What is Financial Managment? Why is it important in 2024?

What is Financial Managment? Why is it important in 2024?

Financial Management is one of the most important aspects for individuals and organisations in this rapidly growing world. It is no longer about saving money; it is about managing and growing money. To run a business efficiently and effectively and achieve business goals, one needs to have a good knowledge and understanding of financial accounting and management. Financial management gives you the tools to make sustainable growth with your money. This applies whether you’re saving for a dream vacation or running a business for long-term success.

What is Financial Management?

According to the Financial Experts Guthman and Dougal,

“Financial management is the activity concerned with planning, raising, controlling and administering of funds used in the business.”

It manages the finances in a way where the business/organization is profitable and scalable in the near future.

Elements of Financial Management

Imagine financial management as a sturdy building. Here are the key elements that form its foundation:

  • Financial Planning: This is the blueprint, outlining your financial goals (short-term and long-term) and the strategies to achieve them. It involves creating a budget, forecasting future income and expenses, and identifying potential risks.
  1. Goal Setting: Do you have well-established, SMART business goals that define your success and guide resource allocation?
  2. Long-Term Vision: What is your long-term brand strategy for the next 5, 10, or even 20 years? Financial plans need to consider your brand’s future growth and evolution.
  3. Capital Needs: How much capital does your organization require to operate and sustain itself in the long run? This includes factoring in daily expenses, potential growth initiatives, and necessary reserves.
  4. Regulatory Landscape: Are you familiar with the key policies and regulations (industry-specific, tax laws, labor laws)? These can impact your financial decisions and overall business operations.
  • Financial Control: Think of this as the monitoring system. It ensures your spending aligns with your plan. This involves tracking expenses, managing cash flow, and implementing internal controls to minimize misuse of funds.

Financial Decision-Making: This is where you leverage the information gathered through planning and controlling. It involves analyzing investment opportunities, making sound choices about debt and equity, and allocating resources effectively.

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Importance of Financial Management

Financial Management is vital for businesses and organisations as it lays the right pathway to achieve business goals and objectives. Here are some of the reasons why financial management is essential in a business:

  • Helps in Financial Planning
  • Assists in acquiring and managing funds
  • Helps in funds allocation
  • Provides insights to make critical financial decisions
  • Cuts down financial costs
  • Improves profitability and value of the organization
  • Makes employees aware of financial savings and investments
  • Helps in planning the future growth of the organization
  • Helps in achieveing economic stability

Approaches and Areas: A Broader Look

Financial management isn’t a one-size-fits-all approach. Different situations call for different strategies. Here’s a glimpse into the broader landscape:

  • Approaches: There are various financial management approaches, such as value investing (focusing on undervalued assets) or growth investing (prioritizing companies with high growth potential). The chosen approach depends on individual or organizational goals and risk tolerance.
  • Major Areas: Financial management encompasses various financial activities like:
  1. capital budgeting (determining how to allocate investment funds), 
  2. working capital management (managing short-term assets and liabilities), and
  3. risk management (identifying and mitigating financial risks).

Objectives of Financial Management

Just like we all used to save money during our student life and be mindful about it while spending, organisations need to manage the finances effectively to scale and be successful. Here are some crucial objectives that organisations need to be kept in mind:

  • Profit Maximization: Businesses aim to generate maximum profit while maintaining a healthy balance sheet. Financial management helps achieve this by optimizing resource allocation and cost control.
  • Growth and Expansion: Financial management fosters sustainable growth by ensuring sufficient capital is available for future endeavors. This could involve securing funding for new projects or market expansion.
  • Liquidity and Solvency: Imagine having enough cash to meet your short-term obligations. Financial management ensures sufficient liquidity while maintaining long-term solvency (ability to meet debt obligations).
  • Risk Management: Financial management helps identify, assess, and mitigate financial risks. This could involve diversifying investments, hedging against market fluctuations, and having adequate insurance coverage.

Quick check – Learn Business Finance Foundations

Elements of Financial Management

Financial Management is made of the following key elements. These are:

1. Financial Planning

Financial Planning is a way of calculating the capital required by an organization and adequately allocating resources accordingly. To do this effectively, one needs to have answers to the following questions:

  • Do you have well-established business goals and objectives?
  • What is your long-term plan as a brand?
  • What is the capital required for the organization to sustain itself?
  • What are the different policies and regulations involved in your business?

Answers to each of these questions and many more are all related to Financial Management. So, it is crucial to plan things properly that help you achieve your business goals. 

2. Financial Control

It is a pivotal activity to ensure the business is working to meet its objectives. It is more about setting proper KIPs rather than reducing costs. It is essential to ensure everyone in the team is aware of both financial and business goals.

3. Financial Decision-making

Once you have a proper plan and understanding of all the financial aspects, decision-makers should access and decide on fundings, resource allocations, profit distributions, and many more.

