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Financial management: What is it and why is it important?

Financial management is one of the most important aspects of a business. To start and run a successful business, you will need excellent knowledge of financial management.

So what exactly is this form of management and why is it important?

What is financial management?

Financial management is strategic planning, organising, directing, and controlling of financial undertakings in an organisation or an institute. It also includes applying management principles to the financial assets of an organisation, while also playing an important part in fiscal management.

The objectives involved in financial management include:

• Maintaining enough supply of funds for the organisation;
• Ensuring shareholders get good returns on their investment;
• Optimum and efficient utilisation of funds;
• Creating real and safe investment opportunities.

The role of the financial manager

The financial management department of any company is handled by a financial manager. 

This department has numerous functions, such as:

Calculating the capital required. The financial manager has to calculate the amount of capital an organisation requires. This depends on the policies of the company with regards to expected expenses and profits. The amount required has to be estimated in such a way that the earnings in the company increase.

Formation of capital structure. Once the amount of capital has been estimated, a capital structure needs to be formed. This involves a debt-equity analysis, both short-term and long-term. The outlook of the structure depends on the amount of capital the company owns, and the amount that needs to be raised via external sources.

Investing the capital. Every organisation or company needs to invest money in order to raise more capital and gain regular returns. This means the financial manager needs to invest funds in safe and profitable ventures.

Allocation of profits. Once the organisation has a solid net profit, it is the financial manager’s duty to efficiently allocate it. This could involve keeping a part of the net profit for contingency, innovation, or expansion purposes, while another part of the profit can be used to provide dividends to the shareholders.

Effective management of money. The financial manager is also responsible for effectively managing the company’s money. Money is required for various purposes in the company such as payment of salaries and bills, maintaining stock, meeting liabilities, and the purchase of any materials and/or equipment.

Financial control. Not only does the financial manager have to plan, organise, and obtain funds, but he/she also has to control and analyse the company’s finances. This can be done using tools such as financial forecasting, ratio analysis, risk management, and profit and cost control.

Why is financial management important?

This form of management is important for various reasons. 

Helps organisations in financial planning and acquisition of funds;

Aids organisations to effectively utilise and allocate the funds received or acquired;

Supports organisations in making critical financial decisions;

Helps in improving the profitability of organisations;

Increases the overall value of organisations;

Provides economic stability.

Thanks for taking the time to read our blog post on what financial management is and why it is important.

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