Financial Management

What is Financial Management?

Financial management is the business function concerned with planning, organizing, controlling, and monitoring an organization’s financial resources. Broadly, anything having to do with profitability, expenses, cash, or credit falls under the purview of financial management.

Here’s a brief list of functions financial managers normally touch:

• Budgeting and financial planning
• Creating financial projections
• Financial analysis and reporting
• Resource allocations
• Investment decisions
• Profit maximization and value creation
• Fundraising
• Risk management
• Regulatory compliance
• Cash flow management
• Financial control

In essence, financial management refers to anything and everything related to an organization’s money. Every business, regardless of its size or industry, has at least someone responsible for these processes to ensure its economic stability and success.

Synonyms

• Business financial management
• Finance management

Components of Financial Management in Business

Managing and Assessing Financial Risk

In the context of company finances, there are four types of risks companies need to look at: market, credit, liquidity, and operational risks.

• Market risks are those associated with the potential loss of value due to market fluctuations. It also accounts for situational factors like stock performance (for public companies) and the shift from retail to a direct-to-consumer model. Financial managers use hedging strategies to mitigate this risk.
• Credit risks refer to the possibility of a customer defaulting on payments. They lower a company’s valuation, limit its access to capital, and cause short-term cash flow problems. The easiest way to identify them is with an AR aging report, but finance teams also use credit ratings and financial statements.
• Liquidity risks like not having enough cash to cover day-to-day operations or a significant non-recurring expense are the reason behind 82% of business failures. That’s why finance teams track current cash flow, evaluate future needs, and set aside enough working capital for emergencies.
• Operational risks are less tangible — they don’t pertain to financial markets or hard assets. They’re more about internal operations like fraud, cybersecurity threats, and natural disasters. To manage these risks, companies normally budget for insurance, software, and infrastructure.

Since many of these risks are business-critical, they’re usually the first considerations in the financial management process. It’s impossible to do business without enough cash flow and protection against cybersecurity risks, for instance.

Planning

A financial manager projects the capital resources they’ll need to sustain positive cash flow, allocate funds to growth initiatives (like new product development), and handle an unexpected event. They share this info with the rest of the finance team.

Managers break down financial plans into individual categories for organizational purposes. These include:

• Capital expenditures
• Travel and entertainment budgets
• Project-specific finances
• Salaries and wages
• Operating expenses
• Indirect costs

By segmenting different aspects of their financial projections and analysis, they can relay the information to others without it being misconstrued or muddled with irrelevant data. Plus, it sets them up nicely for the next step: budgeting.

Budgeting

To create a budget, the team allocates the company’s available financial resources (laid out based on findings from the ‘planning’ phase) to specific projects and departments.

They cover the essential ones (operating expenses) first.

• Mortgages/rents
• Employee payroll and benefits
• T&E
• Raw materials
• Advertising and marketing spend

After setting some aside for a contingency plan, the rest gets divvied up as the organization sees fit. This is one of the most delicate steps of all parts of this process, since it involves actual commitments to resources and can affect a company’s financial stability in a big way.

Most companies create a master budget, which captures all the individual budgets of different departments and functions. Usually, they’ll also have sub-documents that cover things like project-specific budgets or GTM spending.

A budget can either be static or flexible.

• Static budgets stay the same for the period’s duration, no matter if the assumptions turn out to be inaccurate or the conditions change.
• Flexible budgets allow for adjustments if actuals are different from estimates.

Ideally, you’d use a combination between the two. Larger recurring expenses generally necessitate a static approach, while small and/or variable ones call for flexible budgeting.

Financial Procedures and Operations

Financial management procedures set the rules for handling and recording financial data. They cover things like:

• Invoicing customers
• Reimbursing employee expenses
• Paying bills
• Approving and shipping purchase orders

They also detail who’s responsible for making financial decisions in the company’s hierarchy.

By decreting formal procedures around these processes, you can minimize the likelihood of fraud and errors. Plus, it keeps everyone honest since finance teams are responsible for handling large sums of money.

Financial managers also implement internal controls, like reviews and audits, so they can double-check transactions that other employees might have handled. The procedures and internal controls are what prevent potential issues from becoming financial catastrophes.

4 Phases of the Financial Management Cycle

Broadly, there are four phases of the financial management cycle:

1. Planning and budgeting
2. Resource allocation
3. Operations and monitoring
4. Evaluation and reporting

1. Planning and Budgeting

During the initial analytical phase of the financial management cycle, the finance team uses current and past financial performance data to set targets, identify areas for improvement, and create a budget for the upcoming period.

The team will assess day-to-day operations and long-term goals. Then, they’ll connect the dots between their financial data, targets, and the specific activities required to meet those goals.

Ideally, your financial plan should cover your objectives for the next 3-5 years (though you should only budget for one fiscal year at a time). While your budget is subject to market changes, your financial plan should be more of a longer-term roadmap.

