What is Financial Management? Function, Principles, and Types

Table of Contents

What is Financial Management?

Financial management refers to the act of planning, organizing, directing, and controlling financial activities such as the acquisition and utilization of funds of an enterprise. In other words, it is the application of general management principles to the enterprise’s financial resources or possession. This activity is vital to the health of an organization. It is necessary to plan, organize, control, and monitor financial resources with the aim of achieving organizational goals and objectives. It is ideal for an organization to control its financial activities when it comes to procurement of funds, utilization, accounting payments, risk assessment, and every other thing that relates to money. When an organization properly manages its finances, there will be an effective functioning of the firm. On the other hand, if the organization fails to properly deal with its finances, it is bound to face barriers that come alongside severe consequences on its growth and development.

Several options exist for the management of finances which can either be managing them on your own, hiring a full-time employee, hiring a part-time accountant or a third party to manage all financial activities, etc. Most organizations have a dictated department that is responsible for taking care of the financial matters of the company. A financial manager is solely responsible for handling an organization’s finances as well as its resources. Every decision that relates to finances takes place within this position. A finance department can cater to the various needs of the company depending on the profile of the company.

Financial management, therefore, implies strategically meeting the financial needs of the organization as well as applying management principles to the organization’s financial assets. Alongside this, this plays an important role in fiscal management.

Personal financial management

Personal financial management simply entails planning, organizing, directing, and controlling one’s personal financial activities. This includes the utilization of funds, income analysis, managing your spending, savings, cash flow, planning for uncertainties, and maintaining financial security. As an individual, you can plan on making your capital grow over time. Make use of your own decisions to have a better understanding of the things that work in your financial management plan 

Who is a financial manager?

A financial manager is someone who is responsible for strategically planning, organizing, directing, and controlling the financial activities of an organization. He looks after the financial health of an organization. Furthermore, they are responsible for producing financial reports, directing investment activities, and developing plans and strategies for the long-term financial goals of the organization.

A financial manager critically monitors the finances of a company as well as carries out data analysis and provides advice to senior managers or ideas with regard to profit maximization. Oftentimes, they work as part of a team, providing assistance with regard to decisions that affect the organization, a task for which they need analytical ability and excellent communication skills. The efficiency of financial managers has increased over time with the improvements in technology.

The roles of a financial manager include;

  • Preparation of financial statements, reporting business activities, and forecasting
  • Monitoring financial details to make sure that they meet legal requirements
  • Supervision of employees that are responsible for financial reporting and budgeting
  • Financial report reviews as well as finding ways to reduce costs
  • Making analyses of market trends in order to find opportunities for expansion and acquiring other companies
  • Help in making financial decisions.

Types of financial managers

The types of financial managers include;

  • Controllers
  • Treasurers
  • Credit managers
  • Cash managers
  • Risk management specialists
  • Insurance managers

Controllers

Controllers are responsible for directing the preparation of financial reports that summarize and forecast the financial position of the organization. This includes income statements, balance sheets, and future earnings or expense analyses. They take charge of the preparation of special reports that regulatory governmental agencies require. They oftentimes take charge and supervise the accounting, audit, and budget departments.

Treasurers

Treasurers perform the role of directing the budgets of their organization in order to meet its financial goals. They carry out supervisions on the investment of funds and employ strategies of raising capital such as the issuance of stocks and bonds to support the expansion of the firm. Also, they develop financial plans for mergers and acquisitions. A merger means two companies joining together while acquisition means one company buying another.

Credit managers

Credit managers oversee the credit business of their firm. They set criteria for rating credit, determining credit ceiling, and monitoring the collections of past due accounts.

Cash managers

Cash managers are responsible for the inflow and outflow of the company’s cash to meet its business and investment needs. For example, it is necessary for them to project cash flow to determine whether the company will either not have enough cash and will need a loan or have surplus cash and can invest the surplus cash.

Risk management specialists

Risk management specialists are responsible for controlling the financial risk of their organization by using hedging and other strategies to limit or compensate for the likelihood of financial loss as well as the company’s exposure to financial uncertainty. Among these risks they try to limit are those that occur as a result of the changes in currency value or changes in the prices of commodities.

Insurance managers

Insurance managers take decisions with regard to the best ways of limiting the losses of their company by obtaining insurance against risks. This can include the necessity of making disability payments for an employee who sustains an injury while carrying out his job, any costs that lawsuit imposes against the company, property loss resulting from fire, etc.

