What is Financial Management? Learn Why It is Important for You (2024)

PFinance is one of the crucial prerequisites to start any business. Further, a sufficient corpus of funds and efficient financial management is required throughout a business’s lifetime and even when a company is sold or wound up. Therefore, funds need to be managed, regulated as per procedures, and monitored at every step of the business lifecycle.

Any business that manages its finances better experiences exponential growth, and businesses that mismanage their financial resources and activities usually undergo losses or make lower profits. Let’s delve deeper into the world of financial management.

Financial management involves strategically planning, organizing, directing, and controlling an organization’s financial resources to achieve its objectives efficiently and effectively. It encompasses activities such as budgeting, forecasting, cash flow management, investment decisions, risk management, and financial reporting. The primary goal of financial management is to maximize shareholder wealth while ensuring the long-term sustainability and growth of the organization. This discipline is crucial for making informed financial decisions, optimizing resource allocation, mitigating risks, and maintaining financial stability.

Importance of Financial Management

The financial management of an organization determines the objectives, formulates the policies, lays out the procedures, implements the programmes, and allocates the budgets related to all financial activities of a business. Through a streamlined financial management practice, it is possible to ensure that there are sufficient funds available for the company at any stage of its operations. The importance of financial management can be assessed by taking a look at its core mandate:

• Availability of sufficient funds
• Maintaining a balance between income and expenses to ensure financial stability
• Ensuring efficient and high ROI
• Creating and executing business growth and expansion plans
• Safeguarding the organization against market uncertainties through ensuring buffer funds

Let’s take a deeper look at the scope of financial management to gain a greater understanding of its importance.

Financial management in a company is governed by the principle that it must protect the financial interests of the investors and shareholders and ensure business growth. Apart from securing their interests, the financial managers are also expected to ensure greater ROI that generates more wealth for all shareholders. There are certain objectives of financial management that are universally accepted by experts and business leaders, and these clearly outline the financial management scope and functions.

Objectives of Financial Management

Certain specific and highly impactful objectives that financial managers aim to attain are:

1. Assessing Capital Needs: Financial managers need to evaluate factors such as the cost of current and fixed assets, cost of marketing, need for buffer capital, long-term operation, and human resources cost, etc. Successful businesses have clearly defined short-term and long-term financial requirement projections in place.
2. Determination of Capital Structure: A company’s capital structure is the framework that determines decisions such as debt-equity ratio in the short as well as long term.
3. Creation of Effective Financial Policies: There is a need to frame efficient financial policies that govern cash control, the lending and borrowing processes, and so on.
4. Resource Optimization: Great financial managers are able to navigate through different scenarios by making optimum use of the available financial resources. This would reduce the cash burn and increase the cash churn to generate maximum ROI.

To achieve these objectives, the financial managers and advisors must perform certain functions. These include:

1. Fundraising

For any business to grow confidently and have a good market reputation, an adequate amount of cash and liquidity is critical. Therefore, businesses raise funds by equity or debt financing. Financial managers make decisions on maintaining a healthy balance between debt and equity to ensure that the company’s financial health is not impacted.

2. Fund Allocation

Smart fund allocation is as critical to a business’ financial health as fund-raising itself. The funds that a company has must be allocated in the best way possible after due diligence on:

• Business size and growth potential
• Whether the assets are short-term or long-term before spending on them
• Mode of fund raising

3. Profit Planning

Unless it is a social organization, earning more profits would be among any business’s primary goals. The profits a company makes determine its financial health and future growth. Therefore, adequate usage of the money generated as profit is needed. Whether they have to be plowed back to acquire assets and expand coverage, or to be spent on marketing, acquiring other businesses, or invested in acting as a buffer resource, all these considerations are made by financial leaders.

4. Understanding Capital Markets

A company’s shares are publicly traded on stock exchanges, and the transactions as well as the change in a listed company’s market capital is a constant phenomenon. Good financial managers have to be well-versed with the capital market dynamics, and the risks associated. Whether dividends are to be given to the shareholders when the business generates profits or is reinvested into the business is one of the crucial decisions that can impact shareholders’ sentiments and the company’s goodwill.

Types of Financial Management

What is financial management beyond managing an organization’s finances, aligning resources to goals, and maximizing profits? To answer that question, here are the different types of financial management that focus on distinct areas, enhancing stability and growth.

1. Capital Structure

Capital structure determines a company’s mix of debt and equity financing. This aspect, crucial to what is financial management, balances funding operations with maintaining financial health. For example, debt financing offers immediate funds but increases risk, while equity financing raises capital by selling ownership stakes. Hence, the right balance optimizes a company’s stability and profitability.

2. Capital Budgeting

Then there is capital budgeting. Simply put, this involves evaluating long-term investments. In essence, this financial management function guides companies in choosing projects that generate high returns. After identifying potential investments, managers assess risks and costs. Consequently, they select the best options, and then monitor their performance over time, thus ensuring they align with the company’s goals.

3. Working Capital Management

Working capital management ensures companies have sufficient funds for operations. This is all about mitigating financial health risks by balancing current assets with liabilities. It is necessary because it ensures operational stability, and also allows companies to cover sudden expenses.

4. Dividend Management

Dividend management involves creating disbursem*nt policies and strategies. This key financial management function balances dividend payouts and reinvestment into the company. Managers monitor distributions, adjust as needed, and ensure flexibility for growth. Additionally, mature companies may pay dividends regularly, while growth-stage companies reinvest them.

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The financial management cycle guides companies through strategic processes, ensuring stability and growth. This cycle involves four key stages:

1. Planning and Budgeting

The first one is planning and budgeting. This includes analyzing past data to set financial goals. Based on this data, managers create budgets for upcoming periods, balancing daily operations and long-term objectives. This stage of the financial management cycle covers budgeting essentials, focusing on stability amidst market fluctuations. Moreover, it ensures that finance aligns with company goals.

2. Resource Allocation

Next comes resource allocation, which assigns value to capital resources, aligning funds with company goals. In this stage, financial frameworks are generated to allocate resources effectively, reducing waste. Consequently, this stage is crucial in supporting growth by distributing assets strategically, as well as balancing costs and benefits.

3. Operations and Monitoring

The third leg of the cycle is operations and monitoring financial activities, tracking transactions, and reducing fraud risks. In essence, this stage of the financial management cycle secures financial stability by validating records and processes, maintaining financial management consistency, and protecting against potential issues as well.

4. Evaluation and Reporting

The fourth and final stage focuses on analyzing financial performance by comparing it to previous periods. Managers create reports detailing progress and guiding future strategies. The financial management cycle at this stage assesses financial management systems, including security and compliance, to ensure decisions align with company goals. This stage completes the cycle, setting a foundation for continued growth and stability.

Objectives of Financial Management

To gain further insight into what is financial management means study the specific and highly impactful objectives that financial managers aim to attain, such as:

1. Assessing Capital Needs

Financial managers need to evaluate factors such as the cost of current and fixed assets, cost of marketing, need for buffer capital, long-term operations, human resources costs, among other factors. In fact, successful businesses always have clearly defined short-term and long-term financial requirement projections in place.

2. Determination of Capital Structure

Another significant objective is a company’s capital structure. This, essentially, is the framework that determines decisions such as the debt-equity ratio in the short as well as long term.

3. Creation of Effective Financial Policies

There is also a need to frame efficient financial policies that govern cash control, the lending and borrowing processes, and so on.

4. Resource Optimization

Finally, effective financial managers are able to navigate through different scenarios by making optimum use of the available financial resources. Doing so reduces the cash burn and increases the cash churn to generate maximum ROI.

ALSO READ: How to Pursue a Career as a Financial Analyst?

Since financial management is integral to any business, and there are huge opportunities in the financial sector verticals such as accounting, banking, insurance and other financial companies, there are various career options available in the field. We’ve curated a few lucrative opportunities in financial management for you:

Corporate Finance Roles

Corporate finance is one of the financial roles pertaining to raising funds for the business operations. Professionals in this field have to manage funding sources, investment decisions, capital restructuring, while focusing on the following parameters.

• Striking a balance between risk and profitability
• Analysing and forecasting economic trends in the industry
• Analysing company’s reports and making improvement related suggestions
• Enhancing the value of stock
• Fund management through selection of investment portfolios
• Focusing on actions that mitigate financial risks for the company

There are both leadership as well as junior level job opportunities for corporate finance professionals. To prepare yourself for the role, it is best advised to undergo a professional financial management course that will impart necessary know-how regarding the importance of financial management in the corporate financing sector.

Investment Banking Roles

One of the most rewarding and reputed careers in the finance management sector is in the field of investment banking. Investment banking professionals handle financial restructuring of companies and they use data and technologies to generate insights and make impactful financial decisions. Investment banking requires good understanding and a passion for financial markets and economic trends. Trading and stockbroking, and asset management roles are also a part of this segment. While stockbrokers make stock market transactions on behalf of their clients, the asset management companies determine the investment portfolios over longer periods and diversify client investments with an aim to mitigate risk and deliver superior ROI.

