10.1: What Is Financial Management?

Without good financial controls and planning, a company will not be able to respond to unexpected challenges or planned expansion. Financial management involves the strategic planning and budgeting of short- and long-term funds for current and future needs. This may include activities such as investing, borrowing, lending, budgeting, saving, and forecasting. In most companies, the finance department comprises two divisions—accounting and financial management. To remain competitive, a business must make large strategic investments, such as buying or building a new factory, investing in more advanced equipment or technology. At the same time, the business must continue to pay its monthly expenses.

There are three main types of finance: Personal finance, corporate finance, and government finance.  In this chapter, we will discuss corporate finance.

The Financial Manager’s Role

A financial manager oversees the financial operations of a company. Many financial managers have backgrounds in accounting, banking, business management, economics, or finance. In most organizations, financial managers hold mid to upper-level roles requiring multiple years of experience. They can work in the private or public sectors.^[1]

Generally, a financial manager assumes accounting responsibilities for the company and is responsible for planning and managing the company’s financial resources, including the following:

• Developing plans that outline the company’s short-term and long-term financial needs.
• Defining the sources and uses of funds that are needed to reach goals.
• Monitoring the cash flow of a company to ensure that obligations are paid in a timely and efficient manner and that funds owed to the company are collected efficiently.
• Investing any excess funds so that those funds can grow and be used for future development.
• Raising capital for future growth and expansion.

A financial manager analyzes short-term and long-term money flows to optimize a firm’s profitability and make the best use of its money. This is usually done in three steps: 1) forecasting the firm’s short-term and long-term financial needs, 2) developing budgets to meet those needs, and 3) establishing financial controls to see whether the company is achieving its goals.