Importance Of Financial Management And Apply To Business

Understand better the role of business financial management, what management practices are, and how technology can address key constraints. The financial management is one of the most important administrative functions in a company. Responsible for planning and controlling the use of the organization’s resources, financial management influences all sectors of the enterprise, as the functioning of each depends on the budget. It is thanks to the correct application of resources that operations are able to generate profit for the company. It is evident that financial management is strategic. In spite of this, this area commonly gets stuck in barriers such as the difficulty of establishing processes, analytical failures, loss of information, ineffective planning and calculation errors. Deficiencies like these lead to a distorted view of the financial reality of the organization, generating losses caused by factors such as unmanaged risks, low competitiveness, high costs and loss of business opportunities. In this article, you will better understand the role of corporate financial management, what good management practices are and how technology can solve the main barriers. Follow!

Why is financial management important?

For a company to be successful, it is important that it has an efficient administrative structure in line with the purposes and objectives of the business. But how do you achieve this? Through the organizational process. It is he who will direct all actions so that the goals are achieved consistently and continuously. We can describe the organizational process as the group of administrative functions that are divided into five stages:

Planning;

Direction;

Communication;

Control;

Evaluation.

In the macro scheme, which includes the organization as a whole, financial management participates in several phases, especially in planning. This is because financial management has the central objective of managing the company’s resources.

Thus, it is crucial to point out what are the resource limitations, investment opportunities and measurement of results obtained. Every business has to generate profit to be sustainable. But if there is no good management of these gains, how will the operations be financed? Therefore, it is necessary that financial management is aligned with the organizational process. Without it, the company is exposed to economic risks, such as not obtaining (or preserving) the working capital required for business operations, increasing debt commitment, among others. It is worth noting that the stages of the organizational process must also be present in the organization of the department responsible for financial management. That is, planning, direction, communication, control and evaluation need to be considered for each sector. That is why it is so important to know these steps. Check out!

Planning

Planning is the sphere of the organizational process that is concerned with verifying the current reality of the company, assessing opportunities to be achieved, defining future objectives, devising means to achieve the goals and designing actions according to different scenarios. In financial management, planning is different, but more specific. You should be concerned with analyzing the financial situation, identifying better possibilities for investment or use of economic resources, defining results to be achieved, assessing how goals can be achieved and predicting how to act in different scenarios.

There are three levels of planning:

Strategic;

Tactical;

Operational.

Strategic planning

Strategic planning takes care of long-term projections. That is, for a period of more than five years. Therefore, it is a less detailed planning, which indicates perspectives to be sought, but in a more flexible way, as there is the possibility of changing scenarios. In financial management , we can use future investment planning as an example, such as business expansion.

Tactical planning

In tactical planning, the focus is on the medium term, comprising a period ranging from one to five years. It is an offshoot of strategic planning and outlines activities that must be adopted to lead the organization to achieve its objectives. Here, it is also important to have a degree of flexibility to adapt to changing scenarios. Following the example of business expansion, financial management would be concerned, in this case, with financial control , definition of investments and, mainly, enhancing results through the company’s operations.

Operational planning

In the short term, within the period of one year, comes operational planning, whose main characteristic is the definition of the action plan itself. In other words, how the processes should be conducted in the company’s day-to-day activities to support tactical and strategic planning. Here, all employees are involved. In financial management, it consists of defining daily financial processes.

Direction

The execution of the processes established in the planning depends on the role of the leadership, who must guide the teams towards the fulfillment of the functions according to what has been defined. In financial management , this presupposes the command and supervision of procedures that, in general, are complex, as they involve financial records, calculations and controls.

Communication

Communicating is essential action at all times. The transparent and objective dialogue favors the execution of the work and the achievement of the objectives.

Control

The control should be concerned with the verification of the processes, with the intention of assessing whether they are being executed according to what was planned. Thus, it is possible to adopt corrective measures in a preventive way, avoiding the occurrence of errors, rework or deviation of purposes.

Evaluation

The evaluation focuses on measuring the results. For this, it is important that from the planning there is clarity as to the indicators that should be adopted. In addition, to make an efficient analysis of results it is necessary to have a record of all the data necessary for the calculation. Assessing is a fundamental step in the organizational process, as it is the one who will indicate whether the planning and defined processes generate return for the business.
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What are the main functions of financial management?

