What is financial management?

The job of financial management in a business is to plan, organize, control, and keep an eye on the money that the business has. Financial management is a broad term for anything related to making money, spending money, cash, or credit.

Here is a short list of tasks that financial managers usually do:

• Making a budget and planning your money
• Making predictions about money
• Reporting on and analyzing finances
• Allocation of resources
• Choices about investments
• Making the most money and adding value
• Raising money
• Taking care of risks
• Following the rules
• Managing cash flow
• Management of money

Financial management is everything that has to do with an organization’s money. No matter the size or type of the business, at least one person must complete these tasks to keep it operating successfully.

Synonyms

• Business financial management
• Finance management

What Makes Up Financial Management in Business

How to Manage and Evaluate Financial Risk

There are four types of risks that businesses need to consider when it comes to their money: market, credit, liquidity, and operating risks.

• Market risks come with the chance of losing money because of changes in the market. It also considers how well a company’s stock did (if it’s a public company) and the change from a store model to a direct-to-consumer model. Financial managers use hedging techniques to lower this risk.
• Credit risks are the chances that a customer won’t pay in full. They make a business less valuable, make it harder to get money, and create short-term problems with cash flow. An AR aging report is the best way to find them, but finance teams also use credit scores and financial statements.
• 82% of businesses fail because they can’t handle liquidity risks, such as insufficient cash to cover day-to-day activities or a significant one-time cost. Finance teams keep an eye on present cash flow, plan for future needs, and ensure there is enough working capital in case of an emergency.
• Operational risks aren’t as natural because they don’t affect hard assets or financial markets. They have more to do with things inside the company, like fraud, cyber threats, and natural events. Companies usually set aside money for insurance, tools, and infrastructure to deal with these risks.

Many of these risks are very important to the business, so they are usually the first things financial managers consider. One thing that a business can’t do without is enough cash flow and security against online threats.

Setting up

A financial manager figures out how much capital they’ll need to keep their cash flow positive, put money toward growth projects (like making new products), and deal with an emergency. They let the rest of the business team know about this.

For organizational reasons, managers divide financial plans into separate groups. Some of these are:

• Spending on capital
• Spending plans for fun and travel
• Money for a particular project
• Wages and salaries
• Costs of doing business
• Costs that don’t come directly to you

They can give others their financial forecasts and analysis without being misunderstood or cluttered with irrelevant data if they separate different parts. Plus, it prepares them for the next step, making a budget.

Making a budget

To make a budget, the team divides the company’s money into different categories (based on what they learned in the “planning” phase) and gives them to different projects and offices.

They pay for the most important ones first, like running costs.

• Rents and mortgages
• Payroll and perks for employees
• T&E
• Supplies for work
• Spending on marketing and ads

Some are set away as a backup plan, and the rest are split up however the organization sees fit. This is one of the most delicate steps because natural resources are being committed, and it can significantly impact the business’s financial stability.

A master budget is what most businesses make, and it includes all the separate budgets for each department and purpose. They will often have sub-documents covering things like budgets for specific projects or spending on GTM.

A budget can stay the same or change over time.

• Static budgets don’t change after the time ends, even if the assumptions are wrong or things change.
• Flexible budgets can be changed if actuals are different from estimates.

You should use a mix of the two if possible. Regarding planning, fixed budgeting is best for considerable, recurring costs, while flexible budgeting is best for small, changing costs.

Procedures and operations related to money.

The rules for how to handle and record financial data are set by financial management processes. They talk about things like

• Sending bills to people
• Paying back employees for their costs
• Getting paid
• Approve and send out buy orders

They also explain who in the company’s hierarchy is in charge of making financial choices.

By writing down the official steps for these processes, you can lower the risk of fraud and mistakes. Also, because finance teams are in charge of large amounts of money, it keeps everyone honest.

Financial managers also set up internal controls, such as audits and reviews, to ensure that other workers handled transactions were done correctly. The processes and internal controls keep problems from worsening and costing a lot of money.

The financial management cycle has four stages.

The financial management cycle can be broken down into four main stages:

1. Making plans and budgets

2. Allocation of resources

3. Working and keeping an eye on things

4. Reviewing and writing up

Making plans and budgets

The finance team uses current and historical financial performance data to set goals, find places to improve, and make a budget for the next period during the first analytical part of the financial management cycle.

The team will look at long-term goals and day-to-day processes. Then, they’ll make connections between their financial information, their goals, and the exact tasks they need to do to reach those goals.

Your financial plan should include goals for the next three to five years for the best results. However, you should only make budgets for one fiscal year at a time. It would be best to make a longer-term plan for your money instead of a short-term budget because the market can change.

Allocation of Resources

Next, your finance team will determine how much your company’s cash resources are worth. This includes everything you use to make products or provide services. Based on your company’s current financial situation, working needs, and long-term goals, the financial manager will tell you where to put your money and how much to spend on each part of its operations.

Capital management tries to balance cost and benefit so that resources are used in the best ways to make the most money without going to waste. Using a framework, your company can compare projects with those of other departments and efforts fairly, which is an integral part of allocating resources correctly.

Controlling and running things

The finance team monitors your company’s money-related activities once you’ve planned your daily tasks and decided how to spend your working budget.

Among these are:

• Doing regular checks to lower the risk of theft
• Writing down and sorting deals into groups (for example, income and expenses)
• Making sure that financial information is correct and useful
• Making sure that reports and other paperwork made by finance staff are correct

As a preventative measure, this step ensures that your company’s records correctly show its finances and that all financial activity follows the proper steps. It’s an essential part of financial management because it ensures that your internal processes are correct and stops scams.

Evaluation and Writing Up

Lastly, the financial manager will look at how well your business is doing and make reports showing how far it has reached its goals. They will look at past and present results to see if you’ve met (or surpassed) their standards. These new ideas will help us make plans for the future.

These are some of the most essential papers that financial managers write:

• Statements of income
• Sheets of accounts
• Statements of cash flow

They will look at more than just the three standard financial statements. They will also look at how they handle their money overall. This includes checks for security, compliance, data needs, and help levels. They will also make forecasting models to predict future income, costs, and financial health.

Why good financial management is important

Each choice you make affects the company’s finances, whether good or bad. Of course, making money is the main reason people start businesses. This means that the finance team has a say in almost everything your company does now and will do in the future.

There are five main reasons why sound money management should be a top priority:

• You are getting the most money. There are places where you can spend and get the best return on your money and places where prices will rise and fall. For example, if you learn that the cost of raw materials increases, you might decide to work with a different source.
• Good handling of liquidity and cash flow. If you’re good with the money at your business, you’ll always have enough to meet your responsibilities.
• Follow-through. Not following state, federal, and industry-specific rules costs a lot of fines and lost resources. Following the proper steps to manage your money will prevent this and lessen the effects of an audit or noncompliance problem.
• You are making financial models. If so, then scenarios and predictive modeling are based on how your business is doing right now. You can try out different market situations and possible scenarios before making a big business decision to see how the changes you want to make will affect your company’s bottom line.
• You are managing relationships with stakeholders. Your financial information is always correct and up-to-date if you responsibly handle your money. It’s also simple to report to investors and the board, which makes things easier for them.

Following the proper financial steps can also help you determine which assets perform best and how to achieve product-market fit when managing investments, growing your market, and reducing risk.

What are the goals and objectives of financial management?

The main job of financial management is to keep your business’s money safe. That way, you can pay your employees, keep the lights on, carry out your growth plans, and give money back to investors.

However, there are other goals as well:

• Safety for cash flow
• Getting the best return on investment
• Finding and stopping fraud
• Being careful with the company’s money
• Enforcing good money habits
• Making sure that everyone has access to correct and up-to-date financial data
• Working for growth and survival over the long term

What People Do in Financial Management

President and CEO of the company

The Chief Financial Officer (CFO) oversees all the company’s money. They are the company’s second or third most influential people and report straight to the CEO. Along with the CEO, they make long-term financial choices and present them to investors and the board of directors.

The CFO is responsible for:

• Setting the stage for cash management strategies for the company
• Giving their approval on budgets, forecasts, and choices about capital investments
• Putting together and giving financial reports to investors, executives, and board members
• Being in charge of financial risk management as well as financial planning and record-keeping
• Working with other executives to make sure that financial plans are in line with business goals
• Making sure (and being responsible for) that all financial rules and laws are followed
• Helping with M&A deals and fundraising efforts
• Getting the big picture of a company’s strengths, flaws, risks, and growth opportunities
• Giving strategic advice and giving feedback on significant business decisions based on how they will affect money

Modeling, forecasting, auditing, and safety skills that CFOs have. They also know how to clarify financial reports for buyers by explaining what the numbers mean. They usually have a graduate degree in economics, finance, accounting, or business management.

Controller of finances

It takes one step to get from the CFO to the finance controller. They are in charge of accounting and the financial team and answer directly to the C-suite. Someone like an AR or AP manager, an accounting manager, or a financial planning manager could be below the controller.

These are some of their most important duties:

• Being in charge of day-to-day accounting tasks and looking for ways to make them more efficient
• Making sure that all deals are recorded correctly and in line with the rules
• Looking into any mistakes or strange things that might be in transaction data
• Making sure that financial records are correct and making any changes that are needed
• Making sure that invoices, receipts, ledgers, and other financial papers are kept in the right way
• Taking care of spending and planning tasks

What makes a CFO different from a controller is that a controller is more involved with day-to-day financial management, while a CFO is more focused on big-picture projects and high-level decisions.

