Financial management is a key skill that businesses and individuals need to maintain a steady flow of profits for business and personal growth. This article focuses on the objectives of financial management so that you know what you need to focus on when operating your business or investing in your retirement.
What is Financial Management?
Financial management is the process of planning, organizing, and managing a business’s financial resources to achieve its objectives. Financial managers must consider a company’s overall financial situation, including its cash flow, investments, liabilities, and capital levels; and make strategic decisions about where to allocate resources to meet short-term and long-term goals.
Four Objectives of Financial Management
- Maximizing Profits:
Financial managers must identify opportunities for cost-effective growth while minimizing risk. They must also ensure that adequate funds are available to support long-term operations.
- Maintaining Liquidity:
Financial managers must manage cash flow and ensure that the company has enough money available to cover its short-term liabilities. This goal may be achieved by making wise investments or by raising additional capital.
- Managing Debt:
Debt can be used to finance future growth or to cover short-term expenses. Properly managing debt can improve a company’s overall financial status and stability.
- Protecting Shareholders’ Interests:
Financial managers must make decisions that are in the best interests of their shareholders. This includes assessing the risks associated with various investment options and choosing the most appropriate course of action for the company’s situation.
Importance of Financial Management
- Achieving Financial Goals:
Financial managers use information gathered from financial records to make sound decisions about where to allocate resources, thereby achieving organizational objectives.
- Enhancing Decision-making Skills:
Financial management skills are essential for making sound business decisions. By maintaining accurate records, financial managers can identify trends and patterns that can help them identify opportunities or risks related to their businesses.
- Increased Savings:
Good financial management can help people save money on their groceries, utilities, and other bills. People who track their expenses and adjust their spending as necessary are more likely to save money.
- Better Investments:
Financial managers use a variety of investment strategies to help people reach their long-term financial goals. Properly planned investments can provide stability and growth over the long term.
- Protection from Financial Disaster:
Poor financial management can lead to ruinous consequences like foreclosure or bankruptcy. A well-managed bank or company is less likely to go under in tough economic times.
Main Tools of Financial Management
- Financial Statements:
A financial statement is a document that shows an organization’s financial position, performance, and cash flow over a specific period. Financial statements are prepared by Generally Accepted Accounting Principles (GAAP).
Budgeting is a process used to create a plan for allocating an organization’s resources over some time. Budgets reflect the priorities of the organization and help identify which programs need funding most urgently.
- Debt management:
Managing debt is important to protect an organization’s long-term interests. Debt should only be incurred when it is necessary and can be repaid promptly.
- Investment Analysis:
Investment analysis helps identify opportunities and risks associated with potential investments. Financial managers should carefully consider both opportunity costs (the costs associated with not investing) and risk premiums (the extra return that investors are willing to pay for potential risks).
- Credit Analysis:
Credit analysis is used to assess an organization’s ability to repay loans or borrow money in the future. Credit ratings indicate an organization’s creditworthiness.
Roles of Financial Management
- Financial managers are responsible for the financial planning and execution of an organization’s overall financial goals.
- They work with the CEO to set overarching financial objectives, and then develop specific plans to achieve these goals.
- They also manage the budget, monitor performance against targets, and make adjustments as needed.
- Financial managers may also be responsible for overseeing investments and insurance policies.
- In some cases, they will also have responsibility for risk management and compliance with regulations.
Frequently Asked Questions
Q: How do financial managers achieve these objectives?
A: There are several ways in which financial managers can achieve their objectives. Some common methods include analyzing company data, making decisions based on historical data, and analyzing external factors such as global economic conditions. Additionally, financial managers often rely on outside advisors when making important decisions.
Q: How do companies measure their financial performance?
A: There are many ways that companies can measure their financial performance. Some measures focus on individual company results (such as profits), while others focus on overall company performance (such as stock prices). Most companies use a combination of different measures to determine how they’re doing.
Q: What factors can affect a company’s financial objectives?
A: Many factors can influence a company’s financial objectives, including market conditions, economic conditions, and government regulations. Changes in any of these factors can often lead to changes in a company’s desired financial performance outcomes.