Objectives of financial management

It is pertinent for the top management of every organization to lay down the goals and objectives that they need to achieve in their business. This is absolutely necessary for the implementation of wise financial decisions. Objectives are meant to provide a framework within which an organization makes various decisions that relate to investment, finance, and dividend.

There are two major objectives with regard to financial management. These are;

  • Profit maximization
  • Wealth maximization

Profit maximization

Companies use the profit maximization objective as a standard of financing decisions. This approach states that a firm has to undertake all those activities to its profits and avoid or eliminate all others that bring about a reduction in its profits. According to this objective, every financial decision; financing, dividend, and investment should bring about profit maximization. Therefore, there should be one test that guides financial decision-making in an organization which is to select all those assets, projects, and decisions that are profitable and discard those that are not profitable.

Strengths of profit maximization

The following are the strengths of profit maximization objective;

  1. Performance measurement
  2. Efficient resource allocation and utilization
  3. Social welfare maximization
  4. Source of incentive
  5. Helps in facing adverse business conditions
  6. Helpful in a firm’s growth
Performance measurement

Profit serves as a test of a company’s business efficiency. That is, it is a gauge by which one can judge the economic performance of a business.

Efficient resource allocation and utilization

Profit maximization brings about efficiency in the allocation and utilization of scarce resources of the business. This is because businesses tend to direct the uses of these resources from projects that are less profitable or unprofitable to those that are more profitable.

Social welfare maximization

The maximization of profits is also essential for the fulfillment of social goals as well. In other words, profit maximization brings about social welfare maximization.

Source of incentive

Profitability serves as a motivating factor or incentive that stimulates a company/business organization to work more efficiently. If a firm withdraws the profit motive, then there will be a decrease in its pace of development.

Helps in facing adverse business conditions

Over time, business and economic conditions keep on changing. Adverse business conditions such as recession and severe competition may occur. But if the business has some past earnings that it can depend upon, then it will be able to survive such conditions. This implies that a business should be effective in maximizing its profits when the circumstances are favorable.

Helpful in a firm’s growth

The major source of a firm’s financial growth is profit. On the other hand, an unprofitable firm cannot grow and expand. For a firm to grow and increase its pace, it has to yield profits because, in the long run, a firm that cannot maximize its profit will not be able to survive the market and business environment.

Weaknesses of profit maximization

The profit maximization objective has been criticized on account of the following weaknesses;

  1. Ambiguity
  2. Fails to pay attention to the time value of money
  3. Ignores risk factor
  4. Does not consider future profits
  5. Ignores the business’s social obligations
  6. Negligent about the effects of dividend policy on share market prices
Ambiguity

A practical difficulty that relates to the profit maximization objective is that it tends to be ambiguous and vague. Different individuals read different meanings to the subject matter of profit. For instance, profit may either be short-term or long-term, it may either be before or after tax, and it may either be total profit or rate/percentage of profit. In similar terms, it may either be total returns on capital employed, total assets, or the funds of shareholders, etc.

Fails to pay attention to the time value of money

The profit maximization approach is practically ignorant of the time value of money. That is, it does not differentiate between the profits business earns over different years. It tends to ignore the fact that the present value of a currency can be greater or less than the value of the same currency in subsequent years. In similar terms, the value of profit a business earns in a specific year can be more or less in comparison to the equivalent profits in subsequent years.

Ignores risk factor

This approach tends to ignore the risk involved in the earnings of a business. For instance, two firms have the same expected earnings. If the earnings of one firm fluctuate more than the other, it will be riskier. Generally, investors have a preference for a lower income with a lower risk associated in comparison to high income with greater risk factors. This approach pays zero attention to the risk factors.

Does not consider future profits

In this approach, the business tends to solely run with the objective of maximizing immediate profits. Some firms attach more importance to growing sales. In essence, they are ever willing to accept lower profit yields in order to achieve stability as long as there is a large volume of sales.

Ignores the business’s social obligations

The profit maximization approach tends to ignore the social obligations of business to social groups like workers, consumers, government, society, etc. When a firm fails to put into consideration the interest of social groups, it will not exist for a long period of time. This is because these groups have a vital role to play in their smooth and effective running.

Negligent about the effects of dividend policy on share market prices

Under this approach, firms may fail to put into consideration dividend payments because retaining profit in the business may satisfy the goal of the maximization of the earning per share.

