Understanding the Financial Management Process
Finance is a broad term encompassing many things regarding the study, formation, and management of funds and other financial assets. The word ” FINANCIAL” was first used in 18arat. The term is derived from the Latin finis, meaning “finite.” In the early days, the study of finance dealt largely with the issue of how to accumulate capital for ventures. In recent years, with the advent of better banking practices and more sophisticated tools for managing funds, the study of financial affairs has broadened to include issues related to management of individual investments.
Some of the basic components of modern financial management are money management, planning, investment, and asset allocation. All of these must be kept in place in order to meet long-term goals. Many of today’s advanced techniques for money management and planning include sophisticated computer models that enable managers to prioritize various financial opportunities and decide when it makes sense to invest. Managers also can set and accomplish several time-frame goals for investments and distribute performance rewards or penalties along the way depending on their level of skill and experience. Investment is typically done through mutual fund and bank accounts, real estate, and other assets.
Successful management of investment funds and other types of assets requires a combination of financial decision making, financial analysis, effective portfolio and bond selection, utilization of interest rate and other risk factors, and adherence to general time frame and investment objectives. All of these must be in place for long-term success for any investment strategy to be successful. To facilitate efficient decision making and management of complex financial statements, financial professionals use multiple disciplines such as mathematics, accounting, economics, and business administration. A good financial manager is expected to be skillful in all of these areas and possess additional specialized skills such as those associated with tax law, estate planning, probate, and mergers and acquisitions.
In order to achieve long-term viability in their organizations, managers must ensure that all aspects of finance are well-managed. Properly trained and knowledgeable managers who fully understand the importance of each discipline and its applications are essential to the achievement of financial goals and objectives. Good financial management includes sound financial planning, prudent investment practices, effective supervision of finance, and careful assessment of risks and strategies. All of these must be in place for a company to realize its profits and become financially sustainable.
The creation of a corporate finance strategy begins with the identification of an overarching organizational purpose. The purpose of the corporate finance strategy should include an accurate assessment of the company’s short-term and long-term results as well as projections for the next five to ten years. The financial plan should also provide for the funding requirements of the organization, particularly with respect to the financing needs related to expansion and development. A sound corporate finance plan will also provide for adequate levels of flexibility in dealing with cash flows. It will also take into account the need for adequate levels of short-term credit in cases when the need for such financing becomes apparent. Finally, it will recognize any limitations in the availability of credit and seek to remedy them.
While management often has a direct hand in the formulation of the corporate financial plan, it is also important for senior management to have a clear view of the organization’s overall financial goals and objectives. In addition, management must be able to communicate its expectations to key personnel in various disciplines and to the staff at all levels. All these functions should be interrelated in a way that ensures proper communication and effective implementation of the financial plan.