What is financial management and why does it matter in your business

The importance of financial administrationa within a business lies in the fact that it allows smarter and better-founded decisions to be made, in such a way that its resources are taken care of and its permanence in the market is ensured. That is why it is essential to understand what it consists of and how to perform it correctly.

When the financial administration of a company is efficient —regardless of its size— it is possible to know its economic situation, identify its growth potential and more. So, if you still do not know all the opportunities that this crucial work offers, in this article we will explain all the details.

We start at 3,2,1… Take note! 🖋

First of all… what is financial management?

It is of little use for a business to generate millions of sales if it does not properly manage its money. This situation only causes financial problems that become unsustainable over time and put its continuity at risk.

To avoid this, it is necessary to resort to good practices. The Financial management is the discipline that is responsible for planning, organizing and controlling the monetary resources of the company, in order to ensure its profitability. and that generates benefits.

Benefits of proper financial management

Keeps finances in order.
Improves asset and liability management.
It specifies the need for new investments.
Determine the investment payback time.
Makes it easy to meet goals.
Analyze the opportunities and challenges that arise.
Identifies what resources are needed to maintain the operation.
Minimize uncertainty when making decisions.
It favors growth and the scope of financial stability.
It provides key information about the behavior of the company.
Recognizes the break-even point (moment when revenues cover fixed and variable expenses).

And to achieve this, it is basically guided by two economic guidelines:

Types of financial administration

Strategic financial management: is responsible for planning, management, performance control and analysis of the company’s risk position, especially the allocation and organization of capital.
Operational financial administration: its main function is to ensure financial liquidity, guaranteeing the good course of the operational transformation processes, according to a previously established plan.

8 objectives of financial management in companies

Although it is true that financial management provides competitive advantages such as those mentioned above, it is necessary to know that all these results are only obtained when clearly defined objectives are pursued.

In this context, the purposes that this activity seeks to achieve in the company are:

Provide information: generate useful, relevant and accurate data.
Manage risks: ensure that the company does not face undue pressure or risk.
Improve operational control: improve financial controls and workflow.
Maximize the value of the company: exploit areas that are most convenient.
Give peace of mind: keep the accounts in good condition and .
Plan: define what steps to take and what decisions to make in favor of growth.
Evaluate projects: ensure that projections and budgets are realistic and achievable.
Preserve performance: optimize the use of resources, savings, investments and financing.

If it is not defined in advance and on time, all the efforts made by the team would be misdirected and the chances of success would be low. Even if the company were to turn a profit, the situation would be the same; one is considered one of the main causes of business failure.

Fundamentals of financial management

Now, to assess how useful the information provided by financial management is and to be able to take action, it is also vital to understand what its principles are, that is, the bases that govern its reason for being.

In this sense, they are:

1. Investment decisions

Determine the total amount of goods needed by the company. And it also gives importance to disinvestment. That is, it raises the possibility that assets that cannot be economically justified may have to be reduced, eliminated, or replaced.

2. Financing

Decide what is the best way to inject money into the company and how to raise those necessary funds. It helps to understand the mechanics for short-term, making a long-term lease agreement, or negotiating a stock or bond sale.

3. Asset management

Once the assets are purchased and adequate financing is obtained, it is concerned with managing those assets in the most efficient manner possible. Much of the responsibility for managing fixed assets rests with the operating managers who employ those assets.

Together, they determine how best to deal with business risks and returns.

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Importance of financial management for business

Although we have already mentioned the advantages of managing money in business, it is important that we do not confuse it with the fact that it simply allows you to fulfill your obligations.

Knowing how to carry out the financial activities that keep a business alive (paying suppliers, payroll, taxes, etc.) is not the same as knowing how to manage money. For the former, it is enough to have theoretical and practical knowledge, while for the latter, more than one and financial intelligence is needed.

This is exactly what the financial administration is in charge of. Its importance lies in the fact that it allows:

Explore all available alternatives to obtain and maximize resources.
Manage resources in different instruments to diversify them.
Go beyond traditional schemes to obtain financing.
Develop an infrastructure that allows building sources of income generation.
Exploit the benefits that exist in the business financial system.
Identify the mistakes that are being made in financial matters.
Act proactively to grow funds. And leave behind the reactive mentality.
Make less expensive decisions that meet needs in less time.
Know the real situation of the business and based on it, potentiate it.
Focus on what is important, and not just what is urgent.
Have planning capacity in the short, medium and long term.
Develop financial scenarios based on the current state of the business.

Once this is understood, now the next step is to make it happen.

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8 financial management tips for businesses

As we mentioned, it can be very easy to confuse accounting responsibilities with those of financial management, so when performing the latter, it is key:

1. Understand the financial documentation

You don’t just have to read and balance figures, you also have to understand them. It is essential to keep in mind that money management decisions are based on feedback from reports, reports and all financial documents that are handled.

2. Design a financial plan

All the ones they want to achieve, because in the end those same ones will translate into profit margin goals and money. If there is no plan to evaluate, you will never know if the administration’s efforts are paying off.

3. Monitor the behavior of numbers

Once the objectives of the financial plan have been outlined, certain periods of time must be allocated for their evaluation. If they are forgotten, it will be impossible to detect in time the opportunities that favor the business, or in its case, the risks that endanger it.

4. Implement financial tools

Gone are the days when everything depended on people and manual labor. Currently, there is technology that complements the work of those who are in charge of managing the financial part of the company; This provides accurate information, security and relevant data to take control of money.

5. Separate personal accounts from business accounts

Especially in the entrepreneurial field, it is common for business owners not to separate their personal and business accounts. To optimize money, it is essential that the business has its own account, since only then will it be possible to accurately control income and expenses.

6. Manage inventory

Efficient stock control ensures you have the right amount of products, at the right time. This is so that the capital does not remain immobilized unnecessarily, and to avoid having more merchandise than necessary.

📒 Tip: If you need an inventory, we share this one so you can start organizing your stock more efficiently.

7. Have a cash reserve

It is known that the life of every business is full of moments of success and others, not so much. That is why before the times of glory, when everything goes perfectly, money must be taken care of. A business savings account with cash reserves is a great place to start.

8. Seek advice from an expert

Whether everything, little or nothing about the financial situation of the business is known, it is always a good idea to seek the help of an expert in the field. The professional guidance that an expert can provide also expands the horizons and scope of the business.

Example of good financial management

A clear example of how management is put into practice is the preliminary analysis of financial statements. This task is just one of the many that ensure the financial health of the company and it is possible to carry it out by combining two tools:

: determines the absolute and relative variation that an account has experienced within a particular period of time, and with this it is possible to visualize the behavior of the company today, compared to the previous period.
determines how much each of the accounts represents with respect to its total in a specific period of time. It allows to observe how representative they are in the financial statements and if they are properly distributed according to the operational and financial needs of the company.

Through both solutions, a complete panorama of the conditions in which the business is found is obtained, as well as information that facilitates effective decision-making.

Summary

In short, financial administration has the mission of guaranteeing the optimal use of economic resources within the company. So if until now you had not given it the importance it deserves, you are in time to take action. Here we already told you where to start. 🙌

And so that you do not forget what you have learned, we share a small summary: