Financial management refers to the systematic management, control, and allocation of financial assets of an enterprise. It is a vital role of business organization. It is the science and art of making best use of economic and human capital resources with the end purpose of increasing profits. This is usually achieved by maintaining and strengthening cash flows and funds flow and also minimising the risk of loss in case of unexpected financial disasters.
There are various techniques and methods that are applied in business finance management. Proper financial strategy is required to reap maximum benefits from the invested capital. There are two major perspectives in the field of business finance management namely the financial analyst and the financial officer. Both these positions work on the same budget, asset, working capital, operating, and financing models. The difference between the two is that the financial analyst makes financial decisions while the financial officer merely implements them.
The primary objective of any company is growth. Therefore, one of the primary functions of business finance is proper financial planning and forecasting. To ensure financial planning and forecasting, it is important to have proper financial management systems. Proper financial planning and forecasting to help to achieve the long term goals of the organization, such as customer satisfaction and market penetration. For a successful operation, the company needs to calculate the annual sales, the net income margin, the capacity to expand, and the number of years it will take to achieve its long term financial goals.
In addition to this, business finance must assist management in achieving short and long term financial goals. One of the main reasons for failure is inadequate short-term and long-term financial planning. It is very important to be able to calculate the potential profitability of any business before taking any action. The importance of forecasting is illustrated by the fact that forecasting results in the setting of the company’s short-term and long-term financial goals.
Businesses should not rely entirely on the use of quantitative methods for setting their goals and objectives. They should also use qualitative analysis in formulating business decisions. Various techniques such as economic, customer, competitive, environmental, and other qualitative analysis are applied by management in formulating their business decisions. Quantitative methods are usually applicable to businesses that have a limited scope and face certain constraints. However, these methods are not applicable if the business aims to achieve sustainable growth opportunities.
The objective of business finance is not only achieving profitability but also helping businesses to achieve long-term growth opportunities. A good way to achieve long-term growth opportunities is through identifying the sources of competition and overcoming them. A good example of this is found when a business has abundant natural resources but lacks an efficient means of marketing them. The company needs to overcome its natural disadvantages to succeed. One way of overcoming the competition is through the proper utilization of the natural resources. Good business planning can help companies overcome their disadvantages and become more profitable.
A successful business finance management system begins with the identification of the company’s assets. These include cash, accounts receivable, inventory, accounts payable, and raw materials. The inventory usually represents the largest portion of a company’s assets because it represents the physical and functional products that are in close proximity to the customer. It is also the reason why these assets account for the largest percentage of the companies profits. Taking all these into consideration, it is easy to see how these assets are essential in the success of every business.
Another aspect of business finance that is crucial to the success of every business is forecasting the short-term financial operations. Forecasting the short-term financial operations is made possible through the process of identifying the current assets, liabilities, and surplus. Once these items are determined, the business can then come up with a formula for predicting how these assets and liabilities will be used in the future. A good example of this process is the forecasting of the capital budget for a company. By properly understanding the importance of forecasting and using it properly, businesses can come up with solutions to many problems that may affect their growth and profitability.