5 Functions of Financial Management: Discover How to Manage Your Finance Efficiently

5 Functions of Financial Management: Discover How to Manage Your Finance Efficiently | Finance | Emeritus

Whether you are a profit or non-profit organization, your business requires finances to stay afloat. But, like every other resource, finance is also limited. Thus, you need financial management to manage your finances effectively.  

Financial management is a business approach to managing the finances of an organization in a better way. It involves making strategic decisions to meet the company’s financial goals.  

In this article, we will provide a comprehensive guide to the functions of financial management. Also, discuss their importance and how they contribute to the organization’s overall financial health. 

Key Functions of Financial Management 

Functions of financial management are the duties that a financial manager performs in an organization. Thus, it includes monitoring finances, planning budgets, and achieving financial goals. Below we have listed five critical functions of financial management.  

1. Financial Planning And Forecasting  

Financial planning is the process of analyzing the company’s financial situation. It delves into different areas of finance such as investment, taxes, and saving.   

Functions of Financial ManagementAs a part of financial planning, financial managers first analyze the cash flow statement, balance sheets, and financial investment statements. Then, they create a financial plan outlining the financial objectives of the company and strategies to achieve them. A financial plan is generally made annually based on the company’s budget and financial projections. 

Financial forecasting, on the other hand, is the process of determining the company’s future income and expenses.  Therefore, financial managers analyze macroeconomic factors to determine the future of an organization.   

Financial forecasts help companies make better financial choices. It gives businesses access to reports that allow them to establish business goals that are both realistic and feasible.  

Organizations that adopt financial planning and forecasting best practices stay unaffected by unexpected setbacks. Therefore, businesses hire experienced financial managers to ensure strong balance sheets and healthy cash flows during dynamic business conditions.  

Financial managers use data analytics to extract information about future events. They use this data to determine the effects of future events on the organization. 

Also Read: Top 10 Finance Skills To Keep You Updated In 2023

2. Cash Management  

Cash management is the process of managing the cash flows of an organization. It is also known as treasury management. In any industry, effective cash management ensures financial stability.  

Financial managers prepare the cash flow statement to formulate effective cash management strategies. They also perform stability analysis to check the financial position of an organization.  

A cash flow statement records all the cash inflows and outflows. It includes cash coming in from operating activities, investment activities, and financing activities. The bottom line of the cash flow statement shows the liquid cash available to the company. 

There are three sections in the cash flow statement- investment, finance, and operating activities.  

  • The first and second section records the cash inflow and outflow related.  
  • The third section consists of net working capital- the result of current assets minus current liabilities.

3. Financial Reporting  

Financial reporting is the process of communicating financial information to different stakeholders. There are two types of financial reporting- internal and external. Every company performs some type of financial reporting.  

  • Senior management prepares internal financial reporting to make finance-related decisions.  
  • External agencies like investors and traders prepare external financial reporting to analyze a company’s financial situation.  

Financial managers play an integral role in financial reporting. They prepare financial reports that demonstrate the company’s financial situation.  The report includes the organization’s revenue, expenses, assets, liabilities, and cash flow. They prepare these reports on a quarterly or annual basis.

4. Financial Control

Financial control outlines an organization’s way of managing its financial resources. It includes strategies and policies that enableFunctions of Financial Management companies to make sensible spending decisions. So, it’s right to say that financial control reduces expenses and maximizes profit. 

Financial managers play a vital role in financial control. They keep a watch on an organization’s financial resources to ensure they are effectively used. They develop and implement financial policies for the same process. Financial managers also identify the areas of improvement that can be optimized to improve a company’s financial stability.   

Finance managers use techniques like ratio analysis, financial forecasting, and profit and loss analysis to understand the company’s financial position.  

  • Ratio analysis analyzes the company’s financial records to determine its financial health.  
  • Financial forecasting helps companies know how strong their finances will be in the future.  
  • A profit and loss analysis provides details about the company’s earnings and expenses for a specified period.

Also Read: What is Investment Management? Types, Career, And How It works?

5. Risk Management  

Financial management helps a company to forecast risks. It also helps businesses develop a mitigation strategy to tackle risks effectively. Risk management involves identifying and managing financial risks that an organization might face. This includes assessing the impact of risk and developing and implementing risk management strategies.  

Although removing all risk is impossible, with financial management you will learn to deal with it. Financial managers play a critical role in risk management by formulating mitigation strategies. 

Improve Financial Management Skills and Maximize Profits

Financial management is an essential function of any business organization. By understanding the functions of financial management and how they are applied in practice, you can improve your financial management aptitudes and maximize profits.  

If you are planning to develop a career and exemplary knowledge in finance then take a certificate course in finance from Emeritus.  

The learning programs are provided in association with reputed institutes like IIM, IIT, and XLRI. Enrolling in online courses will nurse you with the necessary skills and proficiency required to take your career a notch higher.

Frequently Asked Questions 

1. What Are The Objectives Of Financial Management?  

The objectives of financial management can be broadly divided into two categories- short-term and long-term.  

Short-term objectives include managing the daily cash flow of the organization and maximizing the liquidity of the company. In short, ensuring that there is cash to meet the operational expenses of the company.  

On the other hand, long-term objectives include maximizing shareholder wealth, achieving steady growth, and ensuring long-term survival.

2. What Is The Scope Of Financial Management?  

Financial management is associated with the effective management of an organisation’s financial resources. Therefore, the scope of financial management extends to activities such as budgeting, financial planning, financial analysis, financial forecasting, financial reporting, and risk management. 

About the Author

Content Writer, Emeritus Blog
Nikhil is a passionate and free-spirited writer with 4+ years of experience. He has a keen eye for the ever-evolving content landscape, which helps him craft captivating content across various genres. He writes about marketing, data science, and finance for the Emeritus Blog. Beyond work, Nikhil is a dedicated pet parent who loves leisurely walks with his beloved puppers.
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