Financial management is the
business function
A business process, business method or business function is a collection of related, structured activities or tasks by people or equipment in which a specific sequence produces a service or product (serves a particular business goal) for a parti ...
concerned with profitability, expenses, cash and credit, so that the "organization may have the means to carry out its objective as satisfactorily as possible;"
the latter often defined as maximizing the
value of the firm for
stockholders
A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal own ...
.
Financial managers
[Financial Managers](_blank)
Bureau of Labor Statistics
The Bureau of Labor Statistics (BLS) is a unit of the United States Department of Labor. It is the principal fact-finding agency for the U.S. government in the broad field of labor economics and statistics and serves as a principal agency of t ...
(FM) are specialized professionals directly reporting to
senior management
Senior management, executive management, upper management, or a management is generally individuals at the highest level of management of an organization who have the day-to-day tasks of managing that organization—sometimes a company or a corpor ...
, often the
financial director
The chief financial officer (CFO) is an Corporate title, officer of a company or organization that is assigned the primary responsibility for managing the company's finance, finances, including financial planning, management of financial risks, r ...
(FD); the function is seen as
'Staff', and not
'Line'.
Role
Financial management is generally concerned with short term
working capital management
Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allo ...
, focusing on
current assets
In accounting, a current asset is any asset which can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year or operating cycle or financial year (whichever period is ...
and
current liabilities
In accounting, current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer.
A more complete definition is t ...
, and
managing fluctuations in foreign currency and product cycles, often through
hedging.
The function also entails the efficient and effective day-to-day management of funds, and thus overlaps
treasury management
Treasury management (or treasury operations) includes management of an enterprise's holdings, with the ultimate goal of managing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a fi ...
.
It is also involved with long term
strategic financial management, focused on i.a.
capital structure
In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...
management, including capital raising,
capital budgeting
Capital budgeting in corporate finance is the planning process used to determine whether an organization's long term capital investments such as new machinery, replacement of machinery, new plants, new products, and research development projects ...
(capital allocation between business units or products), and
dividend policy;
these latter, in large corporates, being more the domain of "
corporate finance
Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...
."
Specific tasks:
*
Profit maximization
In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit (or just profit in short). In neoclassical economics, w ...
happens when
marginal cost is equal to
marginal revenue
Marginal revenue (or marginal benefit) is a central concept in microeconomics that describes the additional total revenue generated by increasing product sales by 1 unit.Bradley R. chiller, "Essentials of Economics", New York: McGraw-Hill, Inc., ...
. This is the main objective of Financial Management.
* Maintaining proper
cash flow is a short run objective of financial management. It is necessary for operations to pay the day-to-day expenses e.g. raw material, electricity bills, wages, rent etc. A good cash flow ensures the survival of company; see
cashflow forecast
Cash flow forecasting is the process of obtaining an estimate or forecast of a company's future financial position; the cash flow forecast is typically based on anticipated payments and receivables.
See Financial forecast for general discussion ...
.
* Minimization on
capital cost
Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. In other words, it is the total cost needed to bring a projec ...
in financial management can help operations gain more profit.
* Estimating the Requirement of Funds:
[Budget Analysts](_blank)
Bureau of Labor Statistics Businesses make forecast on funds needed in both short run and long run, hence, they can improve the efficiency of
funding
Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses ...
. The estimation is based on the
budget e.g.
sales budget
Revenue management is the application of disciplined analytics that predict consumer behaviour at the micro-market levels and optimize product availability, leveraging price elasticity to maximize revenue growth and thereby, profit. The primary ...
,
production budget
Production budget is a term used specifically in film production and, more generally, in business.
A "film production budget" determines how much will be spent on the entire film project.
This involves identifying the elements and then estimatin ...
; see
Budget analyst.
* Determining the
Capital Structure
In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...
: Capital structure is how a firm finances its overall operations and growth by using different sources of funds. Once the requirement of funds has estimated, the financial manager should decide the mix of debt and equity and also types of debt.
Relationship with other areas of finance
Two areas of finance directly overlap financial management:
(i)
Managerial finance
Managerial finance is the branch of finance that concerns itself with the managerial application of finance techniques and theory,
emphasizing the financial aspects of managerial decisions.
The techniques addressed are drawn in the main from ma ...
is the (academic) branch of finance concerned with the managerial significance of financial techniques;
(ii)
Corporate finance
Corporate finance is the area of finance that deals with the sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, and the tools and anal ...
is mainly concerned with the longer term capital budgeting, and typically is more relevant to large corporations.
Investment management
Investment management is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be institut ...
, also related, is the professional
asset management
Asset management is a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It may apply both to tangible assets (physical objects such as buildings ...
of various
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
(shares, bonds and other securities/assets).
In the context of financial management, the function sits with treasury; usually the management of the various short term financial
legal instrument
Legal instrument is a legal term of art that is used for any formally executed written document that can be formally attributed to its author, records and formally expresses a legally enforceable act, process, or contractual duty, obligation, or ...
s (contractual duties, obligations, or rights) appropriate to the company's
cash- and
liquidity management
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
* Market liquidity, the ease with which an asset can be sold
* Accounting liquidity, the ability to meet cash obligations when due
* Liqu ...
requirements. See .
The term "financial management" refers to a company's financial strategy, while
personal finance or
financial life management refers to an individual's management strategy. A
financial planner
A financial planner or personal financial planner is a qualified financial advisor. Practicing in full service personal finance, they advise clients on investments, insurance, tax, retirement and estate planning.
As a general rule, a financial ...
, or personal financial planner, is a professional who prepares financial plans here.
Financial management systems
Financial management systems are the software and technology used by organizations to connect, store, and report on assets, income, and expenses.
See also
*
Financial management for IT services
Financial Management for IT Services is a Service Strategy element of the ITIL best practice framework. The aim of this ITIL process area is to give accurate and cost effective stewardship of IT assets and resources used in providing IT Services. ...
, financial management of IT assets and resources
*
Financial Management Service, a bureau of the U.S. Treasury which provides financial services for the government.
*
Financial mismanagement
Financial mismanagement is management that, deliberately or not, is handled in a way that can be characterized as "wrong, bad, careless, inefficient or incompetent" and that will reflect negatively upon the financial standing of a business or indiv ...
*
*
FP&A
A financial analyst is a professional, undertaking financial analysis for external or internal clients as a core feature of the job.
The role may specifically be titled securities analyst, research analyst, equity analyst, investment analyst, ...
References
Further reading
* Lawrence Gitman and Chad J. Zutter (2019). ''Principles of Managerial Finance'', 14th edition, Addison-Wesley Publishing, .
* Clive Marsh (2009). ''Mastering Financial Management'', Financial Times Prentice Hall
*James Van Horne and John Wachowicz (2009). ''Fundamentals of Financial Management'', 13th ed., Pearson Education Limited.
{{Authority control
Corporate finance