In any organization, financial management is the most important function. Owners and business managers, in particular, shoulder the responsibility of being mindful of management decisions on cash flow and profits. The importance of financial management is rooted in the fact that it determines the growth and success of a business.
Whether you own your business or work for someone else, managing financial resources should be your priority. Let’s see how we can utilize and manage financial resources for optimum utilization and profitability.
Unfolding The Meaning Of Financial Management
To explain the importance of financial management, we need to understand its meaning first. Financial management involves planning, organizing, directing and controlling financial activities in an organization. The process also helps apply management principles to financial assets or resources. The practice of managing an organization’s finances allows the business to comply with regulations and be successful in its field. The process entails high-level planning and proper execution.
Let’s look at its various types to understand the importance of financial management in businesses:
- Strategic, where you focus on long-term success. You make financial decisions based on what you want to achieve in the future. It may involve tolerating small losses and rethinking your strategy around them. Such trade-offs are inevitable and should be navigated if you want to prioritize the long-term financial health of the organization.
- Tactical, where you make financial decisions for short-term positioning. Your primary motivation is to take advantage of constantly evolving market conditions and respond appropriately. This helps in maximizing gains and minimizing losses.
Therefore, the importance of financial management lies in how you strategize, plan, organize and utilize your resources, in addition to responding to situations.
The Importance Of Financial Management In Modern Business
The most important function of financial management is to allocate and utilize resources efficiently. However, there are various types of financial decisions that inform an organization’s strategy. Financial managers and leaders bear the onus of controlling and dedicating finances. Here’s why managing finances is a core component of any modern business:
- Helps an organization plan its finances and related resources better
- Increases the overall value of an organization, which further improves its competitive advantage in the market as well as its brand image
- Provides economic stability. The better a business runs, the more benefits employees can enjoy
- Assists in making critical financial decisions such as investments, acquisitions and mergers, among others
- Informs an organization how to best utilize funds as well as plan for potential risks
In short, the importance of financial management in modern businesses is rooted in the fact that it helps businesses maximize their wealth and plan better for the future.
Why Managers Need To Understand The Importance Of Financial Management
In any business, the finance department, especially managers and team leaders, make financial decisions that can change the course of an organization. This department is instrumental in fund procurement, allocation of financial resources and utilization of funds, among others. Here are various other functions that explain the importance of financial management across industries:
1. Calculating Capital Required
Managers calculate the number of funds needed by a business to run successfully. This should be in alignment with the policies regarding profits and expenses. Decisions should be made in such a way that firms maximize earning capacity in the future.
2. Allocation Of Profits
If a business performs well and earns profits, it’s the responsibility of financial managers to use or allocate them effectively. It may involve retaining part of profits to innovate or expand; otherwise, the profits can be used to provide dividends to shareholders.
3. Effective Money Management
The most important function of financial management is utilizing the firm’s money. The money is necessary to decide salaries, bills and purchase of materials or equipment. It’s also used to maintain stock and meet liabilities.
When done right, financial management leads to visible progress. Therefore, managers need to think critically and make smart decisions.
Making Smart Decisions With Harappa
It can be said that the finance department has a central role in ensuring that an organization heads in the right direction. However, proper planning and decision-making lie at the heart of financial management. If you want to improve your problem-solving and decision-making capacities, try out Harappa’s Making Decisions course. The Good Decision Process framework, in particular, will teach you how to arrive at smart decisions by analyzing situations properly. Start your free trial and see the difference for yourself!
Explore Harappa Diaries to learn more about topics such as What Is Financial Management, Financial Management Objectives, Career Management and Project Management Process to classify problems and solve them efficiently.