What Is Financial Management? An Expert Guide
Lynne Sampson | ERP Content Strategist | January 30, 2023
When most people think of financial management, they often think of managing their own bank accounts: paying the rent or mortgage, paying utility bills, buying groceries, maybe even planning a monthly budget. But financial management for business is a much more complex pursuit. It involves controlling and tracking all the money flowing in and out of the business, as well as taking steps to make the company as profitable and financially secure as possible.
To get a clearer picture, let’s break down some of the key goals and functions of financial management.
What is Financial Management?
Financial management is about controlling the flow of money in and out of the organization. Every business needs to sell products or services, pay expenses, balance the books, and file taxes. Financial management encompasses all of this, along with more complex processes, such as paying employees, buying supplies, and submitting reports to government agencies to show they’re obeying applicable laws and regulations. The act of overseeing all these transactions for a business is what we mean when we talk about a company’s financial management. In general, the bigger the company, the more complicated financial management becomes.
Employees who specialize in financial management are responsible for all the money going into and out of the company. Smaller companies will have at least one accountant or bookkeeper who works with the bank to execute these transactions and track the flow of money. Large companies will often have entire finance teams led by a chief financial officer (CFO), controller, head of finance, or someone with a similar title.
The finance team’s primary job is to make sure the company stays solvent and never runs out of cash—but it’s not their only job. They’re also responsible for handling loans and debts, balancing the books, overseeing investments, raising venture capital, and managing public offerings (i.e. selling company stock on the open market). Basically, the finance team protects a company’s financial resources, monitors and controls all transactions, and takes steps to make the company as profitable as possible.
Key Takeaways
- Financial management is all about monitoring, controlling, protecting, and reporting on a company’s financial resources.
- Companies have accountants or finance teams responsible for managing their finances, including all bank transactions, loans, debts, investments, and other sources of funding.
- Finance teams are also responsible for ensuring the company follows all regulations, stays solvent, and is as profitable as possible.
Understanding Financial Management
Financial management includes business processes that span every team and department in the company. A finance team’s responsibilities include:
- Invoicing and receivables: Money that customers pay or have promised to pay to the business. Finance teams are responsible for sending out invoices and processing the payments as they come in. Collections teams are responsible for following up on overdue accounts (this process is sometimes outsourced to third parties).
- Payables: Money that the company owes to its vendors and suppliers. Finance teams are responsible for paying these bills and recording the payments.
- Bank transactions and reconciliations Finance teams work closely with their banks to ensure that every bank transaction is processed correctly. They must also make sure that the bank’s statements match their own records, which are kept in the company’s general ledger and subledgers. The finance team must follow up on, and correct, any mismatches between bank statements and ledgers—a process known as account reconciliation.
- Closing the books: On a particular date, the company will tally transactions from a given period so it can reconcile its accounts and report on its financial position. The close, as this process is known, typically happens at the end of a month, quarter, or year.
- Reporting: Companies must report regularly on their financial performance, whether it’s to the CEO, a board of directors, investors, shareholders, or government regulators. The finance team is responsible for ensuring that these reports are clear and accurate.
- Scenario modeling, planning, and budgeting: Scenario modeling starts with making certain assumptions about an upcoming period of time, such as, “Next quarter, we expect to bring in $10 to 15 million in revenue.” The finance team will run multiple “what-if” scenarios for the best and worst cases to estimate how much money the company will have if those conditions come to pass. Based on these models, the finance team will assess how best to respond and develop appropriate plans, forecasts, and budgets. Often, the finance team will work with other departments—such as sales, HR, project management, or procurement teams—to build models that include data from sales forecasts, workforce expenses, and inventory costs. This is known as connected planning.
- Payroll and expenses: Individual paychecks to employees are typically the responsibility of the HR department. However, overall workforce costs roll up to the finance team so they can factor it into their budgets and plans. Finance is also responsible for reimbursing employee expenses, such as work-related travel and meals.
- Cash management and forecasting: With money constantly flowing in and out of a business, it’s important for finance teams to look ahead. They must ensure that the company has enough cash to stay solvent for the next quarter, next year—even the next three to five years. In most companies, cash forecasting is typically done once a month.
- Tax strategies: Every company must file. taxes; and, like the rest of us, they want to take advantage of as many deductions as possible to prevent overpayment. Some finance teams have tax specialists on staff to manage this. Those that don’t will often outsource this task to an accounting firm.
- Risk and compliance Every business has financial risks, from rising interest rates to global pandemics. It’s the finance team’s job to control such risks and reduce the company’s exposure as much as possible. They must also make sure the company follows the rules and regulations laid out by governments, regulators, and other jurisdictions to stay in compliance and avoid hefty fines.
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Financial management matters because it keeps a company solvent. Its most basic goal is to ensure that the business doesn’t go bankrupt. Financial management addresses the most critical issues that a business can face, such as loss of revenue (as happened during the COVID-19 pandemic), natural disasters, strikes, wars, and so on.
Beyond basic survival, good financial management—and financial management software—can help a company grow and thrive. Finance teams have many tools they can use within the business to help drive growth. In good market conditions, with a growing economy and low-interest rates, finance teams can borrow money from banks, raise funds from venture capitalists, or take the company public (i.e. sell shares on the stock market). The company can invest these funds for growth by opening new locations, expanding into other territories, upgrading equipment, and so on. When market conditions are less favorable—for example, during a recession—financial management tactics might include cutting costs by laying off workers or closing unprofitable locations.
