Finance is one of the crucial prerequisites to start any business. Further, a sufficient corpus of funds and efficient financial management is required throughout a business’s lifetime and even when a company is sold or wound up. Therefore, funds need to be managed, regulated as per procedures, and monitored at every step of the business lifecycle.

Any business that manages its finances better experiences exponential growth, and businesses that mismanage their financial resources and activities usually undergo losses or make lower profits. Let’s delve deeper into the world of financial management.

What is Financial Management?

In simple terms, financial management is the business function that deals with investing the available financial resources in a way that greater business success and return-on-investment (ROI) is achieved. Financial management professionals plan, organize and control all transactions in a business. They focus on sourcing the capital whether it is from the initial investment by the entrepreneur, debt financing, venture funding, public issue, or any other sources. Financial management professionals are also responsible for fund allocation in an optimized way to ensure greater financial stability and growth for the organization.

Importance of Financial Management

The financial management of an organization determines the objectives, formulates the policies, lays out the procedures, implements the programmes, and allocates the budgets related to all financial activities of a business. Through a streamlined financial management practice, it is possible to ensure that there are sufficient funds available for the company at any stage of its operations. The importance of financial management can be assessed by taking a look at its core mandate:

• Availability of sufficient funds
• Maintaining a balance between income and expenses to ensure financial stability
• Ensuring efficient and high ROI
• Creating and executing business growth and expansion plans
• Safeguarding the organization against market uncertainties through ensuring buffer funds

Let’s take a deeper look at the scope of financial management to gain a greater understanding of its importance.

Financial Management Scope

Financial management in a company is governed by the principle that it must protect the financial interests of the investors, shareholders, and ensure business growth. Apart from securing their interests, financial managers are also expected to ensure greater ROI that generates more wealth for all shareholders. There are certain objectives of financial management which are universally accepted by experts and business leaders, and these clearly outline the financial management scope and functions.Objectives of Financial Management

Certain specific and highly impactful objectives that financial managers aim to attain are: Assessing Capital Needs Financial managers need to evaluate factors such as cost of current and fixed assets, cost of marketing, need for buffer capital, long-term operation and human resources cost etc. Successful businesses have clearly defined short-term and long-term financial requirement projections in place. Determination of Capital Structure a company’s capital structure is the framework that determines decisions such as debt-equity ratio in the short as well as long term. Creation of Effective Financial Policies there is a need to frame efficient financial policies that govern cash control, the lending and borrowing processes and so on.

Resource Optimization

Great financial managers are able to navigate through different scenarios by making optimum use of the available financial resources. This would reduce the cash burn and increase the cash churn to generate maximum ROI. For any business to grow confidently and have a good market reputation, an adequate amount of cash and liquidity is critical. Therefore, businesses raise funds by equity or debt financing. Financial managers take decisions on maintaining a healthy balance between debt and equity to ensure that the company’s financial health is not impacted.

Fund Allocation

Smart fund allocation is as critical to a business’s financial health as fund-raising itself. The funds that a company has must be allocated in the best way possible after due diligence on:

• Business size and growth potential
• Whether the assets are short-term or long-term before spending on them
• Mode of fundraising

Profit Planning

Unless it is a social organization, earning more profits would be among any business’s primary goals. The profits a company makes determine its financial health and future growth. Therefore, adequate usage of the money generated as profit is needed. Whether they have to be ploughed back to acquire assets and expand coverage, or to be spent on marketing, acquiring other businesses or invested to act as a buffer resource, all these considerations are made by financial leaders.