Money Keeper

As treasurer, you must monitor your company’s money and activities. Like the controller, they work directly for the CFO and are usually seasoned accountants.

These are some of their duties:

• Managing cash, which includes keeping an eye on cash flow, liquidity, and risk,
• Making connections with banks
• Figuring out what loans and funds are best for the business
• Keeping an eye on investments, cash structure, and debt management
• Taking care of relationships with outside parties, like banks and credit unions

Treasurers oversee the company’s cash, investments, debt, and credit. Controllers are in charge of what has already happened in the company, like reports and financial accounts. They also keep in touch with outside partners who work in these areas, such as insurance companies and investment bankers.

Analyst of finances

Financial analysts use trends, measurements, and data to monitor how thriving businesses are doing financially. They usually work closely with upper management to develop intelligent ways to improve a business’s finances and investment choices.

The following are everyday things that a financial analyst does:

• Looking into company profiles and market trends
• Looking at the information in financial statements and finding patterns
• Making financial models to test different possible results and guess what will happen
• Using research to come up with suggestions for how to improve financial performance

Being a financial analyst takes a lot of study, problem-solving, and critical thinking. Most of the time, they work for pension funds, banks, and insurance companies. But each company may also have its internal experts.

Manager of Risk

It is the job of risk managers to find, evaluate, and reduce financial risks that could hurt a company’s bottom line. To help make investment choices, they work closely with the CFO, treasurer, or VP of Finance.

Some of the most common things a risk manager has to do are:

• Figuring out possible financial risks, such as changes in the market or new rules
• Figuring out how likely risks are to happen and how they will affect the company’s finances
• Making plans for dealing with risks and what to do if something goes wrong
• Checking how well risk management plans are working and reporting on it
• Working together with other areas to make sure rules are followed

Risk managers are essential to the finance team because their actions affect the business’s safety, reputation, brand image, and overall financial success.

Manager of Credit

A credit manager is responsible for a company’s credit rules, ensuring customers can pay their bills and collect debts. They work with sales teams to ensure customers pay on time and report to the CFO or cashier.

Some of the specific things a credit manager has to do are:

• Setting up terms and conditions for people to pay
• Giving specific customers extra terms
• Checking to see if new clients have good credit
• Keeping an eye on how old accounts receivable are and starting the collection process for accounts that are past due
• Taking care of ties with debt collectors and credit reporting agencies

Cash flow and liquidity are directly affected by the job of a credit manager. They are in charge of dealing with customers who don’t pay.

The internal auditor

The main job of internal audits is to ensure everything is in order so that the company is in line with the rules and ready for a possible external audit. They work directly for the board of directors or the audit committee, giving them much freedom.

Auditors are primarily in charge of the following financial tasks:

• Checking business records to make sure they are correct and follow the rules
• Looking at internal controls to find places where danger might be present
• Coming up with suggestions for how to make internal processes and procedures better
• Figuring out which risk management methods work best

Audits of businesses can cost anywhere from $20,000 to $50,000, based on how complicated they are. Having an in-house auditor lowers the company’s risks and keeps it from paying these costs.

Planner of money

Financial planners help people and businesses make budgets, save money, handle investments, and plan for retirement. They often work one-on-one with their clients to help their clients reach their financial goals.

A financial manager may be responsible for the following:

• Looking at people’s finances and making custom plans to help them reach their long-term financial goals
• Advising on how to spend and taking care of investment portfolios
• Making plans for retirement and suggesting ways to save money
• Giving help with tax planning

There are many places where financial planners can work, such as banks, insurance companies, and independent consultants. In more prominent companies, they are also hired from within.

Accountant for costs

A cost accountant’s job is to look at a company’s costs, cost trends, and general financial performance and report on them. They work closely with the accounting manager or controller to make budgets and keep costs under control.

Some of the most usual things a cost accountant has to do are:

• Figuring out how much an item or service directly costs to make
• Coming up with and handling budgeting methods
• Figuring out where the business can cut costs
• Looking at new projects or businesses’ costs and benefits

Cost accountants are vital for helping businesses stay profitable and make intelligent financial decisions. You can usually find them working in manufacturing, construction, professional services, or retail, where keeping track of costs is a big part of managing money.

Using technology to manage money

Without software, it’s not possible to do modern financial management. Human processes are prone to mistakes, take a long time, and are sometimes impossible. This is very clear in financial modeling; predictive modeling software runs different scenarios by comparing your suggested action to historical data and how the market is moving.

To put it simply, your finance team needs the following tools to do their job:

• Software for accounting
• Software for billing and charging
• Managing subscriptions (for businesses that make money regularly)
• Software for managing risks
• Tools for planning and analyzing money
• Tools for predictive analytics