Functions of Financial Management

The financial management team in any organization is led mainly by the Finance Manager or someone from the Core Leadership team. Here are a few functions which the team generally is responsible for:


1. Capital Estimation

A finance manager has to estimate the capital required for the company. This will include expected costs, profits, future programs, and expected losses, if any. The estimate had to be made in such a way that the earning capability of the company increases steadily.

2. Deciding Capital Structure

Once the estimate has been made, it is now time to form the capital structure. This includes debt analysis in both the short and long term and is dependent on the capital the firm owns and raised external fundings(if any).

3. Choice of Funds

When significant funds are required, the capital structure needs to be expanded. The organization can take options like Bank Loans and Issues of Share and Debentures. It is essential to evaluate these options considering the interest rates, returns and risk involved. A pro and con list of each of these options will be helpful.

4. Investments

The organization cannot just sit on funds or profits. Growing money is more important than saving money for sustainable growth. The finance Manager needs to allocate funds into profitable ventures or make investments that give reasonable returns with safety on the investment made.

5. Profit Allocation

Profit allocation plays an important role. Once the business makes profits, it is essential to allot them properly. Various factors to be considered here are – employee bonuses, dividends, returns to investors, funds for future growth, and other basic cashflows. It is essential to plan and allocate profits to achieve business objectives.

6. Money Management

The team is also responsible for money or cash management. Cash is required for various purposes such as salaries, electricity and water bills, real estate bills, buying raw materials, storage costs, etc.

7. Financial controls

The finance manager has to plan and utilize the funds and needs to have complete control over the finances considering both short term and long term. This can be achieved using risk analysis and mitigation tools, financial forecasting, ratio analysis, cost reduction, and profit control.

An Example of Financial Management

Now you have had a fair idea of Financial Management, let us look at an example of Financial Management.

Suppose you decide to start your own business along with 4-5 partners. You choose to rent a small office in Bengaluru, Karnataka. You will need to consider the following:

  • Which area is best suited for office locations?
  • Should I go for a small independent office or go for a co-working space?
  • What will be the rent cost per annum?
  • What if I buy the property? What will be the evaluation 15 years from now? Will it be lesser than the rental cost for the next 15 years?

You might not have answers to all these questions and might decide to consult a real estate agent. Basis his advice, you might also consult the finance team on how much % of the funds should be invested in real estate so that it does not affect business profitability. 

So basis all this financial information, you might decide whether to rent an office or buy a property. Even Work from Home is an option during the initial stages until the team grows. 

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The Financial Manager: Your Guide on the Journey

Financial managers are the architects of sound financial practices. Functions of a finance manager includes overseeing an organization’s financial health, analyzing data, making investment recommendations, and implementing financial controls. As a business owner, having a competent financial manager on your team is crucial for navigating the complexities of finance.

Financial managers fulfill a variety of critical functions to ensure financial well-being. Here are some key areas they focus on:

  • Capital Budgeting: This involves estimating the funds needed for various projects and analyzing their potential profitability. Financial managers recommend the most promising investments to maximize returns.
  • Cash Flow Management: Ensuring sufficient cash flow is vital for day-to-day operations. Financial managers forecast cash inflows and outflows, manage short-term borrowings, and ensure timely payments to creditors.
  • Financing Decisions: Businesses need funds to operate and grow. Financial managers determine how to acquire capital, whether through debt, equity, or a combination of both. They analyze loan terms, negotiate interest rates, and choose the most cost-effective funding options.
  • Investment Management: Financial managers oversee the investment of surplus funds, aiming to generate returns while minimizing risk. This could involve investing in stocks, bonds, or other financial instruments.
  • Profit Planning and Analysis: Financial managers analyze financial statements to identify trends, assess profitability, and make recommendations for cost control or revenue improvement. They play a vital role in ensuring the financial health and sustainability of the organization.
  • Risk Management: Financial markets are inherently risky. Financial managers identify potential risks like currency fluctuations, interest rate changes, or market downturns. They develop customized strategies to mitigate these risks, such as diversification or hedging, to protect the organization’s financial stability.

Managing finance is a continuous process. You can navigate your financial expenses with confidence and achieve long-term success by understanding the core principles, setting clear goals, and making wise decisions. Managing finance empowers you to take control of your investment decisions, be it for your personal aspirations or your organization’s sustainable growth.

Frequently Answered Questions

1. What are the different types of job roles in financial Management?

2. What is the average salary of a Finance Manager in USA?

The average salary of a Finance Manager in USA is $1,03,000/yr.

3. What is the average salary of a Finance Manager in India?

The average salary of a Finance Manager in India is ₹11,00,000/yr.

4. What are the courses available to learn Financial Management?

There are several courses available online. You can go for free short-term courses to kick-start your financial management journey and later pick up a PG Program or an MBA in Finance. Here are a few courses for you:

Quick Read: Scope of MBA Finance in 2021: Top Job Roles, Skills & Opportunities

What is Financial Managment? Why is it important in 2024?

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