As we have shown, within the organizational process, financial management plays important roles in the business strategy. In practice, it should perform functions that improve results and ensure the best use of resources.

Control over accounts receivable and payable

Managing accounts payable and receivable is actually controlling income and expenses. They are two ends with different foci. Look:

Bills to pay Bills to receive

Identifies all expenses Checks receivable credits

Controls the evolution of expenses Follow the evolution of resources

Make payments due Checks the entry of values

Projects future payments Projects future receipts

Manages debts Manages credit terms

Credit and collection analysis

In companies that offer credit to customers, financial management also includes functions related to credit analysis and collection. These are procedures whose main objective is to minimize risks to the business. That is, they depend on rigorous analysis.

The role of financial management is to elaborate the organization’s credit policy, a document that must cover issues such as business risks, credit granting criteria, impact on the company’s strategies, among others. One of the most important measures in this context is the assessment of the company’s ability to tolerate losses. This type of analysis is based on the verification of corporate finances and projections of returns and losses. Thus, the maximum credit limit to be granted is defined. In daily operations, the credit analysis consists of applying the credit policy, considering the following practical steps with customers:

Obtaining registration data;

Checking credit restrictions;

Credit score analysis;

Assessment of income impairment.

Credit release is a process that must be monitored and strictly controlled, as it also indicates when and how to act regarding the collection of debts. It is important for financial management that credits receivable do not stand still in order not to compromise the company’s finances.

Cash flow management

Cash flow controls the inflow and outflow of resources in the day-to-day activities of the organization, recording daily results and also making projections in line with accounts payable and receivable. However, in the cash flow, also known as cash generation, there is a special care in assessing the source of revenues in a more structured way. This is because cash flow is an excellent management tool to indicate whether the company’s operations are generating the expected return. We are not always aware, but it is possible that a business generates negative operating results, but has a positive cash flow. This is a problem, because if only the final result is analyzed, one can be left with the false idea that the company is doing well when, in fact, it is the other way around.

To better understand, it is necessary to know that the cash flow is divided into three distinct flows:

cash flow from operations (FCO): indicates how much the company generates cash;
investment cash flow (FCI): indicates the amount invested in assets;
financing cash flow (FCF): indicates movements in equity and third parties.
Now consider the following example, in which two companies (A and B) achieved the same final cash flow value, but from very different sources:

Cashier Company A Company B
FCO  72,000.00 – 20,000.00
FCI – 45,000.00 40,000.00
FCF 10,000.00 17,000.00
Cash variation  37,000.00  37,000.00

As it was possible to observe, two companies with the same financial result have a very different economic health due to the origin of the revenues. It is for this reason that financial management depends on a rigorous detailing of information and uses cash flow statements to make the necessary analyzes, whose basic model is the following:

Cash Flow from Operations

(+) Receipt from customers and others

(-) Payment to suppliers

(-) Payment of employees

(-) Tax payment

(=) Net cash from operating activities

R $ 000,000,000.00

R $ 000,000,000.00

R $ 000,000,000.00

R $ 000,000,000.00

R $ 000,000,000.00

Investment Cash Flow

(+) Sale of assets

(-) Purchase of assets

(=) Net cash from investing activities

R $ 000,000,000.00

R $ 000,000,000.00

R $ 000,000,000.00

Financing Cash Flow

(+) New loans

(-) Loan amortization

(+) Payment of capital

(-) Payment of dividends

(=) Net cash from financing activities

R $ 000,000,000.00

R $ 000,000,000.00

R $ 000,000,000.00

R $ 000,000,000.00

R $ 000,000,000.00

(=) Net change in cash or cash equivalents R $ 000,000,000.00
(+) Cash at the beginning of the period R $ 000,000,000.00
(=) Cash at the end of the period R $ 000,000,000.00

Note that the amount of information needed to prepare the cash flow is comprehensive and needs to be passed on to different sectors. Controlling this type of information is one of the biggest challenges faced by companies, so it is essential that data transmission is automated in this process.

How to implement efficient financial management in your business?

So far we have demonstrated the challenges imposed on financial management, which needs to handle a series of tasks in order to enable the company to operate as a whole. These are processes that require, as we have shown, analysis, planning, control and calculation of results.