2. Resource Allocation

Next, your finance team will assign value to all your company’s capital resources — that is, anything you use to produce goods or render services. The financial manager will advise on where to allocate resources and how much to spend on each area of your company’s operations (based on current financial status, operational requirements, and long-term goals).

The goal of capital management is to achieve a balance between cost and benefit, so resources are distributed in the areas that create the most value without creating excess waste. Using a framework allows your company to compare projects with other departments and initiatives objectively — an essential part of proper resource allocation.

3. Operations and Monitoring

Once you’ve mapped your day-to-day workflow and determined where to allocate your operational budget, the finance team monitors all the financial activity within your company.

This includes:

• Running periodic reviews to mitigate fraud risk
• Recording and categorizing transactions (e.g., expenses, revenue)
• Checking for accuracy and relevance of financial data
• Verifying the accuracy of reports and other documentation prepared by finance staff

The goal of this preventative step is to verify your company’s records accurately reflect its company’s finances and all financial activity follows proper procedures. It’s one of the most essential financial management practices because it validates your internal processes and protects against fraudulent activity.

4. Evaluation and Reporting

Finally, the financial manager will evaluate your company’s performance and create reports that illustrate progress toward goals. They’ll compare current results with previous periods to see if you’ve met your expectations (or exceeded them). These insights will help inform future plans.

Some of the most important reports financial managers prepare include:

• Income statements
• Balance sheets
• Cash flow statements

Beyond the three standard financial statements, they’ll also evaluate their overall financial management system. This includes security, compliance, data needs, and support levels assessments. They’ll also develop forecasting models to predict future income, expenses, and financial health.

Importance of Sound Financial Management

Every decision you make has a positive or negative impact on your company’s financial situation. And, of course, the main reason to go into business is to make money. So, input from the finance team guides just about everything related to your company’s current operations and future investments.

There are five core reasons to prioritize proper financial management:

• Profit maximization. Financial data tells you where you can expect the most return on your investments and where prices will rise and fall. For instance, insights into rising raw materials costs might drive you to work with a new supplier.
• Liquidity and cash flow management. When you handle company finances responsibly, you’ll always have enough on hand to meet your obligations.
• Compliance. Failure to comply with state, federal, and industry-specific regulations costs tons of money in fines and internal resources. Proper financial management procedures protect you from this (and minimize the impact when an audit or noncompliance issue happens).
• Financial modeling. Predictive modeling and if-then scenarios are based on your business’s current state. Before making a huge business decision, you can play around with a wide range of scenarios and potential market conditions to see how proposed changes will impact your company’s bottom line.
• Stakeholder relationship management. Responsible financial management practices ensure your financial data is always accurate and up-to-date. It’s also easy to report to investors and the Board, which makes your relationship with them a lot smoother.

When it comes to investment management, market expansion, and risk management, adequate financial procedures can also help you determine which assets perform the best and how you can achieve product-market fit.

Objectives and Goals of Financial Management

Financial management’s primary goal is to protect your company’s financial health. That way, you can make payroll, keep the lights on, execute growth plans, and pay investors.

But there are other objectives as well:

• Cash flow protection
• Maximizing return on investment
• Fraud detection and prevention
• Preserving the company’s financial resources
• Enforcing financial discipline
• Ensuring all stakeholders have access to accurate and timely financial information
• Promoting long-term sustainability and growth

Roles in Financial Management

Chief Financial Officer (CFO)

The Chief Financial Officer (CFO) holds the highest position in financial management. They are a company’s second or third in command and report directly to the CEO. They also work alongside the CEO to make long-term financial decisions and present to investors and the board of directors.

CFO responsibilities include:

• Laying the groundwork for company financial management strategies
• Signing off on budgeting, forecasting, and capital investment decisions
• Preparing and presenting financial reports for execs, board members, and investors
• Overseeing financial planning and record-keeping, as well as financial risk management
• Collaborating with other executive roles to align financial strategies with company objectives
• Ensuring (and taking responsibility for) compliance with all financial regulations and standards
• Assisting in fundraising activities and M&A transactions
• Assessing company strengths, weaknesses, risks, and areas of opportunity at the highest level
• Providing strategic guidance and input on major business decisions, based on financial implications

CFOs are skilled in modeling, forecasting, auditing, and compliance. They also know how to tell the story behind financial reports in a way that investors understand. They generally have an advanced degree in finance, accounting, business administration, or economics.

Financial Controller

The financial controller is one step down from the CFO. They report directly to the C-suite and manage accounting processes and the financial team. Below the controller could be an AR or AP manager, accounting manager, or financial planning manager.

Here are some of their biggest responsibilities:

• Overseeing day-to-day accounting operations, looking for ways to optimize efficiency
• Making sure all transactions are recorded accurately and in compliance with regulations
• Addressing possible mistakes or anomalies in transaction data
• Verifying financial statements for accuracy and making any needed adjustments
• Ensuring proper record-keeping for invoices, receipts, ledgers, and other financial documents
• Managing budgeting and forecasting activities

The primary difference between a CFO and a controller is that the former focuses more on strategic initiatives and high-level decision-making, while the latter is directly tied to the daily operations of financial management.

