Effective financial management is crucial for any company. With sound financial management, companies can monitor cash flow and ensure operational expenses are within the established budget.
The function of corporate financial management also includes strategic decision-making regarding investment, asset management, and funding. Through planned financial management, companies can assess the feasibility of a project and optimize capital utilization to achieve maximum results.
From these functions, it can be seen that financial management is not just about recording income and expenses, but also encompasses the planning, control, and decision-making processes that directly impact business continuity and growth.
So, what are the functions of financial management in a company? To learn more, here is information about the functions of financial management in a company. Let's take a look!
What is Financial Management?
Financial management is the process of planning, organizing, controlling, and monitoring a company's financial resources to achieve business goals efficiently and effectively.
The primary goal is to ensure that a company has sufficient funds for operations, uses those funds wisely, and creates maximum value or profit for both business owners and shareholders.
Financial management encompasses various critical activities, such as budgeting, cash flow management, investment planning, risk analysis, and funding strategy development.
With sound financial management, a company can maintain financial stability, support business growth, and survive in various economic conditions.
Scope of Financial Management
The scope of financial management encompasses various critical activities related to the efficient management of company funds. The goal is to ensure financial stability, support business growth, and maximize company value. The following is the scope of financial management, as reported by Netsuite.
1. Financial Planning
Financial managers are primarily responsible for planning the company's funding needs. This includes calculating the amount of funds needed to maintain positive cash flow, expand products or services, and address unforeseen circumstances.
This planning covers various categories, from capital costs, labor costs, business travel (T&E), to other operational expenses. This information is then shared with relevant parties within the business to support decision-making.
2. Budgeting
The next responsibility is to prepare the company budget and ensure that available funds are used efficiently. This includes fixed costs such as rent, salaries, raw material purchases, and other expenses.
Budgeting also considers reserve funds for emergencies and business expansion opportunities. Companies generally have a master budget, which can be supplemented by additional budgets such as cash flow or flexible operating budgets.
3. Risk Management and Assessment
Financial managers help assess various risks that could impact the company's financial stability and provide appropriate solutions or controls.
These types of risks include:
• Market risk: related to market and industry conditions that can impact investments and financial performance.
• Credit risk: arises when customers fail to pay on time, thus disrupting the company's cash flow and credit score.
• Liquidity risk: when cash is not available when needed, requiring management to manage the availability of working capital.
• Operational risk: the risk arising from internal events, such as IT disruptions, cyberattacks, or managerial crises.
4. Financial Procedures and Policies
This scope includes establishing procedures for how financial data is processed, stored, and reported while maintaining security and accuracy. The financial manager is also responsible for determining who has the authority to make and approve financial decisions.
To support this process, many organizations use standard policy and procedure templates that can be customized to suit each company's needs.
The Function of Financial Management in a Company
Financial management in a company is quite important. Effective financial management will help the company organize, control, and optimize the use of its financial resources. Here are some of the functions of financial management in a company that you should understand.
1. Financial Planning
Financial management functions to plan the company's funding needs, both for daily operations and long-term business development. This planning includes cost estimation, revenue projections, budgeting, and identifying the most effective financing sources.
2. Financial Control
After planning is created, the next function is to ensure financial realization runs according to plan. This control is carried out by monitoring expenditures, evaluating financial performance, and conducting periodic audits to identify deviations and take corrective action if necessary.
3. Cash Flow Management
This function ensures the company has sufficient liquidity to finance daily operations. Cash flow management helps regulate income and expenses to avoid cash shortages, while optimizing the use of cash for investment or company savings.
4. Financial Decision Making
Financial management is responsible for assessing existing investment opportunities, whether in the form of fixed assets, product development, or business expansion. Every investment decision must be subject to a risk and potential return analysis to ensure that the funds spent add value to the company.
5. Capital Acquisition and Management
This function relates to how a company obtains funds, whether through equity, loans, or share issuance. Financial management is responsible for establishing a balanced capital structure to keep the cost of capital low and minimize financial risk.
6. Increasing Company Value
One of the main objectives of financial management is to increase the company's value in the eyes of shareholders and potential investors. This is achieved by maintaining good financial performance, maximizing profits, improving operational efficiency, and carefully managing risks.
7. Financial Risk Management
Financial management also plays a role in identifying, measuring, and managing risks that can impact a company's financial condition. These risks can arise from market fluctuations, changes in interest rates, economic instability, or other internal factors.
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