Every company has various business units that help it function and grow. Of all these departments, it is probably finance that exists even before a company has started working. It is the finance people who decide if a venture is viable and how it can earn revenue to sustain itself. For such an important department, it is essential to have excellent management. That is why it is highly important to know what it is before looking at its roles.
Understanding Finance Management
Finance is a necessary and critical part of any organization. It is difficult for profit-making or other organizations to sustain themselves for long without proper finances. Apart from this reason, the efficient management of these financial resources is essential to be sustainable and viable in the long run.
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Financial management helps organizations to do so. This term refers to the effective and efficient planning, organizing, directing, and controlling the financial activities and processes of an organization. This includes fund procurement, allocation of financial resources, utilization of funds, etc., apart from various other functions.
Now that we know what is financial management, it is necessary to understand how important this function is for any organization. There are online finance courses that highlight the importance of financial management to businesses. Learn more about them here.
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Why Is Finance Management Important For Companies?
1. Financial Management Helps Businesses Succeed
Another problem that arises from not managing finance is bad planning and missing opportunities to improve profits. One can say with certainty that a lack of management of money will undoubtedly lead to businesses failing. Without experts in this subject, it is possible that business owners may overestimate revenues and plan for more expenses. They will be caught by surprise and be at a loss to know what to do.
2. Follow Rules And Manage Taxes
Helping companies to maintain their books and mitigating tax burden are essential functions of financial management. Maintaining proper accounts is very important for all firms. This will not only help to follow regulations but also make tax calculations very easy. Finance departments also help to know what taxes to be paid. They also help in finding legal ways to reduce a company’s tax burden.
3. Get Better Access To Finance
All companies need money to run businesses and to expand them. They must look at various sources for this valuable commodity. Finance managers help in finding suitable sources that will not be very expensive. They will also be able to advise business people about what methods to raise funds are most appropriate for their companies. These experts will also prepare business plans to convince lenders to finance that firm.
4. Control Business Costs
Every company spends money on its regular operations. Companies must meet certain essential fixed costs. Sound financial management will help to cut costs. Budgeting is one of their responsibilities, and this helps to plan and reduce expenses. By spending within available funds, it is possible to minimize unnecessary bank charges. Reasonable control of costs will provide for surpluses that can be invested wisely to earn more.
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5. Measure Your Success
Money is the benchmark used for a company’s success. When they earn more money, they are said to be more successful. But one would need strict financial management to improve earnings. Organizations also need these professionals to work out how much profits they have made and compare it with previous years. Financial experts also see how a company has performed vis-a-vis its competitors. Such information motivates everyone in a firm and makes them work harder.
6. Improve Weak Areas
Finance heads use analytics to know which areas in a business are bringing profits. They can give reports about how various departments in an organization are performing financially. It is also a function of financial management to assess what products are giving better profits. They can process this information for every activity of a business. Such analysis will help in improving weak areas and support profitable activities to perform better.
7. Optimizing Marketing Activities
Marketing is a vital activity for any firm because it helps bring in revenue. But it is also a department that spends a considerable amount of money. So, one must necessarily know what returns each campaign brings. If any advertising program is not earning much, it must be optimized or temporarily stopped. Finance managers provide accurate information about returns from marketing campaigns.
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8. Focus On Growth Areas
All companies must expand their activities to grow. But there must be concrete information about where it is most beneficial to invest to improve earnings. Finance departments can help identify such areas where spending money can bring in excellent returns. It may be possible that investing in new machinery will help to increase production and satisfy new market demands. This is a significant role of financial management in business.
9. Enhancing Staff Strength
Despite rapid automation of various processes in organizations, there is no way machines can replace humans. Devices also require people to program and operate them. This is why the human workforce is very crucial for any firm. But employing more people will need additional expenses. Financial management helps in finding out which positions are most profitable to fill. It will also enable companies to increase salaries to deserving employees.
10. Predict Risks And Avoid Them
The role of finance departments includes forecasting future events using analytics. It helps to know risks that can occur in the coming period. Comparing actual results with forecasted figures will also help to know if there is any area that needs to be taken care of. Companies can be aware of downturns in their financial position and take care to act against that. Finance managers also continue to study markets to know factors that are likely to affect a company’s position.
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As it supports companies in so many ways, this department is a very crucial and critical area. Taking into account the importance of financial management functions in organizations, there is always a steady demand for professionals with these skills. Today, it is possible for even non-finance professionals and businessmen to learn finance concepts through a certified financial analyst course.
What are the major roles of financial management?
- Financial Decisions and control
- Financial planning
- Capital management
- Allocation and utilization of financial resources
- Cash flow management
- Disposal of surplus
- Financial reporting
- Risk Management
Financial managers perform tasks that are specific to their organization. For example, healthcare financial managers must be aware of issues regarding healthcare finances, and similarly, government financial managers must be well versed in appropriations and budgeting processes. Above all, they must know the tax laws and regulations like the back of their hand!
Financial Decisions and Controls
A crucial role of financial managers is in making financial decisions and exercising control over finances in the organization. They make use of techniques like ratio analysis, financial forecasting, profit and loss analysis, etc. These are all tasks that help a firm understand how efficiently they are working and what activities will help them improve their earnings.
Ratio analysis helps understand a firm’s liquidity, revenues, and profits by studying its financial records. It helps to know how financially healthy an organization is. Financial forecasting helps an establishment know how strong their finances will be in the future. Various indicators like predicted sales volumes are used for finding this. A profit and loss analysis details a company’s earnings and expenses for a specific period which is usually a quarter or a year.
