Finance plays a critical role in all economic interactions. As things are today, it’s difficult to envision a future without finance. Originally, finance was a French term. In the 18th century, English-speaking communities used it to refer to money management.
It has since established a permanent position in the English vocabulary. While the term finance is frequently associated with money, it actually refers to a larger idea that is connected to money and its movement. According to the Oxford dictionary, finance is the management of money. Individuals have varying perspectives about finance.
What is Financial Management?
Financial management is the process of strategically planning, organising, directing, and managing the financial activities of a management or organisation. Additionally, it entails applying management principles to a company’s financial assets and playing a significant part in fiscal management.
- Optimal and effective resource utilisation;
- Ensure that the organisation has an appropriate financial base;
- Creating investment options that are viable and safe.
- Among the objectives of financial management are the following:
- Ensuring that shareholders get a profit on their investments
Financial Management Definition
Financial management is the process of applying broad management principles to a business’s financial assets. Appropriate financial management in a firm ensures adequate fuel and regular service, resulting in optimal financial performance. Without sufficient funding, an organisation may have limits that have a significant influence on its growth and development.
Financial management is a critical function of business owners and managers. They must examine the long-term impact of their management activities on the company’s profits, cash flow, and overall financial health. Each facet of a business’s operations has an effect on its financial success and must be carefully studied and managed by the owner.
Normal Operations Financial Management
A corporation’s usual actions include supplying a product or service, selling it to a consumer, getting money, and repeating the process. This cash cycle is efficiently moved by financial management. Controlling the turnover rates of raw materials and finished goods inventories, selling to clients and collecting receivables on schedule, and beginning anew with new raw materials are all examples of what this requires.
Meanwhile, the corporation must pay its expenses, suppliers, and workers. All of this must be done in cash, and skilled financial management is essential to guarantee that the monies flow smoothly.
Even if economies have a lengthy history of expansion, they will periodically encounter a devastating recession. Businesses that fail to plan for economic downturns risk going out of business owing to a lack of money.
The Life Cycle of a Business
The majority of firm’s experience losses and negative cash flows throughout their early phases. Financial management is critical at the moment. While the business is still in its infancy, managers must ensure that they have sufficient cash on hand to pay its staff and suppliers.
This means that the owner must predict these negative cash flows in order to ascertain the amount of money necessary to keep the business operating until it becomes profitable.
As a firm develops and matures, it will require more cash to finance its expansion. It is wise to prepare ahead of time and set aside finances to cover these charges. Financial management makes the decision on whether to fund expansion internally or borrow from outside lenders.
Financial management comprises selecting the most cost-effective source of money, controlling the company’s cost of capital, and keeping the balance sheet from being unduly loaded with debt, which can impair the company’s credit rating.
Business Operations Reporting
Every organisation is accountable for delivering periodic reporting on the status of their activities. Shareholders want regular updates on the performance and security of their investments. State and municipal governments seek reports in order to collect sales tax. Business managers require extra forms of reports, such as key performance indicators, which analyse the operations of numerous divisions inside their organisation.
Furthermore, a complete financial management system can create the different sorts of reports required by each of these particular businesses.
Filing and Payment of Taxes
The government is constantly on the scene to collect taxes. If financial management wishes to meet its promises, taxes must be paid on schedule.
Financial management is a vital skill for any owner or manager of a small business. The acts of a business owner have a financial ramification, and he must make these judgments in the context of the overall organization.