Finance is one of the crucial prerequisites to starting any business.

Further,
a sufficient corpus of funds and efficient financial management is required
throughout a business’s lifetime and even when a company is sold or
wound up. Therefore, funds need to be managed, regulated as per
procedures, and monitored at every step of the business lifecycle.

Any business that manages its finances better experiences exponential

growth, and companies that mismanage their financial resources and
activities usually undergo losses or make lower profits. Let’s delve deeper
into the world of financial management.

What is Financial Management?

In simple terms, financial management is the business function that deals
with investing the available financial resources in a way that greater
business success and return-on-investment (ROI) is achieved. Financial
management professionals plan, organize and control all transactions in a
business. They focus on sourcing the capital, whether it is from the initial
investment by the entrepreneur, debt financing, venture funding, public
issue, or any other sources. Financial management professionals are also
responsible for fund allocation in an optimized way to ensure greater
financial stability and growth for the organization.

Importance of Financial Management

The financial management of an organization determines the objectives,
formulates the policies, lays out the procedures, implements the
programs, and allocates the budgets related to all financial activities of a
business. Through a streamlined financial management practice, it is
possible to ensure that there are sufficient funds available for the company
at any stage of its operations. The importance of financial management
can be assessed by taking a look at its core mandate:

• Availability of sufficient funds

• Maintaining a balance between income and expenses to ensure
financial stability
• Ensuring efficient and high ROI
• Creating and executing business growth and expansion plans
• Safeguarding the organization against market uncertainties through
ensuring buffer funds

Let’s take a deeper look at the scope of financial management to gain a

greater understanding of its importance.
Financial Management Scope
Financial management in a company is governed by the principle that it
must protect the economic interests of the investors and shareholders and
ensure business growth. Apart from securing their interests, financial
managers are also expected to provide a more significant ROI that
generates more wealth for all shareholders. There are specific objectives of
financial management that experts and business leaders universally
accept, and these clearly outline the financial management scope and
functions.

Objectives of Financial Management

Certain specific and highly impactful objectives that financial managers
aim to attain are:

1. Assessing Capital Needs

Financial managers need to evaluate factors such as the cost of current

and fixed assets, the cost of marketing, the need for buffer capital, long-
term operation, and human resources cost, etc. Successful businesses
have clearly defined short-term and long-term financial requirement
projections in place.

2. Determination of Capital Structure

A company’s capital structure is the framework that determines decisions

such as debt-equity ratio in the short and long term.

3. Creation of Effective Financial Policies

There is a need to frame efficient financial policies that govern cash

control, the lending and borrowing processes, and so on.

4. Resource Optimization

Great financial managers are able to navigate through different scenarios

by making optimum use of the available financial resources. This would
reduce the cash burn and increase the cash churn to generate maximum
ROI.
Introduction to Financial
Management
Financial Management is one of the most important aspects for individuals
and organisations in this rapidly growing world. It is no longer about saving
money; it is about managing and growing money. To run a business
efficiently and effectively and achieve business goals, one needs to have a
good knowledge and understanding of financial accounting and
management.

What is Financial Management?

According to the Financial Experts Guthman and Dougal,

“Financial management is the activity concerned with planning, raising,

controlling and administering of funds used in the business.”

It manages the finances in a way where the business/organization is

profitable and scalable in the near future.

Importance of Financial Management

Financial Management is vital for businesses and organisations as it lays
the right pathway to achieve business goals and objectives. Here are some
of the reasons why financial management is essential in a business:

• Helps in Financial Planning

• Assists in acquiring and managing funds
• Helps in funds allocation
• Provides insights to make critical financial decisions
• Cuts down financial costs
• Improves profitability and value of the organization
• Makes employees aware of financial savings and investments
• Helps in planning the future growth of the organization
• Helps in achieveing economic stability
Objectives of Financial Management
Just like we all used to save money during our student life and be mindful
about it while spending, organisations need to manage the finances
effectively to scale and be successful. Here are some crucial objectives
that organisations need to be kept in mind:

1. Profit Maximisation

One of the most critical objectives is to ensure maximum profits in both the
short and long run. A finance manager should consider this on top of his
priority list and ensure that outcomes related to business performance are
profitable.

2. Proper Mobilization

Just like you do not waste your savings all in one go to buy something and
have nothing in hand, managing funds is crucial for any business. Financial
managers need to evaluate and make vital decisions on the allocation
and utilization of various funds. Whether it is shares, products, or investing
in small companies, all the critical factors must be considered before
investing.
3. High Efficiency

Financial Management tries to increase the efficiency of all the

departments of the company. Proper distribution of finances or funds to all
the departments considering the resources and work involved increases
the organization’s efficiency as a whole.

