What is Financial Management and Why is it Important?

Financial management is the business function that deals with the planning, organizing, directing, and controlling of the financial resources of a company or an individual. Financial management aims to maximize the value of the firm for its shareholders, ensure the optimal use of funds, and comply with the relevant laws and regulations1.

Financial management is essential for the success and sustainability of any business or personal endeavor. It helps to achieve the following objectives:

• Profitability: Financial management helps to increase the income and reduce the expenses of the business, resulting in higher profits and returns for the owners and investors2.

• Liquidity: Financial management helps to ensure that the business has enough cash and other liquid assets to meet its short-term obligations, such as paying salaries, suppliers, taxes, and debts2.

• Growth: Financial management helps to support the expansion and development of the business, by providing funds for new projects, products, markets, or acquisitions2.

• Risk management: Financial management helps to identify, measure, and mitigate the various risks that the business faces, such as market fluctuations, currency movements, interest rate changes, or operational failures2.

• Compliance: Financial management helps to adhere to the legal and ethical standards that govern the business, such as accounting rules, tax laws, auditing requirements, and corporate governance principles2.

How Does Financial Management Work?

Financial management involves four main activities:

• Planning: Financial management involves setting the financial goals and objectives of the business, and developing a strategy and a budget to achieve them. Planning also involves forecasting the future financial performance and needs of the business, based on the current and expected market conditions, customer demand, and competitive environment3.

• Organizing: Financial management involves arranging the financial resources and activities of the business, such as allocating funds to different departments, projects, or products, and establishing the roles and responsibilities of the financial staff and managers3.

• Directing: Financial management involves overseeing and guiding the financial operations and decisions of the business, such as approving and executing the budget, monitoring and controlling the cash flow, and evaluating and selecting the investment opportunities3.

• Controlling: Financial management involves reviewing and assessing the financial results and performance of the business, and taking corrective actions if needed. Controlling also involves ensuring the accuracy and reliability of the financial information and reports, and complying with the internal and external audit and regulatory standards3.

What Are the Types of Financial Management?

Financial management can be classified into two main types, depending on the scope and focus of the function:

• Managerial finance: Managerial finance is the branch of finance that deals with the financial management of the business as a whole, and the allocation of funds among the various units or divisions of the business. Managerial finance is concerned with the strategic and long-term financial decisions, such as capital budgeting, capital structure, dividend policy, and mergers and acquisitions4.

• Corporate finance: Corporate finance is the branch of finance that deals with the financial management of a specific unit or division of the business, and the optimization of its financial performance and value. Corporate finance is concerned with the operational and short-term financial decisions, such as working capital management, inventory management, receivables management, and financial risk management4.

In addition to these types of financial management, there is also another related field, called investment management, which is the professional management of various securities and assets, such as stocks, bonds, mutual funds, and real estate, on behalf of individuals or institutions.

How to Get Started with Financial Management?

If you are interested in learning more about financial management, or improving your financial management skills, there are some steps that you can take, such as:

• Reading books and articles on financial management, such as Financial Management Explained: Scope, Objectives & Importance, What Is Financial Management?, or [Financial Management: Principles and Applications].

• Taking courses or workshops on financial management, such as [Financial Management for Non-Financial Managers], [Financial Management Specialization], or [Financial Management Certificate].

• Using software or tools that can help you with financial management, such as [Oracle Financial Management], [NetSuite Financial Management], or [QuickBooks].

• Consulting with a professional financial manager, advisor, or planner, who can provide you with personalized guidance and advice on your financial management needs and goals.

Conclusion

Financial management is the business function that handles the financial resources of a company or an individual. Financial management aims to maximize the value of the firm, ensure the optimal use of funds, and comply with the relevant laws and regulations. Financial management involves planning, organizing, directing, and controlling the financial activities and decisions of the business. Financial management can be classified into managerial finance, corporate finance, and investment management. Financial management is essential for the success and sustainability of any business or personal endeavor.