What is finance management?
Finance Management is the planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization. It also includes applying management principles to the financial assets of an organisation, while also playing an important part in fiscal management.
For entrepreneurs raising money from investors your finance management could be the deciding factor, particularly if they are valuing your business using only the internal rate of return (IRR) method. This may result in the investor choosing to invest somewhere else in a company that has a higher IRR.
Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment.
What is the importance of financial management for your business?
Financial management is one of the most important aspects in business. In order to start up or even run a successful business, you will need excellent knowledge in financial management (the process of planning, directing and controlling financial resources).
The Scope of financial management
The scope and objectives associated with financial management are:
- Maintaining enough supply of funds for the organisation;
- Ensuring shareholders of the organisation to get good returns on their investment;
- Optimum and efficient utilization of funds;
- Creating real and safe investment opportunities to invest in.
Breaking this down into more detail
- Creating a Financial Plan:
- Calculating the amount of capital that is required by an organisation, and,
- Determining its allocation.
- A financial plan includes certain key objectives:
- Determining the amount of capital required;
- Determining the capital organisation and structure;
- Framing of the organisation’s financial policies and regulations.
- Financial control: This is one of the key activities in financial management. Its main role is to assess whether an organisation is meeting its objectives or not. Financial control answers the following questions:
- Are the organisation’s assets being used competently?
- Are the organisation’s assets secure?
- Is the management acting in the best financial interests of the organisation and the key stakeholders?
- Financial decision-making: This involves investment and financing with regards to the organisation. This department takes decisions about how the organisation should raise finance, whether they should sell new shares, or how the profit should be distributed.
Large companies have departments and staff dedicated to financial management, however, in startups it is down to the founder and key members of the team to take on these responsibilities including:
- Calculating the capital required:The financial manager must calculate the amount of funds an organisation requires. This depends upon the policies of the firm with regards to expected expenses and profits. The amount required must be estimated in such a way that the earning capability of the organisation increases.
- Formation of capital structure:Once the amount of capital the firm requires has been estimated, a capital structure needs to be formed. This involves debt equity analysis in the short-term and the long-term. This depends upon the amount of the capital the firm owns, and the amount that needs to be raised via external sources.
- Investing the capital:Every organisation or firm needs to invest money in order to raise more capital and gain regular returns. Hence, the financial manager needs to invest the organisation’s funds in safe and profitable ventures.
- Allocation of profits: Once the organisation has earned a good amount of 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:This department is also responsible for effectively managing the firm’s money. Money is required for various purposes in the firm such as payment of salaries and bills, maintaining stock, meeting liabilities, and the purchase of any materials or equipment.
- Financial control:Not only does the financial manager have to plan, organise, and obtain funds, but he also has to control and analyse the firm’s finances in the short-term and the long-term. This can be done using financial tools such as financial forecasting, ratio analysis, risk management, and profit and cost control.
Why is Financial Management important?
Financial management is important for the following reasons:
- Helps organisations in financial planning;
- Assists organisations in the planning and acquisition of funds;
- Helps organisations in effectively utilising and allocating the funds received or acquired;
- Assists organisations in making critical financial decisions;
- Helps in improving the profitability of organisations;
- Increases the overall value of the firms or organisations;
- Provides economic stability;
Financial Management is critical to any company, whether small or big and is a vital activity that must be performed in any organisation. Financial management entails the process of planning, organising, monitoring and controlling the financial resources of an organisation. The idea for doing such is to be able to achieve the vision or goals of the company at the stipulated time frame. The goals you should set yourself include:
- Ensuring Financial Management is a regular practice in a business environment
- Managing a company’s financial resources to ensure there is little or no wastage.
- Controlling everything regarding the company’s financial activities which includes the:
- procurement of funds,
- use of funds,
- risk assessment,
- and other things that are related to finances.
- Ensuring that there are enough funds to carry out production or activities.
They must be set up to follow the best practices, use the required financial management tools and deploy the right strategies to minimize cost and ensure production or business activities function smoothly.
Your end goal when it comes to managing your finance in your business.
To maximize profit while managing the finance of the company with the main focus being that the individual or department handling the financial issues of the company must ensure that the company in question is making sufficient profit.
Proper Mobilisation of Finance
The collection of funds to run the business is also an integral part of financial management that needs to be handled appropriately. Once you have concluded the estimation of the amount needed for a business process, the required amount can then be requested from any legal sources such as debenture, shares or even request for a bank loan. But the point is that there should be a proper balance between the money the firm has, and the amount borrowed.
To Ensure the Company’s Survival
The survival of the company is essential. You must make adequate financial decisions to ensure the company is successful.
There must be a proper understanding and corporation among the various departments. The finance department must understand and agree with other departments within the company for the business to function smoothly.
Lower the Cost of Capital
Financial managers also try their very best to reduce the cost of capital, which is something that is vital to the business. They ensure money borrowed attracts little interest rates so the company can maximize profit.
What are the duties of a Financial Manager?
1. Financial Planning and Forecasting
- To plan and estimate the business’s financial needs. He needs to provide details regarding the amount of money that would be required to purchase different assets for the company.
- To know what needs to be spent on working capital and fixed assets for the business.
- To make futuristic plans for funds that the company.
- To determine how funds will be realised and used.
2. Determination of capital composition
- Once the Financial Plan and Forecast have been completed, the capital structure has to be decided .The mix of debt and equity used to finance the company’s future profitable investment opportunities is referred to as capital structure.
3. Fund Investment
- The financial manager has to ensure that funds made available to the business are used adequately to grow the business. The cost of acquiring the said fund and value of the returns need to be compared and balanced. The financial manager also needs to investigate the channels of the business that is yielding higher returns and improve them.
4. Maintain Proper Liquidity
- Cash is the best source for maintaining liquidity. Businesses need to buy raw materials, pay salaries and tackle other financial needs of the company. However, the financial manager has to determine if there is a demand for liquid assets. He also must arrange these assets in a manner that the business won’t experience scarcity of funds.
5. Disposal of Surplus
- Selling surplus assets and investing in more productive ways will increase profitability.
6. Financial Controls
- Financial control may be construed as the analysis of a company’s actual results, approached from different perspectives at different times, compared to its short, medium and long-term objectives and business plans.
Financial management is a hot topic in the business world because of the importance of finance to the business. The reason for establishing a company is to make a profit and run for many years. However, it’s the financial manager’s responsibility that the finances of the company are used adequately.