Wealth maximization

The approach of wealth maximization has been recognized for evaluating the performance of a business undertaking. It also implies the value maximization or the maximization of the company’s net present worth/net present value maximization. This approach states that financial management should take such decisions that will facilitate the increase of a firm’s net present worth. Universally, this approach is acceptable as a criterion that is appropriate for making financial decisions as it eradicates all the weaknesses/limitations of the profit maximization approach. Here, the measurement of the worth of an asset takes place in terms of the benefits derived from its use, less the cost of its acquisition.

Also, businesses measure their benefits in terms of cash flows they receive from the use of the asset rather than accounting profit which forms the basis of measuring benefits under the profit maximization approach. So, if a firm decides to measure benefits in terms of cash flow, it will be able to avoid any form of ambiguity with regard to the meaning of profit.

This approach is important in the incorporation of the time value of money. It creates an allowance for time and risk factors by discounting or reducing the cash flows by certain a percentage while measuring the value of future cash flows. This percentage refers to the discount rate.

The difference between the present value of future cash inflows that an asset generates and its cost refers to the net present value (NPV). A financial asset, action, or project with a positive net present value creates wealth for shareholders and is therefore undertaken. On the other hand, a company or business should reject any financial activities that will bring about a negative net present value because it would bring about a reduction in the wealth of shareholders. In this case, if a firm chooses one out of various projects, then it will adopt the one with the highest net present value. This, in turn, will maximize the wealth of shareholders if the firm follows this criterion while making financial decisions.

Strengths of wealth maximization

The following are the strengths of wealth maximization;

  1. Avoids ambiguity
  2. Considers the time value of money
  3. Gives attention to a regular dividend payment
  4. Considers risk
  5. Pays attention to social responsibilities
  6. Considers long-term growth
Avoids ambiguity

As stated above, the wealth maximization approach makes use of cash flows rather than accounting profits to avoid ambiguities with regard to the meaning of profit.

Considers the time value of money

This approach gives due importance to the time value of money by discounting the future cash flows by apportioning an appropriate percentage or interest rate. If there are higher risks as well as a longer period of time are involved, then the firm will use a higher discount rate or interest rate to determine the present value of future cash benefits. On the other hand, if there are lower risks and shorter periods of time involved, the discount or interest rate will be lower.

Gives attention to a regular dividend payment

The wealth maximization approach gives due importance to the regular payment of dividends. Here, business firms make financial decisions such that the shareholders receive the highest combination of dividends and increase the market price of shares.

Considers risk

This objective gives due importance to risk factors and makes analyses with regard to risk and uncertainty so that there will be a selection of the best course of action out of different alternatives.

Pays attention to social responsibilities

Unlike the profit maximization approach, wealth maximization pays adequate attention to the social responsibilities/obligations of business to social workers, consumers, government, society, etc. Giving due importance to these social responsibilities helps a firm to exist for a longer period of time because these social groups play vital roles in the smooth and effective running of businesses.

Considers long-term growth

This approach takes into account the firm’s survival in the long run.

Weaknesses of wealth maximization

The following are the weaknesses of the wealth maximization approach;

  1. It is a prescriptive idea
  2. Difficulties regarding ownership and management
  3. Not useful for every category of people
It is a prescriptive idea

The wealth maximization objective is a prescriptive idea, that is, it enjoins a financial action based on a norm or standard. It fails to be descriptive with regard to the policies that are necessary for a firm to implement in order to maximize its wealth. These policies can vary across firms, that is, the policies a particular firm would adopt can differ from the policies another firm would adopt.

Difficulties regarding ownership and management

When there is a separation between ownership and management in a business organization, this approach tends to face difficulties. This happens to b the case in most large corporations and limited liability companies.

Not useful for every category of people

The wealth maximization approach is only useful for the shareholders of equity. It is not useful for debenture holders and society.

The importance of financial management in an organization cannot be overemphasized. It is important in the aspect of maintaining financial stability and protection from bankruptcy. It is important in every industry such as financial, construction, manufacturing, etc.

The following points describe the importance of financial management;

  • Financial planning
  • Safeguarding and protecting funds
  • Allocation of funds
  • Investment opportunities
  • Financial decision
  • Economic growth and stability
  • Improvement in the standard of living
  • Valuation of a company
  • Tax planning
  • Capital reserves
  • Estimation of capital requirements
  • Investment of funds
  • Disposal of surplus

Financial planning

Financial planning helps in the decision with regard to each financial necessity of a business. Also, it associates the need to undertake prompt and correct measures rather than worries in later stages of a company’s financial management life cycle. Financial planning is a crucial aspect of a business organization as all the credits for business success are mostly dependent on it.

Safeguarding and protecting funds

Financial management is important as it protects finance towards the achievement of business goals. It is necessary for one to measure the areas where it is necessary to allocate funds and then allocate them properly in every necessary area for the smooth functioning of the business. A practical instance is in the area of overspending. When a company overspends on one project, the impact will be visible in other areas of the business operations as this may bring about shortages of finances in many cases. Safeguarding as well as investing funds wisely is very crucial.

Allocation of funds

Financial management is important because it helps an organization to allocate funds appropriately in the course of enhancing its operational proficiency. When finance managers use or allocate funds appropriately and wisely, it helps in reducing expenses in the business as well as increasing the estimated capital for the company.

Investment opportunities

A company that has good financial management skills has greater opportunities of exploring investment. Investment opportunities will certainly help one in creating wealth, most importantly in the future. Depending on the risk preference and tolerance of a company, it can look for investment options and choose the most appropriate.

Financial decision

A company that manages its finances properly has greater opportunities of making the appropriate financial decisions. Once a business concern makes a financial decision, it is irreversible. In other words, once one has spent his finances, he has spent it, so there will be no cash refund for any wrong decision.  Because of this, it is important for a business to crosscheck the decisions it is making. Financial management, therefore, helps in making financial decisions that best suit the needs of a company.

Economic growth and stability

proper financial management has a great impact on the growth of an economy. As different sectors gradually expand their wealth and grow financially, the economy grows as well, particularly in its GDP. This is greatly applicable to the government. When the authorities effectively manage the finances of the economy, the economy will grow steadily. In essence, economic growth is greatly dependent upon how effective the economy is in managing its finances.

Improvement in the standard of living

Effective financial management which greatly contributes to economic growth and stability, in turn, improves the standard of living in the economy. From the top financial managers of the government down to private sectors and the individuals living within the economy, the impact of this will be felt. In essence, when the economy grows, the standard of living will improve because there is a great efficiency in the allocation of resources.

Valuation of a company

Financial management is important in the area of expanding the number of speculators. With this, a company will be able to realize a greater market value. There will be an achievement of greater gain and efficiency. Increasing production and returns can bring about expansion to other countries. Effective financial management helps in improving business valuation. In other words, the valuation may not be accurate if a company does not effectively manage its finances.

Tax planning

Financial management does not fail to include tax planning which is important to every business firm. This tax planning includes how a company charges tax depreciation on its assets. The failure to appropriately plan for taxes can lead to a higher level of expenses and personal spending. A company should be able to manage its budgets and savings accordingly.

Capital reserves

Proper financial management helps in creating and expanding the capital reserves of companies. These capital reserves are vital for the operations of a company. With adequate capital reserves, a company can survive in an unfavorable business environment.

Estimation of capital requirements

It is important for a financial manager to estimate the capital requirements of a company. This, however, is dependent upon the expected costs, profits, future programs, and policies of the firm. It is crucial for a firm to make adequate estimations in order to increase its earning capacity.

Investment of funds

Financial management helps a company in making decisions with regard to allocating funds in profitable ventures in order to facilitate safety on investment and regular returns. Also as the name implies, financial management is vital in assisting a company effectively manage its money. Money is needful for different purposes such as salary and bills payment, stock maintenance, meeting liabilities, purchase of assets, etc.

Disposal of surplus

The financial manager is the one who makes decisions with regard to the company’s net profit. While managing finances, the company can make dividends which entails identifying dividend rates and other benefits like bonuses. It also makes decisions with regard to retained profits depending on the expansion, innovational, and diversification plan of the company while another part is used for the payment of dividends to shareholders. Therefore, financial management helps a company efficiently allocate its net profit.

Why study financial management?

The study of financial management is important to both individuals and organizations in the following areas;

  • Diverse career opportunities
  • Improve interpersonal skills
  • Builds personality
  • Greater job prospects
  • Higher salary packages
  • Career growth

Diverse career opportunities

Studying the financial management course exposes one to diverse career opportunities, either private or public sector. These careers include entrepreneurship, financial analysis, banking, financial and managerial accounting, and strategic financial management. People who are interested in starting up a business of theirs can also derive benefits from studying this field. Also, employees are able to obtain promotions and better accounting jobs.

