Financial Management in Business

Overview

Modern business may be complex. One of the most complicated, yet important and necessary, areas of running a business is dealing with money, or finances. Business owners and managers may face many financial concerns in the course of day-to-day and long-term operations. Keeping track of this financial activity and balancing financial needs versus available funds can occupy much of a business operator’s time.

Owners and managers have to find, hire, and try to retain the best personnel to meet the needs of the business. This involves paying competitive salaries and offering attractive benefits, which can be costly. Many business leaders need to pay suppliers for the materials and utilities they need to conduct business, ranging from computers and office equipment to electricity and building maintenance to various raw materials used in manufacturing. Many leaders have to arrange for research and development, which means exploring new ideas for future products and services. Research and development also may involve hiring high-level professionals. Other common business expenses focus on the completed products and finding and satisfying consumers; these include marketing, advertising, and public relations.

For many businesses, the strain of handling all these financial demands can present a major problem. However, overlooking any of these concerns or making unwise decisions could have a wide array of negative effects on a business, from never reaching full potential to failing and going into bankruptcy. For that reason, keeping control of business-related finances is an essential task for success. Many companies reach this goal by using financial management experts and techniques.

In general, financial management in the business world refers to the process of making sound financial decisions that will help companies thrive and grow. It means understanding how much funding is available and distributing it among the various company expenses in the most effective ways, while following all applicable rules and regulations. Many financial management plans involve both high-level decisions as well as all the necessary steps to carry out the decisions in regular, day-to-day business operations.

Financial management plans may differ in many ways and take almost any form or size, but most share some common goals. One goal is to reach an understanding of how a business operates in the present and how it handles its money and other resources. This understanding is vital to ensuring that the business will have enough liquid, or available, money to handle its regular expenses as well as unforeseeable expenses that may occur in the future. From there, financial management can use understanding of the current business to create scenarios for possible future decisions and changes. For example, knowing that the business has ample funding available can open opportunities to expand into new markets or research new products.

One of the most important goals of financial management, as with businesses in general, is to maximize profit. Financial management must take into account current income and expenses as well as possible alternatives that could provide similar or better results for lower cost. It must track various expenses and analyze how changes in these expenses may affect the company’s bottom line. For example, if the raw materials a company relies upon increase in price, the company must decide on a compensatory action (such as finding a new source of materials or new kinds of materials or raising prices for consumers) or risk losing money. Financial management plans may seek to increase profits by reducing expenses, increasing income, or both.

Although profit is a major focus of financial management, this cannot be the sole focus. Effective financial management constantly reviews and works with up-to-date laws and regulations, including those created within an industry and those legislated by state and federal lawmakers. Financial management also must take into account the results of the business’s actions and the business’s reception and reputation with consumers, investors, employees, and directors. For example, at first glance, lowering product quality might seem like a quick fix for raising profits, but it can prove more costly in the end if it damages the company’s reputation and drives away consumers.

Financial management in business may take two main forms, often known by the militaristic terms tactical and strategic. Tactical financial management focuses mainly on shorter-term practical financial decision-making. For example, this type of financial management might oversee how a business runs day-to-day, week-to-week, or month-to-month in its functions such as producing its offerings and handling its transactions. Tactical financial management might review monthly income and expense reports to ensure the business is profitable and on sound financial supports. It is also the branch of financial management most involved with meeting governmental and industrial regulations and handling taxes, fees, and other necessary expenses.

Strategic financial management typically operates from a broader and higher-level perspective. It may deal with more theories and analysis than the practical-minded tactical approach. Strategic financial management often takes place among business leaders and financial experts well-versed in long-term planning. Together, they may search for new opportunities the business may pursue, such as introducing new products or attempting to engage new demographics of customers. They may also plan new investments and other major financial moves, such as mergers, that they believe could benefit the business months, years, or decades into the future. On the strategic level, financial management is sometimes referred to as financial planning and analysis, or FP&A.

Beyond the two main categories of tactical and strategic financial management, business experts often group financial management activities into three major categories. These categories are capital budgeting, working capital management, and capital structure. (In these instances, the word capital refers to a business’s money.)

Capital budgeting is much like any other form of budgeting, in which people in charge of money analyze existing money, new income, and various expenses. In capital budgeting, financial management experts identify what financial steps are necessary for a business to prosper day-to-day while moving toward its longer-term goals.

Working capital management is closely tied to capital budgeting. Working capital refers to the money a business requires simply to perform its most basic daily operations, whether that is writing books, shipping goods, or producing machines. Companies may require significant amounts of working capital to function smoothly; this money may go toward paying employee salaries, buying necessary raw materials, and paying for rent or utilities such as electricity and water that a business might require.