A diploma in banking and finance or a financial risk management course would be an ideal value addition for job seekers in this segment.

Portfolio Management

In the modern world of financial operations, a hybrid of commerce and science has emerged as portfolio management. It is an advanced field that requires sound knowledge of mathematics, business operations, and data analytics. A portfolio manager would be entrusted with guiding business policies related to investments, and asset allocation decisions. He/she would also conduct SWOT analysis across markets and focus on factors such as growth vs safety, debt risks etc.

Risk Management

With constantly changing market dynamics, and other socioeconomic and political variations, risk management has become a crucial part of the financial sector operations. Professionals in this field use their mathematical expertise, analytical skills, reasoning ability and market understanding to advise their clients. There are various types of risk management roles such as:

• Financial Risk Manager
• Enterprise Risk Manager
• Supply Chain Risk Manager
• Operational Risk Manager
• Digital Risk Manager

Risk management jobs are richly paying and there are ample opportunities in NBFCs and insurance sector for risk management roles such as analysts, managers, consultants and advisors etc.

A financial risk management course would be a perfect value addition to an accounting qualification or an MBA degree.

Financial Planning

Financial planners are in high demand these days. Individuals as well as companies are availing the services of financial planners to optimize their investments and savings, to ensure future financial safety. Financial planners need to be experts in analysing financial statements, income flows, expenses, and creating a customized solution that matches a client’s needs. There are various segments of financial planning such as wealth management, tax planning, retirement planning, investments etc. The aspirants can work as self-employed financial planners, launch a financial planning startup or work in businesses such as the Knowledge Process Outsourcing (KPOs), NBFCs, Asset Management Companies (AMCs), or wealth management and financial services companies.

A masters degree in finance or PGDM Finance along with an MBA would make a person a good hire in this arena.

Commercial Banking Sector

Banks are a key enabler of financial support to individuals as well as businesses. From maintaining savings and current accounts, debit, and credit cards, to offering personal, home, education or business loans, the banks are a key to everyone’s financial journey. The banking jobs are respected, offer good salaries and fixed working hours. Nowadays, having technological expertise alongside an MBA degree can make a person highly employable in this arena.

Compliance and Internal Financial Management

Companies also employ managers and financial administrators to handle various procedures and regulations such as law adherence, ethical operations, compliances to industry standards, and reputation management etc.

These roles are best suited for people with college degrees in accounting and law. By adding a sector specific qualification such as diploma in financial accounting, one can grab attractive internships or job opportunities in this arena.

Frequently Asked Questions About Financial Management

1. What is Financial Management?

Financial management involves strategic planning, directing, and controlling financial resources. Additionally, it encompasses budgeting, cash flow management, investment decisions, and risk management, balancing short and long-term goals.

2. Why is Financial Management Important for Businesses?

Financial management functions ensure businesses balance income and expenses, allocate resources effectively, and mitigate risks. As a consequence, this improves financial stability, maximizes ROI, as well as secures company growth.

3. What are the Types of Financial Management?

The types of financial management include capital structure, capital budgeting, working capital management, and dividend management. Each contributes uniquely to business operations and growth.

5. What is the Financial Management Cycle?

The financial management cycle covers planning and budgeting, resource allocation, operations and monitoring, and evaluation and reporting. This further ensures strategic management throughout the company’s lifecycle.

6. What Jobs are Available in the Financial Management Sector?

The financial management sector offers roles such as corporate finance analysts, investment managers, financial planners, risk managers, personal financial advisors, and commercial bankers. These roles involve managing finances, analyzing trends, mitigating risks, and supporting overall business growth.

Today, we are living in a world where hybrid educational models combining online as well as on-campus learning options are available in all fields including financial management. Emeritus India offers numerous general options as well as area-specific financial management specializations.

Emeritus is an internationally acclaimed career learning and development brand with over 2000 employees and offices in Mumbai, New Delhi, Shanghai, Singapore, Palo Alto, Mexico City, New York, Boston, London, and Dubai. The edtech giant is committed to teaching the most advanced and futuristic financial management skills to individuals, companies, and governments all over the world. We offer online learning as well as in-class courses in collaboration with over 50 top-tier universities. Aspirants can enroll in options like diplomas, certifications, boot camps, and senior executive programs to acquire new skills and transform their careers.

There is an extensive range of financial management, analytics, and other learning opportunities at Emeritus that can give you a jump start on a career in the financial sector. You can also get a broader understanding of business by opting for the Executive Programme in Strategic Management from IIML (Lucknow), which covers strategy as a function.