7 Essential Functions Of Financial Management
Financial management is the process of managing, controlling and measuring the financial resources of an organization to support investment, operations and growth sustainably. Financial management also encompasses income-generating activities and the evaluation of these activities. Financial management plays a crucial role globally, and the functions of financial management are quite useful as well. The room for growth and opportunity is huge in this field, and with the help of proper knowledge through a degree or finance management courses, anybody can become a part of this field. It is the process of managing money and assets to meet financial goals. That includes investment, planning, budgeting, accounting and more.
There are four parts to financial management:
- Investment: This involves setting a plan for allocating capital to achieve the desired return on investment. To invest properly, one has to understand which securities to buy and sell when deciding what strategy should be followed.
- Budgeting: To keep a spending plan or cash flow plan that allows you to balance your expenses against the revenue you expect over some time.
- Accounting: The record-keeping system that keeps track of transactions and can be used for reporting purposes.
- Risk Management: Risk is always present, and you must be aware of it, so you can take measures against it. This includes many things such as theft, natural disasters, labour strikes or even changes in tax regulations for your industry sector.
Scope of Finance Management
The scope of financial management includes budgeting, risk management, investment analysis and other functions that are related to generating funds for small and medium-sized enterprises and large corporations. The scope of financial management can also include accounting, operations and human resources in larger corporations. Money is a necessary resource for companies to grow, which is why it should not be overlooked at any stage of the decision process. Finance functions such as budgeting are an essential part of almost every business environment because they help managers plan, so they can be better prepared for the future.
Functions of Financial Management
- Financial planning and forecasting: A financial plan is a strategic approach to finances that lays out a plan for the future. A financial forecast is a projection of future outcomes based on one of several methods, including statistical models.
- Fund Investment: The function of financial management is to invest funds in the most profitable way possible. Financial managers have several functions like sourcing funds, evaluating risk, diversifying investments and monitoring them.
- Estimating Capital Expenses: Estimating the capital expenses of a company is a crucial part of financial management. It is necessary to know the future of capital expenditures so that they can be subtracted from future income. The major methods of estimating such expenses are straight-line, sum-of-the-years digits, and double-declining balance depreciation.
- Determining the capital structure: Capital structure refers to how a company funds its operation through either equity, debt or a combination of both. It is a crucial decision that every business person has to make before they set off as many factors need to be taken into consideration while considering it. This article will cover some of these factors in detail, so you can understand how many different factors play into capital structure decisions.
- Maintaining liquidity: Based on the definition of liquidity, liquidity management can take one of two forms. The ability to trade an asset, such as a stock or bond, at its current price is one type of liquidity. The second definition of liquidity applies to large organizations such as financial institutions. In either case, liquidity management refers to an investor’s or manager’s effort to reduce their exposure to liquidity risk.
- Analyzing the financial status of a business: Financial Status refers to the person’s financial or other situation, business, assets, properties, or operations. Profits, losses, revenue, income, earnings, indebtedness, EBITDA, corporate valuation, available cash, or cash flow are all examples of financial status. In financial management, analyzing the financial status is necessary, and it helps a business in multiple ways.
- Disposal of surplus assets: The removal of a long-term asset from the company’s accounting records is known as asset disposal. The disposal of surplus assets is necessary for any business and is a key functionality of financial management.
It is crucial to have financial management courses comprising different types of tools in place to ensure the business stays within budget. The above-mentioned functions of financial management play a role in the success of a business, irrespective of the fact that they are new or old.