What Is Financial Management And Its Functions? (2024)

Are you someone who keeps a tab on monthly expenses? Whether it’s through money management applications or spreadsheets; if you keep track of the amount you earn and spend, then you engage in personal financial management. The process isn’t only limited to mere calculation of expenses but also helps us plan better for future spending and saving.

In organizations, finance is one of the most important aspects of conducting business. For successful business outcomes and growth, an organization needs to prioritize good financial management. Read on to explore the meaning of financial management, its benefits and its functions.

  1. What Do You Mean By Financial Management?

  2. What Do You Mean By Financial Management Types?

  3. What Are The Functions Of Financial Management?

  4. What Are The Types Of Financial Management Decisions?

  5. Make Sound Decisions With Harappa!

What Do You Mean By Financial Management?

Before we deep dive into the functions and advantages, let’s understand the meaning of financial management. Whether a business follows a for-profit or not-for-profit model, it needs sound financial standing to stay afloat. It can be said that finance is the lifeline of any business, irrespective of the business model and industry. However, like any other resources, finances are limited. Therefore, businesses need to manage them effectively.

In its most basic form, financial management involves planning, organizing, directing and controlling financial activities in an organization. The process also helps apply management principles to financial assets or resources. The practice of managing an organization’s finances allows the business to be compliant with regulations and be successful in its field. The financial management process entails high-level planning and proper execution.

Here are the common objectives of financial management across organizations:

  • The insights help in maximizing profits. The gains can be either short-term or long-term. Either way, individual departments manage financial issues to ensure that the organization is making sufficient profit.
  • By tracking liquidity and cash flow, businesses ensure they have enough money in hand. Proper mobilization of funds is an integral part of the financial management process.
  • It helps in forecasting possible market conditions and outcomes and makes sound financial decisions. Additionally, it’s instrumental in effectively dealing with the board of directors and investors.

But what is financial management without effective application? When done right, that is, when management principles are properly applied, there is visible progress.

What Do You Mean By Financial Management Types?

Financial management takes various forms; however, there are two key types of financial planning that inform business decisions and solutions. They are:

1. StrategicFinancial Management

What is financial management without strategy? In the strategic approach, you focus on long-term success. If you’re being strategic, you make financial decisions based on what you want to achieve in the future. This means that you may even have to tolerate small losses and navigate your strategy around them. Therefore, effective strategic financial management may push you to adjust or compromise on some short-term goals, if needed. Such trade-offs are necessary to consider if you want to prioritize the long-term financial health of the organization.

There are some core elements of strategic financial management, such as:

  • Defining objectives, identifying resources and creating a specific plan
  • Reducing wastage, identifying areas of financial efficiency and uncovering areas for new investments
  • Identifying, assessing and mitigating uncertainty or risk factors in investment decisions
  • Making and tracking financial decisions and taking corrective actions, if needed

2. Tactical Financial Management

On a tactical level, financial decisions relate to short-term positioning. Tactical financial management procedures inform how to process daily transactions and compare actual spending with what was budgeted for. It helps you ensure compliance with auditor and tax requirements.

In the tactical approach, the primary intent is to take advantage of market conditions. For example, if the market outlook is poor, tactical financial management involves acting more defensively and reducing equity exposure. Alternatively, if the market outlook is healthy, the tactical approach provides flexibility to move to a higher end. The approach is also useful for dynamic markets to help increase gains or mitigate losses.

What Are The Functions Of Financial Management?

Financial management functions are critical for fund procurement, allocation of financial resources and utilization of funds, among others. The responsibility typically lies with financial or fiscal managers. Let’s navigate the financial management functions through the roles of a manager:

1. Decisions And Control

Financial managers shoulder the primary responsibility of making decisions and controlling the finances. Through various techniques like financial forecasting, ratio analysis and profit and loss analysis, they prepare for potential threats.

2. Financial Planning

Decision-making also spills into planning financial activities and resources. Managers use available information to gauge an organization’s priorities and needs. They also analyze the overall economic situation to plan budgets and make decisions accordingly.

3. Resource Allocation

Managers need to make sure that all financial resources are being utilized in appropriate ways. They oversee whether businesses have invested effectively and efficiently. Proper allocation of financial resources leads to profitability in the long run.

4. Cash Flow Management

Managers have the responsibility of ensuring cash management. In other words, they need to make sure that organizations are able to meet operational expenses and emergencies. This is done by checking if businesses have sufficient working capital and cash flow.

5. Disposal Of Surplus

Decisions regarding the net profits of an organization are taken by fiscal managers. They calculate the profits at the end of the accounting year. This helps them make pivotal decisions—whether dividends should be distributed or retained for internal purposes.

6. Acquisitions And Mergers

An organization may take critical strategic turns to maintain relevance in the competitive market. They can either expand by acquiring new businesses or through mergers, where they enter into a new business. Such decisions deal with the complex valuation of securities, and financial managers are the ones who oversee such processes.

7. Capital Budgeting

Capital budgeting refers to decisions that involve investing in shares or bonds, building new plants and purchasing new equipment, among others. Financial managers need to identify opportunities and challenges before organizations decide to invest a huge amount of capital.

In short, financial management functions help businesses maximize their wealth. However, it’s a continuous and interrelated process and financial managers need to be prompt and efficient.

What Are The Types Of Financial Management Decisions?

It’s evident that proper planning and decision-making lies at the core of financial management. However, there are different types of management decisions that govern an organization.

