As a business owner, or manager of a business, financial management is an integral part of running an effective business. Financial management can be summarized as the planning procedures for the future of a company. It involves various types of business planning which ensure that the company will have a positive cash flow in the future.
Financial management is often referred to as money management and primarily uses cash management strategies. Many companies, small to large, hire a financial manager to assist them in financial planning. Smaller companies may decide to take this role on themselves. This fundamental aspect of business requires companies to monitor their cash flow and plan for future expansions and expenditures. The primary purpose for doing this is to ensure the continuity of business and to make the business operations as effective and efficient as possible.
Numerous activities are involved in financial management. One primary tool used is the interpretation of financial statements. A financial manager will take a company’s financial statements and interpret the health of the company based on the information they contain. These statements include the balance sheet, income statement and cash flow statement.
A financial manager will analyze this information and determine ways to improve the allocation of the company’s assets, liabilities and investments. A financial manager often uses ratios to determine the position of the company. These ratios are compared to prior years’ information, as well as to other companies within the same industry. A financial manager can help a company decide whether paying off debts with available cash will be beneficial for the company, or if the company should hold on to the cash. All types of financial decisions can be made through the help of a financial manager.
Another large part of financial management is budgeting and forecasting. In order for a company to plan for the future, it must have a budget. A budget offers a way for companies to predict what will happen in the future. This helps a company set goals and objectives to obtain the financial health they are aiming for. Through this activity, financial management is used to determine what types of investments would be beneficial for the business. It also helps a company determine how to expand operations, and if it can afford to purchase new assets to help with the expansion. Financial management helps companies use their assets in the best possible way.