What is financial management?

Becky Leighton

Posted: July 8, 2019

Table of Contents

Financial management online short course from the University of Stellenbosch

Financial management refers to all of the functions and aspects of the financial components of a company or for an individual. This includes, but is not limited to, the planning, managing, controlling, and evaluating of the finances and economic structure for a client.

The financial management of a company requires putting together a strategy to ensure that a company maintains positive growth in its finances in order to maximise profit and minimise costs.

What are the goals of financial management?

One of the key goals in financial management is to make certain that the client is in a financial state such that there will be more funds coming in than going out.

The goals of financial management can be two-fold related to:

  • – The company
  • – The stakeholder

When it comes to the company, the main goal of financial management is to organise a plan for how the funds are spent in order to see the financial assets of the company returned both quickly and more than when they left. In short, the financial manager should draw up a blueprint which will be able to see the revenue grown quickly, but sustainably.

For the stakeholder, the financial manager should be able to show how the company’s money is being used so that their investment is proving worthwhile and that their profits will come in with time. The financial manager should also be able to communicate any financial plans with the stakeholders in a clear and concise manner, so that they are well informed of future plans.

Key objectives in financial management

As the principal goal in financial management revolves around growing revenue and creating ways to maximise costs, it is not surprising that the main objectives of a financial manager are based on that fundamental idea. The financial manager is responsible for putting plans in place to make sure the goals are met. This includes all phases of strategising, planning, evaluating, monitoring the company’s finances.

Plan and map out goals clearly

Drawing up a strategic plan helps put the right processes in place before moving forward. This helps to define where and why certain funds are allocated and when they should and can be spent or moved. Planning a roadmap makes it easy to evaluate and track the direction of the money and whether the strategy is working as expected or whether the plan should be changed and modified.

Organise financial assets

In order to best consider and monitor the company’s finances, there should be clear, easy-to-see methods of tracking and organising the movement of the funds. This can look different for businesses and individual clients.

For a business, it is important to record all relevant information in clear systems which can be looked over by management and make sense. Should it be necessary, the organisation of the financial assets should also be able to be controlled by another financial manager or team member.

For an individual client, all processes of investment and financial storage should be explained in clear terms with no jargon or slang so that the client can understand. This includes communicating all aspects related to the client’s financial ecosystem such as retirement and health plans, credit or cheque systems, and any insurance that might be advised or necessary.

In order to efficiently organise the assets for both businesses and individuals, the financial manager should take advantage of any software and technology.

Grow revenue passively

One of the best ways for a company to build revenue is to earn it passively. If a financial manager can find the right investments, then half of their job is done without even trying. With a good investment strategy, a company’s money can grow exponentially over years without needing to add any further investments. The financial manager is responsible for finding the best way to grow their client’s profits passively.

Communicate with clarity

Not all individuals are aware of the different phrases and terminology in commerce and finance. When talking with clients and stakeholders, it is important to explain in simple, easy terms so that there is absolutely understanding. 

It should be one of the objectives to communicate frequently, breaking down any important steps or movements with clients and stakeholders on a regular basis, such as monthly and quarterly.

The importance of financial management

The backbone in any company is in its finances. This means that focusing on growing the finances is essential for success. Beyond the fundamental necessity of having good financial stability, financial management has important features in building an excellent business.

Helps with financial planning

Any expert execution comes from a plan in place. With a financial plan in place, the financial trajectory of the business is easy to see. If things are off track, the financial manager will be able to identify problem areas and set things straight to get the direction back on course.

Plans for acquisition of funds

Companies, especially startup ones, require capital to drive operations forward. The capital contribution can come from a number of different locations. It is up to the financial manager to set up strategies to advise on where to both source and place the funds that come in for the business to use. 

Allocates funds in effective ways

For the business to run in the best and most sustainable way, the funds coming in need to be used effectively. The financial manager plays an important role in helping management allocate where the funds go. For example, if the company has just received a large investment sum, then those funds should go towards an integral part of the business’ functions in preparation for building and maximising profit.