Treasurer

A company’s treasurer is responsible for overseeing its financial accounts and transactions. Like the controller, they report directly to the CFO and are usually an experienced accountant.

Their responsibilities include:

• Cash management, including monitoring cash flow, liquidity, and risk
• Setting up banking relationships
• Determining the company’s best interest for loans and funding
• Overseeing debt management, investments, and capital structure
• Managing relationships with external partners like banks and credit institutions

While controllers focus on what’s already happened in the company (e.g., reports and financial statements), treasurers handle the company’s actual assets and liabilities — cash, investments, debt, and credit. They also maintain relationships with external partners related to these areas (e.g., investment bankers and insurance companies).

Financial Analyst

Financial analysts track financial performance by analyzing trends, metrics, and data. They often work closely with upper management to make strategic recommendations for improving a company’s finances and investment decisions.

A financial analyst typically handles the following tasks:

• Conducting research on market trends and competitors
• Analyzing financial statement data and identifying trends
• Creating financial models to simulate different scenarios and predict outcomes
• Developing recommendations for improving financial performance based on analysis

Financial analysts are highly analytical with strong research, problem-solving, and critical thinking skills. They normally work for banks, insurance companies, and pension funds. But individual businesses may have internal analysts as well.

Risk Manager

Risk managers are responsible for identifying, assessing, and mitigating financial risks that could harm a company’s financial health. They work closely with the CFO, treasurer, or VP of Finance to facilitate investment decisions.

Some typical responsibilities of a risk manager include:

• Identifying potential financial risks, like market volatility or regulatory changes
• Assessing the likelihood and impact of identified risks on the company’s finances
• Developing risk management strategies and contingency plans
• Monitoring and reporting on the effectiveness of risk management strategies
• Collaborating with other departments to ensure compliance with regulations

Risk managers are essential members of the finance team because their input directly impacts the company’s safety, reputation, brand image, and bottom-line financial success.

Credit Manager

A credit manager is responsible for overseeing a company’s credit policies, customer creditworthiness, and collections processes. They report to the CFO or treasurer and work closely with sales teams to ensure customers pay on time.

Specific responsibilities of a credit manager include:

• Setting up payment terms and conditions for customers
• Approving special terms for certain customers
• Evaluating the creditworthiness of potential new clients
• Monitoring accounts receivable aging and initiating collections processes for overdue accounts
• Managing relationships with credit reporting agencies and debt collectors

A credit manager’s role directly affects cash flow and liquidity. They’re responsible for handling customer non-payment.

Internal Auditor

Internal auditors’ main purpose is to ensure everything is in order, so the company is compliant (and prepared for a potential external audit). They report directly to the board of directors or audit committee, so they have a high level of independence.

Auditors primarily handle the following finance tasks:

• Examining financial records for accuracy and compliance with regulations
• Assessing internal controls to identify areas of potential risk
• Developing recommendations for improving internal processes and procedures
• Evaluating the effectiveness of risk management strategies

On average, company audits can cost businesses anywhere from $20,000 to $50,000 (depending on their complexity. Having an in-house auditor reduces risks and prevents the company from incurring these costs.

Financial Planner

Financial planners help individuals and companies create budgets, save money, manage investments, and plan for retirement. They often work with clients on a personal basis to help them achieve their financial goals.

Some specific responsibilities of a financial planner may include:

• Analyzing financial situations and creating personalized plans to reach long-term financial goals
• Advising on investment strategies and managing investment portfolios
• Creating retirement plans and recommending savings strategies
• Providing tax planning advice

Financial planners can work in various settings, including banks, insurance companies, or as independent consultants. In larger companies, they’re also hired internally.

Cost Accountant

A cost accountant is responsible for analyzing and reporting on a company’s expenses, cost trends, and overall financial performance. They work closely with the accounting manager or controller to develop budgets and control costs.

Some common responsibilities of a cost accountant include:

• Calculating the direct costs of producing goods or services
• Developing and managing budgeting processes
• Identifying areas where the company can reduce costs
• Conducting cost-benefit analyses for new projects or investments

Cost accountants play a crucial role in helping companies maintain profitability and make strategic financial decisions. They’re often found working in manufacturing, construction, professional services, or retail industries where tracking costs is a significant proportion of a company’s financial management processes.

Technology in Financial Management

(different types of software in financial management including billing platform)

Modern financial management procedures aren’t possible without software. Human processes are error-prone, time-consuming, and, in some cases, impossible. Financial modeling is a perfect example of this; predictive modeling software simulates various scenarios by weighing historical data and current market dynamics against your proposed action.

Briefly, your finance team needs the following tools to run their financial operations:

• Accounting software
• Billing and invoicing software
• Subscription management (for recurring revenue businesses)
• Risk management software
• Financial planning and analysis tools
• Predictive analytics tools

Built into this tech, they need features like tax compliance, revenue recognition automation, and adaptable reporting.

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