What Purpose Does Financial Management Serve in Business?

Finances are a vital part of any business.

To achieve maximum profits, companies need experts to handle all areas of their finances so they can budget and make better financial decisions. 

This is where financial managers come in. 

REGENT offers a Diploma in Financial Management that equips students with the skills and knowledge they need to make them more employable and thrive as financial managers. 

This article will discuss the purpose of financial management within businesses. It will also look at the primary responsibilities of financial managers so you can decide if this is the right career for you.   

What is financial management?

Financial management is the process of planning, organising, and controlling the funds of a business. It handles funds in a way that allows the company to succeed and comply with financial regulations. 

Good financial management enables chief financial officers and vice presidents to make the best long-term decisions about where to invest and how to fund these investments so that they can achieve greater profits. 

There are three types of financial management. 

• Capital requirements and budgeting: This involves identifying what a company needs in terms of finances to reach its long and short-term goals. This includes things like buildings, equipment, employees, and more.

• Capital structure: This involves determining how to pay for growth and operations. For example, when the interest rate is low, taking on debt may be a viable option. This may also include seeking funding from investors, selling equity, etc.

• Working capital management: This involves ensuring enough “cash” to pay for the day-to-day operations, including salaries, raw materials for production, and more. 

Functions of financial management

Effective corporate financial management allows businesses to use cash and credit in a way that helps them grow and reach objectives. Here is a list of some of the main objectives of financial management within businesses. 

1. Maximise profit

Financial management ensures that the best output and price levels are reached to maximise the company’s return on investment. To realise its profit goals, the company uses and adjusts sale price, production cost, and output levels. 

2. Maximise wealth and value

Once a company reaches profit maximisation, the next objective is to increase the company’s worth and, in so doing, increase the shareholders’ shares. Wealth maximisation is also known as net worth maximisation, and many businesses consider this superior to profit maximisation. 

3. Avoid bankruptcy

Effective financial management helps companies prevent bankruptcy. This ensures that the company can continue to bring products and services to the market, employees can continue to have jobs, and buyers can continue to get quality goods. 

4. Estimate funds

Financial management helps companies estimate how much money they need to function — both short and long-term. 

5. Cash flow maintenance 

Cash flow management is a short-term objective of financial management. It ensures enough money is available to pay for daily expenses and operations. Keeping enough cash on hand to pay bills and salaries on time builds the company’s credibility and reputation amongst job seekers and investors. 

6. Minimise costs

To make a profit, companies need to keep their expenses under control. Financial management ensures that money is spent responsibly in all business areas — including fees, interest, and other costs. 

The role of financial managers

People who are in charge of business finances are called financial managers. They have several duties. The scope of their responsibilities will ultimately depend on the company’s size. 

The financial manager may be responsible for all financial management tasks in smaller companies. In contrast, those working in large firms may be responsible for managing specific financial departments.

Below is a list of the primary responsibilities of financial managers. 

Track money 

Financial managers need to track how much money the company has at any given time. To do this, they need to: 

• Review statements: Look at the company’s banking activities, reports, and statements to spot discrepancies. 

• Assess financial performance: Measure how the company is fairing based on budgets and projections. 

• Improve budget areas: If the financial manager sees areas where costs exceed expectations, they need to recommend strategies to lower costs.

Manage financial documents

Financial managers need to create and maintain several financial documents to ensure profitability. They need to:

• Utilise technology: They can use tools, technology, and automation to help with detailed record-keeping. They need to know how to use different databases and software to interpret large data sets. 

• Develop the organisation’s master budgets: This is also known as the budget variance analysis — which brings the company’s profits and expenses together so better decisions can be made. 

Create strategies

The financial management team needs to project the future and strategise plans to maximise company profits. This process includes: 

• Developing financial models: Financial managers and their teams need to build financial models to show how the company can operate in the future. They can then use these models to give progress updates throughout the year.

• Analyse risk: With financial knowledge of the company’s history and financial forecasting, managers can analyse the risk of potential purchases and activities and negotiate better pricing for new contracts. They also need to consider periods of economic downturn to ensure they have enough cash flow to cover any possible threats. 

• Identify opportunities: By keeping up with industry standards and trends, such as sustainable finance, they can identify key investment opportunities and potential merges to help the company grow.

How can you become a financial manager?

Financial managers need both knowledge and skills to perform all these tasks. 

You must pursue a finance diploma or degree to obtain the necessary knowledge to be eligible for managerial positions. This will help you attain higher-paying positions far sooner and with less experience. 

As for skills, here are some of the top skills that financial managers need to succeed: 

• Good with numbers
• Leadership skills
• Communication skills — both verbal and written
• Analytical skills
• Organisational skills

Discover the top eight skills all managers need. 

Study financial management with REGENT

After reading this article, does financial management seem like the perfect career for you? It is likely an excellent fit if you are good with numbers, enjoy looking at analytics, and have outstanding leadership abilities. 

Have a look at REGENT’s Diploma in Financial Management to learn more about what is included in the course.