Improving profitability is an important part of financial management. Finance teams often work with sales and marketing teams to set prices for the company’s products or services. They must strike a balance to set the right prices. If prices are too high, customers might run to cheaper competitors; too low, the company might not bring in enough revenue to cover expenses. In the same way, controlling costs is also one of the finance team’s key responsibilities, whether it’s for employees, rent, electricity, raw materials, or shipping expenses.
Reporting is a key part of effective financial management. The CFO and other business leaders want to know how well the company is performing so they can make the best decisions for the health of the business. They want to know that the business is performing to plan, and that it’s providing a good return to the company’s investors. Good financial management matters because it helps a company to meet—or even exceed—these goals.
Goals of Financial Management in Business
Finance teams have many goals when it comes to financial management. Their top goals include:
1. Keeping the company solvent by avoiding bankruptcy and ensuring the business has enough money to continue operating.
2. Maximizing profitability by setting the right price for existing products and services, discontinuing unprofitable products and services, and evaluating the potential profit of new products and services.
3. Minimizing costs by monitoring spending and looking for ways to reduce overhead.
4. Ensuring a good return on investment (ROI) for venture capitalists, stock shareholders, and other investors.
5. Raising capital by attracting more investment via positive ROI.
6. Cash forecasting to make sure the organization has enough cash—not only to function but to invest in growth.
7. Reducing risks and avoiding fines by ensuring the company complies with the appropriate regulations. Increasingly, this includes environmental, social, and governance (ESG) planning and reporting.
Financial Management Functions
In smaller companies, one person or a small team of people might perform all the financial management functions for the business. Larger companies typically have teams that are responsible for specific functions. These include:
1. Accounting
This includes tracking, recording, and matching all monetary transactions within the company. The accounting team is often led by a controller or chief accounting officer and aided by accounting software. They often use cloud ERP systems—in particular, financial systems—to perform, record, and report on the company’s finances. Accounting is also responsible for account reconciliation and closing the books (see above).
2. Project management
Projects are a chief source of both income and expenses, especially for professional services, such as engineers, lawyers, and consultants. Finance teams are responsible for allocating budget to a project and overseeing the revenue each project brings in.
3. Procurement
This is typically divided into two categories:
- Direct procurement includes the parts and raw materials used to make a company’s products. Direct procurement is typically overseen by supply chain and/or operations teams who manage and work with suppliers through a procurement system. The parts, raw materials, and finished products are tracked using an inventory system. Having these systems connected to each other makes operations, control, and oversight of suppliers and inventory much easier.
- Indirect procurement refers to supplies that don’t go into a company’s products and services but are used for day-to-day operations. These might include items such as office furniture, laptops, and stationery. Finance authorizes and tracks these purchases using a procurement system.
4. Financial planning and analysis (FP&A)
In large companies, this is sometimes a separate team inside the finance department. FP&A specialists are responsible for modeling potential scenarios and forecasting likely outcomes for the best- and worst-case situations. They use these forecasts to develop financial plans and budgets for the next quarter or year. FP&A professionals often work closely with other parts of the business to develop forecasts and budgets, including sales plans, workforce plans, and operational plans. This is known as connected planning.
5. Tax
Every company must file taxes, but it gets especially complicated for big companies that must file in different countries. Such companies often have specialized tax teams who use tax-reporting software for country-by-country and other reporting.
6. Treasury
The treasury department is responsible for tracking and managing capital assets, debts, loans, and cash in the bank. Treasury advises the CFO on how much money is available for things such as capital investments (for example, big equipment purchases) or mergers and acquisitions (M&A). They’re also responsible for the company’s capital structure (see below).
7. Risk and compliance
This function manages controls for financial risks—everything from audits to natural disasters—and reduces the company’s exposure as much as possible. They must also make sure the company follows the rules and regulations laid out by governments, regulators, and other jurisdictions to stay in compliance and avoid hefty fines.
Types of Financial Management
In general, financial management is divided into the following types:
Working capital management
This focuses primarily on day-to-day operations, such as making sure there’s enough money to pay employees or buy raw materials. Working capital encompasses things such as cash on hand, inventory on hand, or other assets that can be quickly sold to raise money if critical issues arise.
Revenue cycle management
This accounts for the revenue a company earns over time by selling its goods and services. Increasingly, as more companies move toward selling everything “as a service,” revenue must be recognized in the monthly or quarterly period in which it’s earned, rather than all at once at the time of sale. This spread out revenue cycle is recognized as monthly recurring revenue or MRR.
Capital budgeting
This area of financial management is all about identifying what a company needs financially for it to achieve both its short- and long-term goals. Financial managers use capital budgeting to evaluate the profitability of investments and/or projects to see if they add value to the business.
Capital structure
Capital structure is a combination of the debt and equity used to finance a company’s operations, acquisitions, investments, and growth. A company’s capital structure is usually conveyed in a debt-to-equity ratio.
Manage Your Financial Data with Oracle
Without some sort of financial management software, an organization would have a hard time surviving. As your company grows, financial management gets more complicated—you’ll need financial software that can do more than basic accounting. Advanced financial management systems can help you not only to manage the flow of money—they help you optimize profitability, determine tax obligations, reduce risk, stay compliant, improve revenue management, and more. With the right enterprise resource planning (ERP) system in place, you’ll be ready for whatever comes your way.
Financial Management FAQs
What is meant by financial management?
Financial management refers to the management of a company’s finances, including all money coming into the business, all money going out, and any cash or assets in reserve.
What is the role of financial management?
The most basic role of financial management is to keep the company solvent. Beyond that, good financial management can help a company grow and thrive.
What is financial management example?
An example of financial management is when a financial management team determines how much money a company should borrow to invest in a new factory, product line, or service offering.