Improve interpersonal skills

It helps in building better communication and interpersonal skills as you continue developing relationships with your colleagues.

Builds personality

Studying financial management courses, books, and journals help one in building his personality. This field helps you in improving your soft skills. This is because you have to be an extrovert and have the ability to talk about finance for a long period of time altogether if you desire to work in this field. With this, you will be able to build your personality, knowledge, and communication skills.

Greater job prospects

According to the United States Bureau of Labor Statistics (BLS), there has been an upward slope in the demand for the jobs of finance managers. This is a result of the growth in the range of financial products and the need for an intensive knowledge of geographical areas. Furthermore, there is proof of the fact that the demand for financial managers increased by 14%, careers increased in financial advertising by 32%, and careers in financial analysis by 23%.

Higher salary packages

People that are working in this field usually get enjoy a higher salary package whether at the entry-level or at the management level. Additionally, this is a job role with a high level of skills that is always in demand even in recessive economic conditions. In other words, this job role is not only in demand during the economic boom but also during a recession.

Career growth

Opportunities always exist for one to develop professional skills and jump into a career. It is possible to quickly acquire in-depth knowledge of the systems of financial management as well as software in the field. It is a perfect thing to obtain great aptitude skills.

Principles of financial management

It is important to understand the principles of financial management in order to help an individual and organization track its money. With this, one will be able to spend less than he earns.

The following principles will guide in achieving this;

  • Organize your finances
  • Spend less than you earn
  • Take into consideration the time value of money
  • Limit debt to income-producing assets
  • Educate yourself continuously
  • Understand the concept of risk
  • Diversification is not limited to investments alone
  • Pay attention to taxes
  • Prepare for uncertainties
  • Take the right insurance plan
  • Forecast cash flows
  • Pay attention to wealth maximization
  • The financial decision should align with the business life cycle

Organize your finances

The first step that is necessary for the creation of wealth is organizing your finances. It is important for you to track your bank accounts, credit cards, brokerage accounts, car loans, mortgages, and retirement accounts. Budgeting software can make provisions for total solutions to tracking all these accounts. 

Spend less than you earn

With personal finance software, you can access tools that will help you in tracking and budgeting spending as well as taking steps to achieve your long-term goals. It will be easier for you to gain control over your money when you learn to track your finances and know the areas necessary to spend on the most. A company with financial strength should not only consume the income that the business is generating, but it should also invest in the opportunities that are most beneficial. When a business reinvests its income, it amounts to expansion which brings about employment generation, creation of value, and exchange of value to the economy. Good financial management practice looks out for opportunities, worthy and feasible investment opportunities. This is the more reason why it is good to spend less than you earn to take advantage of investment opportunities.

Take into consideration the time value of money

In this case, you have to take advantage of the time value of money. Your money should not be idle, it should be actively involved in the running of the business as well as long-term investments. If you fail to be aware of the time value of money, you will have a higher chance of losing financially. As you put your money to work, you have to be conscious of this subject matter and the tendency of a reduction in value due to inflation and other factors.

Limit debt to income-producing assets

Spending your income on debt repayments is like flushing your money down the drain. This happens basically when a business fails to analyze the debts it is going for and then spends debts on assets that yield no income. It is necessary to limit debts to assets that produce income for the business. If it is necessary for you to be in debt, stick to financing assets, items, or equipment that will not lose but retain their value over time. This can include real estate and education.

Continuously educate yourself

Never stop educating yourself, engage in continuous research that will help in acquiring financial knowledge. Read every financial periodical, book, blog, etc. that you lay your hands upon. Have an understanding of why you are investing in order for you to stick to your plan. Gather research periodically as this will help you not to miss out on excellent investment opportunities.

Understand  the concept of risk

It is critical to understand that the more risk you take, the better your returns on investment. We refer to this as a risk-return-trade-off. Investments such as stock and bonds with a higher rate of return have a higher risk with regard to losing the principal amount invested. On the other hand, investments such as money market accounts and certificates of deposit with a lower rate of return equally have a lower risk of losing the principal invested.

However, investors must be extra careful as they form a portfolio from the investment opportunities that are available. The choice of investment is usually on the basis of the tradeoff between the risks and returns of the individual. So a positive correlation exists between risk and return. Here, a finance manager is careful in dealing with risk and return which form the core principles of financial management.

