Financial management is one of the pillars of a company’s operations. Setting sales targets and making investment decisions are just two examples of how financial management is essential to a company’s existence and growth.
In reality, a company’s health is influenced by its cash flow, the types of investments it makes, and its compliance with the law. In other words, it depends on the quality of the company’s financial management and, more crucially, how strictly it is implemented. Therefore, it is essential to have a solid comprehension of this concept.
What does financial management do?
The London School of Business and Finance defines financial management as “the strategic planning, organization, direction, and control of financial decisions within an organization or institution.” In short, this area is responsible for managing the money that enters and leaves the company, encompassing decisions on spending, investment, savings, and cuts.
That said, we can see the importance of financial management in four main pillars of action.
1. Accounting
Accounting is an independent area, but interconnected with corporate financial management. Although the latter is responsible for controlling a company’s finances, this is only possible through accounting records.
In this sense, accounting is responsible, among other functions, for keeping records of sales documents, acquisitions of goods or assets, expenses, and other income and expense reports.
2. Monitoring
Monitoring also highlights the importance of financial management, as it is responsible for decisions regarding the company’s present and future. Therefore, financial audits and regular cash flow assessments of operations and active projects must be performed. Only then will it be possible to identify problems, errors, or even fraud, which can later have a significant impact on the company’s accounts—and decisions.
3. Financial analysis and planning
The importance of financial management is evident in making proposals, when necessary, to maximize the company’s potential. For example, if one of the company’s goals is growth, factors such as:
- The size of the organization;
- The current financial situation;
- The state of the sector and the market in general;
- Result data from previous projects.
4. Compliance with rules and laws
The importance of financial management also relates to risk management and compliance with tax obligations (with the help of accounting records), such as paying taxes. Furthermore, this department must ensure that accounts comply with the regulations. Therefore, it is essential to keep accounts up to date and conduct financial audits.
How important is financial management in companies?
The four pillars mentioned in the previous point are, in themselves, reasons to invest in this area. However, the importance of financial management is much broader, as it helps to:
- Maximize profits and minimize costs
By analyzing the risk and return of a company’s products/services, it is possible to identify what is most profitable and what is causing the company to lose money. - Promoting financial stability:
Controlling expenses and monitoring operations makes it easier to keep your accounts up to date. This allows you to determine the margin for investments, new hires, and other expenses that will have a significant impact on your organization’s finances. - Planning future investments
Financial management not only helps companies plan investments, but also decide whether to acquire or sell assets or identify profit potential from investing in new products/services. These are critical decisions for the company’s current and future tax efficiency.
Tips on how to manage your finances effectively
Given the importance of financial management for companies, effective planning is imperative. This involves following a set of strategies that align with the company’s overall objectives, namely:
Maintain a constant evaluation of operations
One of the keys to a successful business is regularly monitoring and evaluating financial performance. This allows you to determine which strategies are working, which aspects need improvement, and which resources can be reduced or increased.
Making predictions for the future based on the present
The ability to forecast your business’s future performance is aligned with the previous point. After all, financial forecasts are based on the company’s current performance, facilitating the development of realistic and achievable plans.
Pay attention to the market
No business works in a vacuum. In other words, market conditions and the industry in which it works have a significant influence on decision-making. For instance, investment choices should be given greater thought if the industry is going through a challenging time. To make sure you’re not lagging behind in market advancements, you should also keep an eye on your competitors.
Make choices based on your business plan.
Despite the fact that most businesses use a similar approach to financial management, it’s crucial to remember that no two businesses are comparable. As a result, the business model and the views of partners and investors should be considered while making choices and taking actions.
Automate processes
Certain tasks can be simplified if automated. For example, there are several accounting software programs that help you keep track of daily transactions and generate financial activity reports more easily. This eliminates human risk and provides greater confidence in the accounts presented at the end of each fiscal period.