from the income statement. In addition, it informs managers of the current financial situation in the balance sheet and the company's development in the income statement.
Accounts receivable are part of financial accounting. It records all the commercial operations associated with customers, in particular receivables and credits, deliveries, and other services.
The investment account provides the main decision bases for investments. It takes into account all the data that can be calculated and thus helps to assess the risks associated with the planned investments, their profitability, and their amortization.
The cash account compares revenue and expenses. Companies can thus ensure that they always have sufficient financial means to pay their invoices on time.
The importance of good financial management:
For businesses, sound financial planning is the key to success. It allows an organization to start its commercial activities and to continue. The content of financial management is particularly important for SMEs and start-ups. Their objective must be to use the available resources effectively and efficiently. It is up to management to know the tools that help it in financial management. The management of a company must control the company's financial flows and the company's associated processes to guarantee liquidity.
But financial management is not limited to tedious obligations and controlling activities. Ideally, it allows management to steer its strategy with precision, to make the necessary changes in due time, and to mobilize employees for the common cause.
What is the corporate financial management?
Money is the lifeblood of any business. Only by having capital is it possible to buy everything you need to start a company and make the right investments for its growth. For this reason, it is necessary to plan and manage the incoming and outgoing cash flows better. Let's see what corporate financial management is and why it is important.
Planning the resources available and any future investments is the first step in getting a company off the ground. To achieve your business objectives, you need to put all the strategic tools necessary to face the market, and, among these, there is financial management. A company does not operate isolated from the context in which it finds itself: to each of its actions correspond market reactions, which are not always positive. For this reason, money management must be carefully planned to be able to face any moments of crisis and support long-term business development.
What is corporate financial management?
Financial management is responsible for making decisions on income and expenses and collecting and payment methods. Machinery, patents, plants, raw materials, human resources: everything has a cost. It is not necessary to be a high finance expert to understand that money is the basis for every company's survival. To keep a business going, you need to know exactly what the available money is used for and constantly monitor the flows.
Whether it's production, human resource management, or marketing, every business function consumes or produces money. Therefore, financial management is not an isolated discipline in its own right, but concerns all company activities and allows the entrepreneur to understand what has the greatest impact on liquidity movements.
Proper corporate financial management should include at least four stages:
- forecast of financial needs;
- finding the necessary resources;
- achieving the balance between collected and employed means and their coordination;
- Control phase.
Three types of planning
Depending on the time frame in which you want to operate, corporate financial management can have different objectives and methods. We can identify three different types of planning:
1. Strategic planning:
Operates in the medium to long term, over a time ranging from three to five years on average. Strategic corporate financial planning has to do with particular projects or events in corporate life and often takes the form of a "business plan," which outlines and evaluates commercial choices, investments, and sources of financing, as well as financial sustainability and convenience of the "Business plan" itself.
2. Budget planning:
Operates in the short term, generally within one year. With financial budget planning, the company's economic budget is transformed into a plan that quantifies its income and expenses, checking that the net flow remains active and sustainable with respect to the company's needs and banking positions. In this context, the determining factor is time: the company must demonstrate its profitability over the year, while the financial budget must be drawn up every month.
3. Treasury planning:
Here we work in the very short term, or in a period of three or four months. The treasury's financial planning analyzes the reality taking into account the firm's fixed costs, the due dates towards customers, and the due dates towards suppliers. Subsequently, it tries to predict the company's liquidity in the very short term, which can vary from a few days to a few months, and it is a programming that must be constantly revised.
The cash flows (inflows and outflows) may depend on operational decisions (such as the purchase of raw materials) or strategic (such as the decision to change obsolete machinery). But it is essential to have the tools to understand how and how any decision impacts the company's financial situation.
What is a company's financial management?
The concept of finance is so broad that a post like today is certainly not enough to be able to summarize it. In fact, when we talk about finance, we can refer to private finance, which includes the finance of a natural person, companies, and others in search of the necessary financial activities to meet their own sustainability and development requirements. Or, we can refer to the concept of public finance, which instead concerns the revenue and disbursements of the state, such as central, regional government, and semi-public financial issues.
But what is meant by financial management?
Financial management is an integral part of global management. As a rule, when it comes to financial management, we speak of a branch of activity that deals with the company's financial managers' numerous aspects and oriented tasks. The term financial management has been defined by authors (Howard and Upton), financial management is an "application of general management," using principles in financial decision-making. For others like Weston Brigham, financial management is an area of financial decision making, which seeks to harmonize individual motivations and business objectives. Still, for others (Joseph Massie), financial management is the operational activity of a company. It aims to obtain and effectively use the funds necessary for efficient management of financial resources, with consequent explanation in operations of various natures.
Beyond the definitions provided by the doctrine, and trying to get to the right mix, financial management mainly deals with the management of funds belonging to or attributable to a company. In simple words, the financial management practiced by commercial enterprises is the set of activities that are aimed at managing the financial requirement and its coverage by applying a series of short, medium, and long term.
Author: Vicki Lezama