Encourages good money planning methods

Teaching staff important lessons can be good for both the individual and the business overall. The financial management can influence team members in a company to be better with their – and the company’s – money which results in a saving-savvy environment. Cutting losses in a general sense benefits the business in a major way.

Ensures financial stability

Once the finances of a company are on a stable path, it does not mean the work is done for the financial manager at all. Maintaining the positive financial stability is one of the most important components in financial management.

Financial management functions

Estimate capital requirements

It is crucial to know how much is necessary to get started or to maintain a company’s operations. This is why the process of estimating the capital requirements for a company is one of the most important roles that a financial manager undertakes. How much will be needed for certain periods of time is a vital consideration as it gives an idea of how long the company has before new funds or investments are needed.

Source fund acquisitions

Since there are different ways to gain finances for capital, it is important to consider which is the best long and short-term approach to take. The main ways to acquire financial assets are:

  • Through issuing shares and debentures,
  • Taking loans from banks or financial institutions, and
  • By drawing public deposits such as in the form of bonds.

While one option might be perfect for one business, it might be entirely unsuitable for another. The financial manager is responsible for considering the different approaches and suggesting the best method of acquiring the financial assets needed.

Investing the financial assets

This function of financial management is vital to the process of passively growing a company’s funds. Similar to capital acquisition, investment options are numerous and it is up to the financial manager to find the best, most suitable ones so that profits can grow without putting in much effort.

Scope of financial management

The scope of financial management can be broken up into three main factors:

Financial decisions

As one of the primary functions of financial management, making the decision of how to source funds is a major factor in the scope of the industry. The financial decisions are important at any juncture in a company’s life, but this is especially true in the initial stages of starting out. Decisions with regards to capital and fund acquisition can make or break a startup, so taking them seriously and doing sufficient research is paramount.

In a business, there are two different sources that can be used to raise funds:

  • Longer-term sources such as capital structure, and
  • Shorter-term sources such as working capital. 

Financial investment decisions

As the third key factor in the functions of financial management, finding the right financial investment option for a company is a main part of the scope too. This can be broken down into short and long-term options:

  • Long-term investment includes making decisions which sees the financial assets of a company pledged for long periods of time. Often, this comes in the form of fixed assets, such as equipment or land. These investments are necessary for the business to operate, but do not directly impact cash-flow.
  • Short-term investment includes making the decisions to see the financial assets of a company pledged for a short amount of time. This, unlike long-term investment, directly affects the cash-flow and liquidity of the company.

Dividends decisions

Dividends refers to the amount of profit to be distributed. This is an important part of financial management because decisions need to be made regarding how and when that profit is allocated. This is not always easy because shareholders and managers might want different things for their claim. Shareholders might want to claim their dividends for personal use, while managers might prefer the profits to remain in the company in order to meet the on-going needs.

This decision involves the financial manager who can help to find a compromise so that both parties are happy with how the profits are split.

Financial management salary expectations

The average salary for this position in South Africa is R 543 713 per annum. 

Financial managers can expect to earn the following according to their occupational level:

Occupational levelAverage annual income
Entry levelR385,719
Mid-career professionalR583,041
Top-end professionalR623,113

A bonus remuneration within this field varies according to your experience and ranges from R25,000 – R50,000.

What skills are needed in financial management

An analytic mind

Analysis is a huge part of financial management, from considering what methods work to identify what techniques need to change. Financial management requires constant evaluation and, as a result, analysis is a skill necessary for the job.

Clear communication

One of the necessary skills in financial management comes from the importance of providing key information to management and stakeholders. 

Eager to learn

In any field, it is important to constantly learn new tricks of the trade. Financial management is no different and the ability to learn is an important skill in the industry. This means constantly reading new material, finding new techniques, and exploring new methods is included in financial management. Taking a financial management short course is a great way to gain new understanding.

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