Financial Management Explained: Scope, Objectives & Importance
Suzy Strutner | Marketing Specialist September 5, 2023
In business, financial management is the practice of handling a company’s finances in a way that allows it to be successful and compliant with regulations. That takes both a high-level plan and boots-on-the-ground execution.
What Is Financial Management?
At its core, financial management is the practice of making a business plan and then ensuring all departments stay on track. Solid financial management enables the CFO or VP of finance to provide data that supports creation of a long-range vision, informs decisions on where to invest, and yields insights on how to fund those investments, liquidity, profitability, cash runway and more.
ERP software can help finance teams achieve these goals: A financial management system combines several financial functions, such as accounting, fixed-asset management, revenue recognition and payment processing. By integrating these key components, a financial management system ensures real-time visibility into the financial state of a company while facilitating day-to-day operations, like period-end close processes.
Objectives of Financial Management
Building on those pillars, financial managers help their companies in a variety of ways, including but not limited to:
Maximizing profits: Provide insights on, for example, rising costs of raw materials that might trigger an increase in the cost of goods sold.
Tracking liquidity and cash flow: Ensure the company has enough money on hand to meet its obligations.
Ensuring compliance: Keep up with state, federal and industry-specific regulations.
Developing financial scenarios: These are based on the business’ current state and forecasts that assume a wide range of outcomes based on possible market conditions.
Manage relationships: Dealing effectively with investors and the boards of directors.
Ultimately, it’s about applying effective management principles to the company’s financial structure.
Narrowing down the right KPIs for your business is critical to your short and long-term success. Whether you’re newly tasked with establishing KPIs for your finance company or looking for best practices on improving existing KPIs, this quick and simple guide is designed for you.
Essential Financial KPIs
Scope of Financial Management
Financial management encompasses four major areas:
1.Planning
The financial manager projects how much money the company will need in order to maintain positive cash flow, allocate funds to grow or add new products or services and cope with unexpected events, and shares that information with business colleagues.
Planning may be broken down into categories including capital expenses, T&E and workforce and indirect and operational expenses.
2. Budgeting
The financial manager allocates the company’s available funds to meet costs, such as mortgages or rents, salaries, raw materials, employee T&E and other obligations. Ideally there will be some left to put aside for emergencies and to fund new business opportunities.
Companies generally have a master budget and may have separate sub documents covering, for example, cash flow and operations; budgets may be static or flexible.