What is financial management? Financial management is managing a business s resources in a manner which enables it to succeed and comply with legislation. That usually requires both boots-on-the ground and a detailed high-level strategy. Financial management therefore, refers to the management of a business’s assets, liabilities, revenues and expenses. The importance of financial management cannot be undermined. It enables a business to achieve maximum productivity and to maximize its Return On Investment (ROI).
As defined by Wikipedia: “The subject matter of financial management means the science of funds management. This science deals with the measurement, treatment and prevention of risks.” The meaning of this definition is that it deals primarily with the financial activities of a business.
The main reason why this is the main reason as to why finance has become the focus of business studies in MBA programs all over the world is because finance directly affects the value of a business. Therefore, sound financial management means good finance management. It also directly impacts the bottom line of any organization since good finance encourages efficient and robust operations. A solid financial management system enables any business to maximize its profits through effective control and utilization of finance.
The importance of Finance As stated earlier, the importance of financial management is associated with the value of a firm. In other words, how does a firm define its worth? For most companies, the main goal of the company is to create value for its stakeholders. This means that how a firm defines its value will determine its ability to attract and retain customers, generate competitive advantage, and motivate and retain employees. Thus, a financial manager is responsible for determining the main goal of any firm.
How Much Money is Enough? There are several questions that need to be asked regarding the amount of money that should be spent on a particular project. As a financial manager, you have to decide how much money is enough to achieve your main goal. Of course, the amount of money will depend on many factors such as the size of the company, the scope of the project, and the role of the financial manager involved.
Strategic Planning The main idea of financial management is planning. However, one should be careful not to use the process of planning too much. A financial statement with all the numbers can look too much like a science experiment. In other words, relying too much on finance results should not be a substitute for strategic thinking. Instead, a good manager must use financial statements to support strategic decisions and make informed decisions based on facts and figures.
Strategic Value A crucial aspect of good financial management is strategic value. A good manager knows that a key strategy will not be implemented immediately. He may have to backtrack for several years before he could even see its real fruits. The longer it takes to realize the purpose of strategic planning, the more costly it would be in the long run. On the other hand, if the purpose of the financial plan was to make more profits sooner rather than later, then the time period for strategic planning will be short.
Meaning of Investments In the end, whether the purpose of the finance is for expansion of market share or for more profits, the importance of the funds in the business enterprise cannot be neglected. Finance must be seen as a tool, which enables the owner to maximize his profits. Therefore, it must always be taken into account when building up the company’s resources. It does not matter what the final goal of the company is. The bottom line is that finance must be considered as a very important part of the business enterprise.