Diversification is not limited to investments alone

It is important to find creative ways of income diversification. Everyone has a special skill that can be converted into a money-making opportunity. However, one should not limit diversification to investments alone as it is also applicable to borrowing. You should have in mind that the target is to ensure the minimum cost of borrowing and financing and gain maximum reward for your investments. This then bounces back to making decisions with regard to risk and return. The aim of this diversification is to make the overall monetary risk remain affordable.

Pay attention to taxes

In managing your finances, it is dangerous to rule out the issue of tax. It is necessary to manage your tax information such as analyzing taxable investments and making provisions for organizing tools that help in smoothening tax filings. While investing, do not fail to consider the related tax implications that accompany every investment you do.

Prepare for uncertainties

Generally, unforeseen circumstances are inevitable no matter the efforts put in to avoid them. Events like natural disasters, unemployment, sickness, accidents, large car or house repairs, fire outbreaks, etc. are bound to happen. It is important to save sufficient funds and stock up on insurance. Increasing the amount of savings in good and favorable times will help a business and individual gain stamina in unfavorable times when uncertain events take place. This planning prevents any form of unexpected financial exposure from derailing your long-term financial goals and financial security.

Take the right insurance plan

After considering the fact that uncertainties are bound to happen, one should be able to find the right insurance plan to take. This will help an organization in diverting risk exposures to insurance companies. When you divert your risk to insurance companies, you do that in exchange for a premium. In turn, the insurer indemnifies you in an event of a loss. Making financial decisions also does not rule out the choice of the insurance policy. Here, the amount of premium to pay will depend upon the nature of the policy you are undertaking. Therefore, taking a proper insurance plan forms part of organizational financial management.

Forecast cash flows

Cash is a liquid asset and it is the most liquid, it flows inwards and outwards. The pattern of cash flows is an influencing factor of financial decisions. The supply of cash and all the activities that take place in an organization are requirements for forecasting cash flows. It is also critical to managing the cash on the basis of these requirements. When you hold the right amount of liquid cash, it is an expression that you are utilizing financial management principles.

Pay attention to wealth maximization

Wealth maximization helps in maximizing the value of an organization. It is a primary objective of financial management that an organization should not neglect. While managing your finances, it is crucial for you to pay so much attention to ways in which you can maximize the wealth or value of your organization. If your company is wealthy, it will have greater opportunities of investing in innovative product development. In turn, the company will experience a more smooth and steady growth.

Financial decisions should align with the business life cycle

The experience of ups and downs is inevitable in a business just like a cycle. It is important for one to consider the current position in the life cycle of a business as well as the forecasted position in the cycle. This is to help in making plans that will help in ensuring the organization’s ultimate financial benefit. A good financial plan certainly helps in bringing out sweet returns that emerge from investment and financing opportunities. At a business’s life span, requirements of different financial decisions may exist and these decisions must match with the financial condition of the business.

What are the 3 types of financial management?

The three major types of financial management decisions are;

  • Financing decision
  • Investment decision
  • Dividend decision

Financing decision

A financing decision is the most basic type of financial management decision. Firms and individuals make decisions in connection with the raising of funds. Also, part of the process is the identification of multiple funding sources and the amount of money one needs to raise from short-term and long-term sources. Forming part of the financing decisions, financial management carries out the evaluation of the cost of capital and financial risks that have to do with different choices. It then determines the percentage of money that a company is to obtain from the funds of shareholders and borrowed funds.

Investment decision

Investment decisions are decisions that the management makes to allocate funds to various assets with the aim of generating the greatest potential returns for the investors. It entails the analysis of potential investment possibilities and selecting the ones with the greatest advantages. A company can make investment decisions that may either be for the long term or for the short term.

Dividend decision

Dividend decisions are financial decisions that companies make with respect to the distribution of a company’s earnings shares to its shareholders in the form of dividend payments. If it is possible, a company should make dividend choices, having in mind the broader goal of maximizing shareholder value. Dividend choice entails making choices of the amount of profit (after tax) to give to shareholders as dividends and the amount of profit to maintain in the firm for its future growth.

