Role of Financial Management in Business

Money, money and money – it is the lifeblood of business and finance can be considered as the nerve center of business. It is no doubt the organization’s financial management creates an indelible mark to determine the ultimate success of the business. The soaring demand for finance professionals has given rise to a whole host of online courses in finance and various certifications.

For ages now, finance has enjoyed its primary role in the general management of the organization and here are the key roles of financial management:

1. Accounting and Bookkeeping

It is very important to measure, identify and record all the financial information of the organization. What goes in, what comes out? Financial management comprises of an effective accounting system that provides the overall financial picture of the organization. On the other hand, there is bookkeeping that records the day-to-day transaction of the business and lies at the foundation of the accounting system.

Also Read: Role & Importance of Financial Management in a Business Organization

2. Reporting

There are several stakeholders that rely on the company’s financial report to make key decisions. For example, shareholders of the business are shared with frequent reports of the financial progress of the business. So, are the stockholders who rely on reports of data forecasting and budgeting when determining to buy and sell. In all cases, accurate data from the financial report is very important to make key decisions.

3. Payables and Receivables

Managing the cash flow of business – what you owe to your suppliers and what do your customers owe you? It is important to maintain a clear track record of this so that you can stay liquid with the right amount of cash on hand at all times.

4. Investment Opportunities

Finance gives you the power to invest in the right opportunities at the right time. Only by considering the financial health of the business and determining its ability to invest, the company can leverage on the right opportunities. Whether you want to invest in an acquisition or new product, it is critical to carefully inspect the different aspects of financial management of the business to make a decision.

Also Read: The Role of Financial Management in an Organization

5. Risk

Minimal risk with maximum profit is the goal of any business. A healthy financial management system is a prerequisite to minimize unforeseen risks and counteract liabilities. An effective finance system should include adequate insurance for important elements of the organization, budgeting for working capital, controlling debt and maximizing operational flexibility if the business experiences cash flow problems.

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Financial risk management centers around identifying the potential risks, prioritizing them, and building strategies to mitigate them. Any circumstance or event that can potentially cause a financial risk to a company is termed as a risk.

Also Read: What Are the Most Popular Careers in Financial Management?

The Application of Financial Risk Management Process

With the financial market being extremely volatile, financial risk management is an ongoing process. The first step even before the management process begins, is to identify the financial objectives of the company very clearly, as these goals will be the guiding path for the various processes.

Prioritize the Financial Risk

Broadly, financial risks are categorized into six sections:

• Market Risk – It is a risk that arises from the uncertainties associated with the financial market.
• Credit Risk – This is a risk that occurs from not being able to recover the credit that was lent out to an entity.
• Liquidity Risk – It occurs when a company is unable to meet its funding needs.
• Operational Risk- This is associated with mistakes made by personnel (fraud or misdemeanor) or error in the systems.
• Interest rate Risk- It arises from the drastic change in the interest rate especially a sudden deflation that might result in financial losses.
• Foreign Exchange Risk – This risk occurs from the uncertain movements in the foreign market.

Identifying different types of risk will make it easier for organizations to make a detailed assessment and analysis of risks that it is dealing with and rank them according to their gravity and potential effect.

• Determining Risk Tolerance

There should be a determined level of exposure to risk that an organization is willing or tolerate. Setting this level will allow it to grow in order to focus on value creation.

• Formulate Risk Management Strategies

The type of risk management strategy depends on the type of risk a company is facing, and available resources to implement specific strategies. For instance, in case of liquidity risk, the company would need to identify the period of low cash inflow by forecasting techniques and plan the cash budget around them.

• Integrating the Strategies

The planned strategies must be implemented and enforced in a manner that they don’t affect the policies established beforehand. This is the stage where planned actions are converted into scalable actions.

• Monitor and Modify

Once risk management strategies are implemented they should be closely monitored to track the progress and ascertain their effectiveness. This will allow managers to make the necessary modifications and control the risks.

Integrating a staunch financial risk management process has become critical for companies to sustain in this highly precarious and evolving marketplace. This is one of the reasons that the demand for risk management professionals is booming. There are plenty of companies that are providing finance and risk management course training to their managers in order to strengthen their financial portfolio. Managers can enroll in risk management training programs and obtain a professional certification to take their career to the next level.

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