1. Investment Decisions

Here, financial managers need to determine the investment amount available out of existing finance. They make such decisions on the basis of long-term and short-term needs. Long-term investment decisions are also known as capital budgeting, where organizations commit to funds for long periods (for example, fixed assets). Short-term investment decisions are also known as working capital management, where businesses commit to funds for short periods. It includes decisions regarding investing funds in inventory, banks and others.

2. Financing Decisions

Financing decisions are concerned with the amount of finance to be raised from various sources. It can be both long-term sources (capital structure) or short-term sources (working capital). Here, managers need to pre-estimate financial needs and ensure the availability of adequate finance. The core objective is to ensure that funds are available as and when needed.

3. Dividend Decisions

Such decisions are concerned with how much of the profits earned by an organization should be distributed and how much should be retained. Typically, when funds are distributed among shareholders, it’s known as dividends. When funds are saved for future investments and contingencies, it’s known as retained earnings. Such decisions are complex and require deep insights and critical thinking.

Make Sound Decisions With Harappa!

Financial management decisions impact everyone in an organization. The more successful a business is, the better it is for individual employees. It can be said that the finance department has a central role in ensuring that an organization heads in the right direction. If you’re a financial manager or leader and you want to make sound decisions, try Harappa’s Making Decisions course. You’ll not only learn the fundamentals of good decision-making, you’ll also identify challenges that often affect decisions. The Good Decision Process framework will teach you how to arrive at smart decisions by analyzing situations properly. The PRISM Framework will help you avoid any negative consequences from personal biases. Start your free trial and never doubt your decisions again!

Explore Harappa Diaries to learn more about topics such as What Is Project Management, What Is Operations Management, What Are The Functions Of Management and What Is Task Management to classify problems and solve them efficiently.

As an expert and enthusiast, I can provide information on various topics, including personal financial management, financial management in organizations, and the functions and types of financial management decisions. I can draw on my extensive knowledge base and provide insights based on the information available to me. Let's dive into the concepts mentioned in the article you provided.

Personal Financial Management

Personal financial management refers to the practice of tracking and managing one's own expenses, income, and financial resources. It involves activities such as budgeting, tracking expenses, and planning for future spending and saving. By engaging in personal financial management, individuals can gain better control over their finances and make informed decisions about their money. This can be done through various tools and methods, such as money management applications or spreadsheets.

Financial Management in Organizations

In organizations, financial management plays a crucial role in ensuring successful business outcomes and growth. It involves planning, organizing, directing, and controlling financial activities within an organization. The goal of financial management is to effectively manage financial resources and assets, comply with regulations, and achieve financial stability and success. It encompasses high-level planning and proper execution to maximize profits, track liquidity and cash flow, forecast market conditions, and make sound financial decisions.

Functions of Financial Management

The functions of financial management are critical for the effective utilization of financial resources within an organization. These functions are typically carried out by financial or fiscal managers. Here are some key functions of financial management:

  1. Decisions and Control: Financial managers are responsible for making financial decisions and controlling the finances of an organization. They use techniques like financial forecasting, ratio analysis, and profit and loss analysis to prepare for potential threats.

  2. Financial Planning: Financial managers engage in financial planning by analyzing available information, gauging organizational priorities and needs, and planning budgets accordingly. They also consider the overall economic situation to make informed financial decisions.

  3. Resource Allocation: Financial managers ensure that financial resources are allocated and utilized effectively and efficiently. They oversee investments and assess whether businesses have invested their resources wisely, leading to long-term profitability.

  4. Cash Flow Management: Financial managers are responsible for managing cash flow within an organization. They ensure that businesses have sufficient working capital and cash flow to meet operational expenses and emergencies.

  5. Disposal of Surplus: Financial managers make decisions regarding the net profits of an organization. They calculate profits at the end of the accounting year and decide whether to distribute dividends or retain earnings for internal purposes.

  6. Acquisitions and Mergers: Financial managers oversee critical strategic decisions related to acquisitions and mergers. They assess the valuation of securities and manage the financial aspects of such processes.

  7. Capital Budgeting: Financial managers identify opportunities and challenges related to investing in shares or bonds, building new plants, purchasing new equipment, and other capital-intensive decisions. They help organizations make informed decisions about investing a significant amount of capital.

Types of Financial Management Decisions

Financial management involves different types of decisions that govern an organization's financial activities. Here are three key types of financial management decisions:

  1. Investment Decisions: Financial managers determine the amount of investment available for long-term and short-term needs. Long-term investment decisions, known as capital budgeting, involve committing funds for long periods, such as investing in fixed assets. Short-term investment decisions, known as working capital management, involve committing funds for short periods, such as managing inventory or maintaining cash reserves.

  2. Financing Decisions: Financial managers make financing decisions by determining the amount of finance to be raised from various sources. This can include long-term sources, such as capital structure, or short-term sources, such as working capital. The objective is to ensure the availability of adequate finance to meet organizational needs.

  3. Dividend Decisions: Dividend decisions involve determining how much of the organization's profits should be distributed to shareholders as dividends and how much should be retained for future investments and contingencies. Financial managers analyze the financial situation and make decisions regarding the distribution of profits.

These are some of the key concepts related to financial management mentioned in the article you provided. If you have any specific questions or need further information, feel free to ask!

What Is Financial Management And Its Functions? (2024)
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