What Is Financial Management? Explained Types, Purpose, Functions and Goals

Financial management is an essential aspect that drives organisations to handle their financial resources and help them achieve their goals. Most people think financial management is only about finances, but that is only sometimes the case. Financial Management involves strategic planning, careful decision-making, and effective execution to ensure the company remains profitable, compliant, and sustainable. 

Hence, understanding financial management is crucial whether you are running a small startup or a large enterprise. It helps you make informed decisions that drive growth and secure your business’s financial future.

In this article, we will help you answer the question, ‘What is financial management?’, exploring its importance, purpose, goals, types and more. 

What is Financial Management?

Financial management is the strategic process of planning, organising, controlling, and monitoring a company’s financial resources to achieve its goals. It involves overseeing all financial transactions, from handling cash flow and paying expenses to managing investments and ensuring compliance with regulations.

In smaller companies, financial management might be handled by an accountant or bookkeeper, while larger organisations typically have a dedicated finance team led by an executive. These financial management teams often work to bring profits, reduce financial risk, and make informed decisions that align with the company’s long-term goals.

In short, the answer to the question, ‘What is financial management?’ is that it focuses on safeguarding the company’s financial resources while guiding its growth and stability.

Understanding Financial Management

Financial management oversees and controls an organisation’s financial activities to ensure its stability and growth. It encompasses various business processes crucial for managing money effectively across all departments. 

One essential process in financial management is managing invoicing and receivables. It also covers handling payables, where the company manages and pays bills to vendors and suppliers. Another critical aspect is closing the books, which involves tallying transactions at the end of a period to assess the company’s financial position. Finally, financial management addresses risk and compliance, aiming to control financial risks and ensure adherence to legal and regulatory requirements. 

Financial management helps businesses optimise their financial resources, increase profitability, and support long-term strategic goals. As a result, by focusing on these areas, you will understand what financial management is and how it guides businesses to make informed financial decisions. 

Why is Financial Management Important?

Financial management plays a crucial role in ensuring a business’s success and growth. It provides the foundation for companies to find their way through challenges and sustain operations while meeting their financial obligations. Here are some of the reasons that highlight the importance of financial management:

• Improves Profitability: By analysing financial data and trends, finance teams can identify opportunities to increase revenue and reduce costs. This leads to better pricing strategies and cost management, ultimately enhancing the company’s profitability.
• Supports Critical Financial Decision-Making: Financial management provides the data and insights necessary for making informed decisions about investments, cost control, and other critical areas. This helps businesses respond effectively to market conditions and internal challenges.
• Enhances Transparency and Accountability: Effective financial management practices ensure accurate and transparent financial performance reporting. This builds trust with stakeholders and supports regulatory compliance.
• Improves Stakeholder Relationships: Accurate and timely financial reporting makes it easier to manage relationships with investors, creditors, and other stakeholders, fostering confidence and support.

Purpose of Financial Management

While finding the answer to the question, ‘What is financial management?’, you must also know its core purpose. You should know that financial management is not just about handling finances but also about paving the way for businesses to achieve long-term success. Here is an overview of the purpose of financial management: 

• Guiding financial decisions to impact stability and growth.
• Enhancing financial stability by reducing risks and ensuring economic security.
• Improving profitability through optimised use of financial resources.
• Analysing financial data to offer insights and recommendations.
• Aligning financial strategies with both short-term and long-term goals.
• Allocating finances to increase efficiency and effectiveness.
• Supporting planning for future financial decisions and investments.

What is the Goal of Financial Management in Business?

When businesses follow effective financial management practices, they will be on the right track to success. It enables financial managers to set clear goals that make the business financially healthy and ready for sustainable growth. So, if you try to understand what financial management is, you should also know the goals of financial management. Some of the goals of financial management are given below. 

• Maintains Financial Stability: Keep the company solvent and avoid bankruptcy, ensuring enough funds for ongoing operations.
• Reduces Risks and Ensures Compliance: Adhere to regulations to avoid penalties and incorporate ESG (Environmental, Social, and Governance) considerations into financial planning and reporting.
• Optimises Return on Investment (ROI): Deliver favourable returns to investors and shareholders by managing investments and resources effectively.
• Ensures Adequate Cash Flow: Forecast and manage cash flow to support daily operations and invest in growth opportunities.

Also, read our article on finance and investment strategies in the South African market

Types of Financial Management

Understanding the different types of financial management is crucial when you try to learn about what financial management is. Each type focuses on different aspects of financial planning and decision-making. Below is a brief overview of the top types of financial management:

• Corporate Financial Management: Handles the financial decisions of businesses, including balancing debt and equity, making investment choices, and managing financial risks.

• Personal Financial Management: Focuses on managing individual financial resources through budgeting, saving, investing, and protecting assets with insurance and estate planning.
• Public Financial Management: Involves managing the finances of government entities, including budgeting, collecting revenue, and overseeing public spending.
• Non-Profit Financial Management: Covers the financial management of non-profit organisations, including fundraising and managing grants to support their mission.
• International Financial Management: Deals with financial activities across international operations, including managing currency risk and making foreign investment decisions. 

Strategic vs. Tactical Financial Management

As you try to answer the question ‘What is financial management?’, it is also essential to understand how financial management is approached. 

At a tactical level, financial management involves managing daily transactions, closing the books each month, tracking budget adherence, and ensuring compliance with audit and tax regulations. On a strategic level, financial management plays a key role in FP&A (financial planning and analysis) and long-term planning, where finance leaders use data to help business units make informed investment decisions, identify growth opportunities, and strengthen organisational resilience.

Learning the differences between strategic and tactical financial management will help you understand them better. In the table below, we have highlighted the top differences between strategic and tactical financial management:

What are the Functions of Financial Management?

While running a small business or managing a large enterprise, you should know the functions of financial management. Here, we have provided a brief explanation of the specific functions of financial management:

• Selecting Funding Sources: Identifies and selects the best sources of funds, such as loans or equity, to meet the company’s financial needs.
• Forecasting Cash Flows: Estimates future cash inflows and outflows to plan for investments, expenditures, and financing needs.
• Pricing & Price Control: Sets and adjusts prices to ensure profitability while covering costs and remaining competitive.
• Profit Distribution Decisions: Decides how to allocate profits, balancing dividends for shareholders with reinvestment in the business.
• Effective Cash Management: Ensures a company has enough cash on hand for daily operations, managing receipts and payments to prevent liquidity issues.

Also, find out how to become a financial manager in South Africa. 

Conclusion

Financial management is crucial for business success because it involves strategic planning and resource allocation. Financial management helps businesses enhance profitability and ensure long-term growth by guiding financial decisions and managing risks. Thus, once you learn effective practices, your company can easily navigate financial challenges and make informed decisions that drive success. In this article, we have outlined everything that points to the answer to the question ‘What is financial management?’, including its goals and functions. We hope you have an in-depth understanding of financial management and its role in business operations.

If you want to start a career in the financial sector, you can opt for programmes from Regenesys School of Finance. Visit our website now and enrol in your desired programme today!

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