Capital structure is a field that helps to ensure a business can meet its budgets and maintain a safe level of working capital at all times. In short, capital structure refers to the ways a business gathers the funding it needs. Most businesses work to produce a profit, which may be re-invested in the business, but many businesses seek additional means of acquiring needed funds. For instance, a business might decide to borrow money from a bank or equity firm to fund new investments. A business might decide to sell some of its existing assets, such as a building or land that is not often used. In some cases, financial experts may even recommend that a business take on debt in the hopes of generating even greater profits in the long run.

Applications

The potential applications of financial management in business are numerous and ever-changing. They are likely to differ from business to business based on many factors, including business size, type of operation, amount of income and expense, and so on. However, some tasks are likely to occur in financial management processes regardless of the circumstances.

An illustration of financial management procedures at work may begin with a business that produces home decor. The business seems to be prospering, but investors and leaders are concerned it may be becoming stagnant or missing out on potential for growth. Therefore, they decide to plan possible new offerings related to home decor, such as scented candles or furniture polish. Company leaders will likely send this idea to one or more financial managers for analysis.

Financial managers will break down the new idea and examine options, feasibility, and likelihood of success. For example, financial managers might begin by exploring ways the business could fund the new venture. For example, the business might have enough built-up assets from prior years’ profits to fund its own new projects. Alternatively, financial managers might look into the potential of taking a bank loan, selling stock in the company, or selling company assets to raise funds.

If the business takes on the new venture, financial managers will carefully monitor its progress. For example, they will likely study the costs of the project versus its returns. If the project proves profitable, financial managers will next deal with the question of what to do with the profits—for instance, should the company keep the money liquid, invest it in various ways, share it as dividends to shareholders, or use it to fund or expand the project?

Financial managers must analyze many other factors, including applicable laws and regulations that may impact how new products are made or offered to the public. Financial managers must also identify and analyze various types of risk that the business may encounter because of this new project. Risk in business may take many forms, some obvious and some harder to foresee. The clearest form of risk is market risk, which refers to how much profit a business makes, how well a business’s wider industry is faring, and how a public business’s stocks are performing. Other risks relate to not having enough funds available to meet various obligations, which can hurt the business’s credit and increase the difficulty of borrowing funds. A broad category of risk is organizational risk, which relates to almost any other negative or damaging situation that may occur to a business, such as natural disasters, scams, or cyberattacks.

Discourse

Much of the study of financial management relates to large companies with various departments and the resources needed to employ financial experts and analysts. However, financial management is not exclusive to these big businesses. Small businesses and startups may also use many financial management tools and techniques, scaled down and customized to meet their specific needs. For a small business, the operator can use financial management ideas to ensure that business decisions align to a budget that will balance income and expenses to generate profit. Financial management is also important for ensuring that customers pay on time and that income is used effectively for business purposes—such as research, marketing new offerings, and paying various bills—that can allow the business to grow.

Small businesses, startups, and individuals are likely to not have the resources to hire financial management professionals. For that reason, people can educate themselves on the basic techniques and goals of financial management so they can act as their own financial managers. In the past, financial management required extensive recordkeeping and mathematical skills. However, in modern times, people interested in managing their finances may find many kinds of assistance from computer programs, apps, and other digital resources.

In the digital realm, Enterprise Resource Planning (ERP) software may prove very helpful. ERP software allows computers to record, save, and access the financial information of a business or individual automatically, relieving humans of much of the work involved in reading spreadsheets and crunching numbers. ERP software for small businesses may only draw on a few basic figures. When used by larger businesses, it may access many kinds of highly complex financial data from company branches such as sales, accounting, manufacturing, human resources, and supply chain management.

ERP programs may serve as computerized financial managers by making calculations, answering questions, and even making suggestions for new decisions or actions. Many business owners find ERP programs very cost-effective because they save the often-high expense of hiring human analysts. They can also save a potentially great amount of time that might otherwise be spent searching for facts and figures or trying to coordinate communication between different parts of a company. Business experts recommend that people interested in ERP programs research various offerings in detail and only invest in those that are well-tuned to the unique individual needs of the business in question.

For people interested in finances, business, and mathematics, financial management may prove to be a rewarding career. Financial managers may work with a variety of businesses of small or large scale; many find employment with insurance companies, investment firms, and banking-related organizations. They may also take on a wide range of tasks including, but not limited to, making investments, producing financial reports, and contributing to a business’s short- and long-term strategies. Most financial managers focus on economic, business, and mathematical courses during their school years and attain a bachelor’s degree or higher. They typically also hone their skills at lower-level jobs first; many work as financial analysts, accountants, or sales agents before finding employment as financial managers.

About the Author

Mark Dziak is a Pennsylvania-based writer. He earned his bachelor of arts degree in English from King’s College in Wilkes-Barre, PA, in 2003, and completed a secondary education program there in 2011. He has worked at Northeast Editing, Inc., since 2004. As a content developer, he has researched and written hundreds of educational articles, test items, and other resources on a wide variety of social science topics. In his spare time, Dziak has also published numerous works of nonfiction and fiction.

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