Financial management

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Financial management is the business function concerned with profitability, expenses, cash and credit. [1] These are often grouped together under the rubric of maximizing the value of the firm for stockholders. The discipline is then tasked with the "efficient acquisition and deployment" of both short- and long-term financial resources, to ensure the objectives of the enterprise are achieved. [2]

Contents

Financial managers [3] (FM) are specialized professionals directly reporting to senior management, often the financial director (FD); the function is seen as 'staff', and not 'line'.

Role

Financial management is generally concerned with short term working capital management, focusing on current assets and current liabilities, and managing fluctuations in foreign currency and product cycles, often through hedging. The function also entails the efficient and effective day-to-day management of funds, and thus overlaps treasury management. It is also involved with long term strategic financial management, focused on i.a. capital structure management, including capital raising, capital budgeting (capital allocation between business units or products), and dividend policy; these latter, in large corporates, being more the domain of "corporate finance."

Specific tasks:

Relationship with other areas of finance

Two areas of finance directly overlap financial management: (i) Managerial finance is the (academic) branch of finance concerned with the managerial application of financial techniques; (ii) Corporate finance is mainly concerned with the longer term capital budgeting, and typically is more relevant to large corporations.

Investment management, also related, is the professional asset management of various securities (shares, bonds and other securities/assets). In the context of financial management, the function sits with treasury; usually the management of the various short-term financial legal instruments (contractual duties, obligations, or rights) appropriate to the company's cash- and liquidity management requirements. See Treasury management § Functions.

The term "financial management" refers to a company's financial strategy, while personal finance or financial life management refers to an individual's management strategy. A financial planner, or personal financial planner, is a professional who prepares financial plans here.

Financial management systems

Financial management systems are the software and technology used by organizations to connect, store, and report on assets, income, and expenses. [5] Here, the discipline relies on a range of products, from spreadsheets (invariably as a starting point, and frequently in total [6] ) through commercial EPM and BI tools, often BusinessObjects (SAP), OBI EE (Oracle), Cognos (IBM), and Power BI (Microsoft). See Financial modeling § Accounting for discussion.

See also

Related Research Articles

Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, which is the study of production, distribution, and consumption of goods and services; the discipline of financial economics bridges the two. Financial activities take place in financial systems at various scopes; thus, the field can be roughly divided into personal, corporate, and public finance.

The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less.

An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture, or an automobile is often referred to as an expense. An expense is a cost that is "paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". Something that seems to cost little is "inexpensive". "Expenses of the table" are expenses for dining, refreshments, a feast, etc.

<span class="mw-page-title-main">Personal finance</span> Budgeting and expenses

Personal finance is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.

<span class="mw-page-title-main">Budget</span> Balance sheet or statement of estimated receipts and expenditures

A budget is a calculation plan, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environmental impacts such as greenhouse gas emissions, other impacts, assets, liabilities and cash flows. Companies, governments, families, and other organizations use budgets to express strategic plans of activities in measurable terms.

Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or service. It is a management accounting concept that can be used in full cost accounting or even ecological economics where it includes social costs.

<span class="mw-page-title-main">Managerial finance</span>

Managerial finance is the branch of finance that concerns itself with the financial aspects of managerial decisions. Finance addresses the ways in which organizations raise and allocate monetary resources over time, taking into account the risks entailed in their projects; Managerial finance, then, emphasizes the managerial application of these finance techniques and theories.

A financial analyst is a professional, undertaking financial analysis for external or internal clients as a core feature of the job. The role may specifically be titled securities analyst, research analyst, equity analyst, investment analyst, or ratings analyst. The job title is a broad one: in banking, and industry more generally, various other analyst-roles cover financial management and (credit) risk management, as opposed to focusing on investments and valuation; these are also discussed in this article.

Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital is equal to current assets. Working capital is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit and negative working capital.

In finance, leverage is any technique involving borrowing funds to buy an investment, estimating that future profits will be more than the cost of borrowing. This technique is named after a lever in physics, which amplifies a small input force into a greater output force, because successful leverage amplifies the smaller amounts of money needed for borrowing into large amounts of profit. However, the technique also involves the high risk of not being able to pay back a large loan. Normally, a lender will set a limit on how much risk it is prepared to take and will set a limit on how much leverage it will permit, and would require the acquired asset to be provided as collateral security for the loan.

Financial risk management is the practice of protecting economic value in a firm by managing exposure to financial risk - principally operational risk, credit risk and market risk, with more specific variants as listed aside. As for risk management more generally, financial risk management requires identifying the sources of risk, measuring these, and crafting plans to address them. See Finance § Risk management for an overview.

<span class="mw-page-title-main">Capital budgeting</span> How an organization allocates its cash and resources

Capital budgeting in corporate finance, corporate planning and accounting is an area of capital management that concerns the planning process used to determine whether an organization's long term capital investments such as new machinery, replacement of machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structures. It is the process of allocating resources for major capital, or investment, expenditures. An underlying goal, consistent with the overall approach in corporate finance, is to increase the value of the firm to the shareholders.

Financial modeling is the task of building an abstract representation of a real world financial situation. This is a mathematical model designed to represent the performance of a financial asset or portfolio of a business, project, or any other investment.

<span class="mw-page-title-main">Financial plan</span> Evaluation of ones financial state

In general usage, a financial plan is a comprehensive evaluation of an individual's current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. This often includes a budget which organizes an individual's finances and sometimes includes a series of steps or specific goals for spending and saving in the future. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan is sometimes referred to as an investment plan, but in personal finance, a financial plan can focus on other specific areas such as risk management, estates, college, or retirement.

The following outline is provided as an overview of and topical guide to finance:

Treasury management entails management of an enterprise's financial holdings, focusing on the firm's liquidity, and mitigating its financial-, operational- and reputational risk. Treasury Management's scope thus includes the firm's collections, disbursements, concentration, investment and funding activities.

Asset and liability management is the practice of managing financial risks that arise due to mismatches between the assets and liabilities as part of an investment strategy in financial accounting.

<span class="mw-page-title-main">Cash flow forecasting</span>

Cash flow forecasting is the process of obtaining an estimate of a company's future cash levels, and its financial position more generally. A cash flow forecast is a key financial management tool, both for large corporates, and for smaller entrepreneurial businesses. The forecast is typically based on anticipated payments and receivables. Several forecasting methodologies are available.

<span class="mw-page-title-main">Strategic financial management</span> Study of finance of an enterprise

Strategic financial management is the study of finance with a long term view considering the strategic goals of the enterprise. Financial management is nowadays increasingly referred to as "Strategic Financial Management" so as to give it an increased frame of reference.

<span class="mw-page-title-main">Corporate finance</span> Framework for corporate funding, capital structure, and investments

Corporate finance is the area of finance that deals with the sources of funding, and the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value.

References

  1. "Howard & Opton, Business Finance and Financial Management". UpFina. Retrieved 2015-11-04.
  2. "Financial Management". Kaplan Financial.
  3. Financial Managers, Bureau of Labor Statistics
  4. Budget Analysts, Bureau of Labor Statistics
  5. "Definition of Financial Management System (FMS) - Gartner Finance Glossary". Gartner. Retrieved 2022-01-06.
  6. Jeremy Fabbri (2020). Should You Use Spreadsheets for Risk Management?

Further reading