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Financial Management: what is it and why is it important?

For finance teams within businesses and organisations, financial management is a key responsibility. Understanding financial management and how it works, and the software and systems which it requires, is vital for any business owner or finance officer. In modern companies, financial management is most often done using a specialised financial management software package, based on the cloud so that all of the relevant data and reports can be maintained securely on a single platform and easily accessed at any time.
financial management system

What is financial management?

In the business context, financial management involves the handling of financial matters and information in order to maintain the company’s financial performance and to ensure that all laws and regulations are complied with. Like many aspects of business and management, these functions have in the past been carried out manually, but now are increasingly done in a digital format. Financial management is often done using a specialised software package. These cloud-based financial management systems are multi-functional and efficient with high levels of automation. They allow many tasks to be carried out more easily and quickly using a single platform.

What are the main objectives of financial management?

Financial management in business is usually tailored to suit the needs of an individual company, but in general, the key goals of a financial management system include:

Maximising profits

Businesses are generally keen to ensure that they achieve the largest and most consistent profits possible, and financial management systems help with achieving this, as they allow constant real time monitoring of the financial situation, allowing business strategies to be modified when necessary to maintain profits. In the long run, a financial management system also helps you make the right choices for your business and give it the best chance of performing well and being profitable in the future. 

Supporting decision-making

One of the key functions of financial management is to provide high quality smart reports and financial analysis which can be used by a company or organisation’s leadership to inform their decision making. Having full and accurate financial information allows wiser decisions to be made and gives you the best chance of success.

Increasing efficiency

A strong system of financial management gives the finance team and leadership within an organisation the information they need to spot inefficiencies and opportunities, allow new strategies to be adopted which increase efficiency and prevent money, time and capacity from being wasted.

Maximising share value

Businesses, particularly finance departments, are expected to aim to maximise the value of their shares and therefore earn the maximum dividends for their shareholders. When finances are properly managed, this supports greater, more reliable returns for shareholders.

Maintaining optimum liquidity

Tracking and analysing cash flow allows you to stay on top of your business’s or organisation’s liquidity and ensure that you have adequate liquid assets to reliably meet your obligations and to operate with ambition and flexibility. 

Ensuring sound capital structure

Financial management provides insights into the capital needs of a company or organisation, its likely earning capability, equity and debt, which can be used to support decisions about what the optimal capital structure is and how to achieve and maintain it.

What are the key functions of financial management?

Financial management involves the combination of many standard accounting functions with more complex finance and business management systems. The key functions a good financial management system should provide include:

  • Core cloud accounting features, which enable efficient maintenance of a general ledger and monitoring of accounts payable and accounts receivable, and other standard accounting practices.
  • Seamless synchronisation with your online banking system, with real time information drawn automatically from your bank feed.
  • Compliance with government regulation and guidance, including Making Tax Digital, automatically built into the system.
  • The capability to integrate other business systems and applications, such as a customer relationship management system or an inventory management system, to broaden the range of financial data.
  • Smart reporting features, which allow you to automatically produce reports which draw on many different data sources and can be customised to suit your needs.
  • Consolidation functions for groups of companies, or those with international subsidiaries, so that data from different entities can be drawn together automatically for easier comparison and analysis.

What is a financial management system?

A financial management system is the set of processes in place within a business or organisation which ensure that all of its activities are aimed at achieving key objectives and contribute to overall plans and goals. 

The system itself, which in modern businesses often takes the form of a cloud-based software package, combines a number of different elements. Chief among these are key accounting functions, such as a general ledger, accounts payable and receivable, and so on. There should be the ability to automatically synchronise the system with your bank feed so that information is up to date. The ability to produce financial reports which incorporate any important variable from across the company or organisation and can be customised to provide the desired insights is also essential.  

Types of financial management

The day to day operation of a financial management system is generally tailored to help inform and support one of three decision types. The functions and elements of financial management may therefore be different depending on which one of the three types of decisions is most relevant.

Financing decisions

Financing decisions relate to how a company gets its funding, and are usually aimed at achieving an optimal financial mix and proportion of debt to equity. Good financial management and a strong understanding of all aspects of financial performance are crucial to making well-informed and wise financing decisions.

Investment decisions

Investment decisions are extremely important because they determine which assets a company or organisation allocates money to. This could mean deciding to purchase new machinery or open up new branches, for example. 

Dividend decisions

A company’s equity shareholders will expect to receive dividends from its profits, and deciding how much can be paid out and when is an important decision for financial managers. They must use the insights and analysis they’ve developed to ensure that paying dividends won’t compromise the firm’s current or future performance.

What is the importance of financial management?

An efficient and effective financial management system is crucial to the success of a business because it provides the information and insight staff need to help them do their jobs more successfully. Good financial management enables more effective decision-making and supports strong business performance. An effective system takes into account all areas of the business and its operations, enabling greater oversight and the development of strategies which boost all aspects of performance.

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