But how do you put all these assignments into practice? This is a question that includes numerous responses. Each company has its own methods and processes and what works for another is not always viable for another. Despite this, there are practices that are common to all and that, when well executed, generate results quickly. We highlight five main functions:

Cost mapping;

Financial planning;

Cash flow management;

Periodic checks;

Process automation.

Although financial management is not restricted to these points, we believe that they can positively influence other processes related to the company’s finances. See in detail how to use them in the implementation of management practices:

Map the costs
As was demonstrated at the beginning of this post, knowing the company’s economic reality is one of the basic assumptions of financial management. In all necessary analyzes, cost knowledge needs to be considered. In addition, closely monitoring expenses is critical to increasing business efficiency.
That is why we started by highlighting the importance of cost mapping, which is nothing more than a report, or map, of all the amounts used for costing. An efficient cost statement must contain:

Division of the company into cost centers;

Expense groups and respective amounts;

Depreciation costs;

Provisioning.

Develop a strategic plan

Strategic planning, as we explained earlier, is the elaboration of plans for the long term. It needs to be aligned with business strategies, as it focuses on defining how the objectives will be achieved.

It is important that strategic planning has a coherent structure, containing at least six steps:

Definition of objectives;

Analysis of the external scenario;

Internal analysis (organizational, above all, financial);

Alternatives proposal;

Formulation of the strategic plan;

Implementation.

It is worth noting that steps 2 and 3 are dedicated to diagnosis, which covers the external and internal environments. Again, the data related to the company’s finances are essential. This demonstrates how important it is to have a process control and registration system, making it easier to obtain information. The implementation will depend on what is foreseen in the tactical and operational planning. Thus, financial management needs to maintain consistency between what has been programmed for the long term and the actions to be taken in the medium and short term.

Manage cash flow

Cash flow management needs to be detailed enough to provide the information needed to make a decision, such as the source of funds and expenses, following the logic that we highlighted earlier. A practice that favors control is to work with forecasts. It works as follows: through the data and perspectives already available, the results to be achieved are projected. As these movements take place, they are launched in the flow to update the data. It is possible to perceive that cash flow management requires attention and the adoption of standardized reports, thus favoring day-to-day management. Another challenge is to obtain accurate data, which makes the use of integrated systems essential. Learn also How Do You Remove a Hard Inquiry From Your Credit Report?

Perform daily, weekly, monthly and annual checks

You should remember that at the beginning of this post we mentioned that financial management is part of a well-structured organizational process. And also, that the organizational process is divided into five stages:

Planning;

Direction;

Communication;

Control;

Evaluation.

Thus, we started to organize the company’s management with planning, which should provide metrics for measuring results, and we concluded, precisely, by checking if the objectives were achieved. After all, there is no other way to check whether the objectives have been achieved or not.

There are countless ways to measure performance in any area of the company. In financial management, however, it is common to use reports and statements. Although it is a more technical standard and aligned with the accounting sphere, they are also quite efficient due to the standardized format and well-known methods, such as income statements and balance sheets. When adopting reports to calculate the results, it is essential to maintain the frequency, so that it is possible to compare results between the periods. Check out some examples:

Daily control: cash flow, bank reconciliation, trial balance, control of accounts payable and receivable;

Weekly control: inventory checks, cash and accounts;

Monthly control: income statement for the years (DRE), balance sheet;

Annual control: balance sheet, DRE.

The information found in these documents must be used strategically, that is, they need to be considered when making decisions and correcting plans.

Use process automation tools

Planning, executing and controlling are essential attributes to good management. But you must have verified that they are careful procedures and that demand a lot of information. It is almost impracticable to adopt a method of financial management without making use of technological resources capable of automating processes. A retail company, for example, takes risks by not computerizing its processes, as there is a high chance that important information will be lost. The same goes for organizations in other segments, regardless of size. Among the daily financial management practices, we highlight bank reconciliation . This is the conference between entries and account balance. It is therefore a process that requires analysis time every day. Only today it is possible to automate this procedure. This results in better use of human resources, who can dedicate themselves to strategic activities, less errors and, consequently, cost reduction.

The main advantages of financial automation include:

Cost reduction;

Agility in the execution of tasks;

Generation of strategic data;

Resource optimization;

Greater financial and operational efficiency.

Financial management is therefore improved with the adoption of automated processes. In this way, it is able to better take advantage of market opportunities without excessively increasing costs with analysis, in addition to strengthening the control of financial risks.