Other types of financial management

  • Capital structure management
  • Working capital management
  • Financial planning, analysis, and control management
  • Insurance and risk management

Capital structure management

In corporate finance, capital structure is the manner in which a company finances through a mix of debt or equity securities. Debt financing comes in form of the issuance of bonds while equity comes from retained earnings or as a stock. Short-term debt financing is seen as a major aspect of the capital structure for example working capital necessities.

In this area, the financial management team is responsible for the capital structure of a company’s short-term debts, long-term debts, preferred stocks, equities, etc. The team is probably considering the debt-to-equity ratio of a company at a point of making reference to capital structure. This gives a clear understanding with regard to the financial health of the organization or its financial risk exposure.

Working capital management

Working capital management refers to the management of the book-keeping methodology and accounting strategies that intend to keep track of current assets, current liabilities, cash flow, inventory turnover ratio, working capital ratio, etc.

The basic role in this area is to make sure that the organization dependently keeps adequate liquid cash to pay off its short-term debts and operational costs. In this type of financial management, it is necessary for the team to maintain the working capital management to make the operation cycle of the company smoother as well as improve its earnings.

Financial planning, analysis, and control management

Financial planning entails the undertaking of making decisions with regard to how a business will accomplish its key objectives and targets. Oftentimes, an organization makes a financial plan after setting the vision and mission. The financial plan, therefore, shows the description of every activity and exercise that are necessary for the accomplishment of these goals.

Financial analysis is the way that gears towards the analysis of businesses, budgets, projects, and other matters that relate to finance in order to make decisions with regard to their execution, suitability, and performance. In regular terms, companies utilize financial examination to provide a breakdown with regard to whether a company is steady, liquid, or sufficiently productive to give room for any investment.

Financial controls refer to procedures, arrangements, and methods a firm actualizes in order to manage finances. This framework for management to screen the accomplishment of a company’s operational goals and objectives. Teams that are usually not responsible for the office of book-keeping, budget division, and the work that relates to audit, are usually responsible for undertaking these financial management decisions.

Insurance and risk management

The primary objective of insurance and risk management gears towards minimizing the risks of an organization. This arm of a company implements distinctive strategies to attain these objectives. The risk management teams are the ones accountable for reducing the risk exposure that poses threats to the operations of their business. These risk exposures can include fire, flood, lawsuits, etc.

What are the four elements of financial management?

The four elements of financial management are;

  • Planning
  • Controlling
  • Organizing/directing
  • Decision-making/Implementing financial plans

Planning

This refers to the process of calculating the amount of capital that an organization requires and then determining its allocation. The key objectives of financial planning include determining the amount of capital required, determining the organization of capital structure, framing the financial policies and regulations of an organization.

Controlling

Another element of financial management is controlling. Aside from planning, organizing, and obtaining funds, it is necessary for a finance manager to control and analyze the finances of the firm. This can take place both in the short run and in the long run. They can do this by making use of financial tools such as financial forecasting, ratio analysis, risk management, profit control, and cost control. Financial control is one of the key activities involved in financial management. It has a major role in assessing whether an organization is attaining its financial objectives or not. It gives answers to questions with regard to whether the organization is using its assets competently, whether the assets of the organization are secure, and whether the management is acting in the best financial interests of the organization and its key shareholders.

Organizing/directing

It is important for the management to decide on the resources that are necessary to effectively execute their plans. Resources do not just refer to material assets and tools, it extends to staff, roles, budget, funding, technology, software, outsourcing services, etc. A company will face negative and adverse consequences when it begins to implant a strategy without having all the necessary resources at hand.

Decision making and implementing financial plans

After investigating all possibilities and options, a company should make choices. In other words, it is necessary for a decision-maker to choose the alternative that is feasible and in synchrony with organizational goals and objectives.  Decision-making will, in fact, coincide with the remaining planning, controlling, and organizing. There will be a need for the confirmation of each element before going ahead with the execution of the plan.

In the course of handling financial management, it is crucial to break down planning into categories in alignment with business goals. After choosing financial plans, a firm can go ahead and make decisions with regard to the software and platforms that support its strategy. Financial decision-making entails investment and financing with regard to the organization. It also entails ways in which the organization is to raise finance, whether they should raise finance, sell new shares, or ways of distributing profits.

What is risk in financial management?

In financial management, the risk is the level of uncertainty or financial loss that is bound to take place in an investment decision. Investments with a higher rate of return have a higher risk with regard to losing the principal amount invested. On the other hand, investments with a lower rate of return equally have a lower risk of losing the principal invested.

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