4. Reduce Risks

There are always risks involved in running a business, especially with the
uncertainties that come along. Financial managers need to avoid high-risk
situations/opportunities and take calculated risks under the consultation of
experienced leaders and subject matter experts.

5. Business Survival

Amidst the competitive world, the survival of the business is a primary goal.
Darwin said, “Survival of the fittest” in Biology, which is applicable for
companies. Companies need to make decisions intuitively. They can
always take the help of expert consultants if needed.

6. Balanced Structure

Like they say – Balance is key to everything. This applies not just in life but
to businesses too. Financial managers need to prepare a robust capital
structure considering all capital sources. This balance is vital for liquidity,
flexibility, economy, and stability.

Quick check – Learn Business Finance Foundations

Elements of Financial Management

Financial Management is made of the following key elements. These are:

1. Financial Planning
Financial Planning is a way of calculating the capital required by an
organization and adequately allocating resources accordingly. To do this
effectively, one needs to have answers to the following questions:

• Do you have well-established business goals and objectives?

• What is your long-term plan as a brand?
• What is the capital required for the organization to sustain itself?
• What are the different policies and regulations involved in your
business?
Answers to each of these questions and many more are all related to
Financial Management. So, it is crucial to plan things properly that help you
achieve your business goals.

2. Financial Control

It is a pivotal activity to ensure the business is working to meet its

objectives. It is more about setting proper KIPs rather than reducing costs.
It is essential to ensure everyone in the team is aware of both financial and
business goals.

3. Financial Decision-making

Once you have a proper plan and understanding of all the financial
aspects, decision-makers should access and decide on fundings, resource
allocations, profit distributions, and many more.

Functions of Financial Management

The financial management team in any organization is led mainly by the
Finance Manager or someone from the Core Leadership team. Here are a
few functions which the team generally is responsible for:
1. Capital Estimation

A finance manager has to estimate the capital required for the company.
This will include expected costs, profits, future programs, and expected
losses, if any. The estimate had to be made in such a way that the earning
capability of the company increases steadily.

2. Deciding Capital Structure

Once the estimate has been made, it is now time to form the capital
structure. This includes debt analysis in both the short and long term and is
dependent on the capital the firm owns and raised external fundings(if
any).

3. Choice of Funds

When significant funds are required, the capital structure needs to be

expanded. The organization can take options like Bank Loans and Issues of
Share and Debentures. It is essential to evaluate these options considering
the interest rates, returns and risk involved. A pro and con list of each of
these options will be helpful.

4. Investments
The organization cannot just sit on funds or profits. Growing money is more
important than saving money for sustainable growth. The finance Manager
needs to allocate funds into profitable ventures or make investments that
give reasonable returns with safety on the investment made.

5. Profit Allocation

Profit allocation plays an important role. Once the business makes profits, it
is essential to allot them properly. Various factors to be considered here
are – employee bonuses, dividends, returns to investors, funds for future
growth, and other basic cashflows. It is essential to plan and allocate
profits to achieve business objectives.

6. Money Management

The team is also responsible for money or cash management. Cash is

required for various purposes such as salaries, electricity and water bills,
real estate bills, buying raw materials, storage costs, etc.

7. Financial controls

The finance manager has to plan and utilize the funds and needs to have
complete control over the finances considering both short term and long
term. This can be achieved using risk analysis and mitigation tools,
financial forecasting, ratio analysis, cost reduction, and profit control.

An Example of Financial Management

Now you have had a fair idea of Financial Management, let us look at an
example of Financial Management.

Suppose you decide to start your own business along with 4-5 partners.
You choose to rent a small office in Bengaluru, Karnataka. You will need to
consider the following:

• Which area is best suited for office locations?

 • Should I go for a small independent office or go for a co-working
space?
• What will be the rent cost per annum?
• What if I buy the property? What will be the evaluation 15 years
from now? Will it be lesser than the rental cost for the next 15
years?
You might not have answers to all these questions and might decide to
consult a real estate agent. Basis his advice, you might also consult the
finance team on how much % of the funds should be invested in real estate
so that it does not affect business profitability.

So basis all this financial information, you might decide whether to rent an
office or buy a property. Even Work from Home is an option during the initial
stages until the team grows.