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Financial Planning
A crucial role of financial management is the planning of financial activities and resources in the organization. To this end, they use available data to understand the needs and priorities of the establishment as well as the overall economic situation and make plans and budgets for the same. This is an important task that helps maintain financial stability by balancing outflow and inflow of cash.
A vital role of a finance manager is to look at what resources a firm requires for a particular period. Planning helps to convince those who lend money that a company is capable of managing funds well and will use it judiciously. It also allows companies to tide over uncertainties as there will be enough funds allocated for that purpose. Such planning will ensure growth and expansion programs. Both short-term and long-term capital requirements are considered for this purpose.
Capital Management
As part of financial management functions, these officials must estimate the capital requirements of the organization from time to time, determine the capital structure and composition, and make the choice of source of funding for the capital needs. This ensures that a company has enough cash flow to meet its immediate and distant needs for smooth operation. Companies can complete day-to-day expenses and short-term financial commitments quickly.
The fundamental idea is to ensure that there is a good balance between a company’s assets and liabilities. This will ensure all commitments will be met without affecting regular functioning. By this action, it is possible to eliminate unwanted expenses and improve financial health. Small changes in operational procedures may help to increase earnings. This activity helps a company to work at maximum efficiency.
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Allocation and Utilization of Financial Resources
Financial management ensures that all financial resources of the organizations are used and invested effectively and efficiently so that the organization is profitable, sustainable, and viable in the long run. Companies are working in a highly competitive environment, and this makes it necessary for finance heads to ensure that available funds are used most beneficially. This activity probably answers the question of what is financial management ideally. One can read more about it here.
Funds are invested in both fixed and current assets. Fixed assets will include those whose value will depreciate over time. This results in an increase in returns on these investments as time passes. Current assets include working capital which is a short-term investment. So companies must ensure that inventories, cash, and book debts should not block funds excessively. Funds for these investments are sourced from profits earned earlier, selling company shares, or by availing loans.
Cash Flow Management
It is extremely important for organizations to have sufficient working capital and cash flow to meet their operational expenses and emergencies. Financial management tracks account payable and receivable to ensure there is the adequate cash flow available at all times. This is the role of financial management that is vital in all companies but especially crucial for small establishments as a shortage in cash flow can affect their functioning badly.
It has been assessed that a significant percentage of companies fail because of bad cash flow management. When expenses are not controlled, and they go beyond earnings, then there will be a cash shortage. Real estate development firms often face this problem as their daily outflow is very high. Unless they can sell all units before construction starts, there could be severe cash flow issues. Rapidly expanding businesses can also face cash flow shortages.
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Disposal of Surplus
The decisions on how the surplus or profits of the organizations is utilized are taken by the financial managers of the organizations. They decide if dividends should be distributed and how much, and the proportion of profits that must be retained and plowed back into the business. It is also paid to employees as a bonus for performing well.
Various factors like how a company continues to earn will influence this decision. Finance managers must also see if there will be a requirement of cash for expansion plans. Market prices of a company’s shares is another factor that will be considered before deciding on what must be done to excess funds.
Financial Reporting
Financial management maintains all necessary reports related to the finance of the organization and uses this as the database for forecasting and planning financial activities. Reporting is a very important function for all organizations. It is a way of knowing the firm’s financial position and performance. This is usually done periodically, either on a quarterly basis or annually. It tells how much money is there, where it came from and what expenses were incurred in that period.
Reporting is an essential role of a financial manager in business, and this is done using various statements. Statements are written records of a firm’s financial and business activities. These documents are used to conduct audits by governments, accounting firms, and company accountants. Important among them are the income statements, balance sheets, and cash flow statements. They are important documents that help everyone know how a company is performing financially.
Risk Management
Sound financial management prepares the organization to forecast risks, put in place mitigation plans as well as meet unforeseen risks and emergencies effectively. No company is safe from risks. There can be dangers from various sides. Market conditions can result in a sudden drop in sales. Government policies could increase tax or other burdens. Exchange rate fluctuations can affect import and export firms. Companies also face problems from internal issues like machine failures.
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While it is not possible to remove all risks, companies must strive to avoid what is possible. There must be steps to ensure that those threats don’t affect the company too severely for those risks that cannot be eliminated. Financial managers should have clear plans about how they can be handled. Risks must be identified, measured and action plans drawn up depending on how serious they are. Such plans must be shared with all stakeholders.
Enroll yourself in a short-term course in finance for working professionals and equip yourself with the skills required to efficiently manage the finances of your organization. Now that we have seen what the purpose of financial management is, it is worth seeing what qualities are needed for becoming a good finance manager.
Skills Needed By Financial Managers
Preparing Financial Statements
This is a fundamental skill required for performing financial management roles perfectly. They must prepare various reports that are consumed by different people inside and outside the company. These statements must reflect the financial position of a company and will be helpful for multiple purposes. They are useful when approaching financial institutions for funding. Preparing and submitting such statements is also necessary as per rules. It is essential for financial managers to know how to prepare these reports with proper structure and information.
Understanding Accounting Types
Maintaining accounts of transactions done by a company is also one of the different functions of financial management. There are two ways to do this. One can do accrual or cash accounting. Different transactions are done in different methods, and this makes it essential for these professionals to know both methods. Knowing the difference between these is essential for cash flow management, collecting receivables, and ensuring payments to various vendors. This is a hard skill specific to finance and accounting personnel.
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Budget Preparation
This is a very critical task that helps companies ensure there is enough cash for short-term commitments and long-term expenses. This procedure also helps in ensuring that objectives are achieved. It is a way of making sure there is enough money for all activities that will help in reaching set goals. It is not just enough to prepare a budget for a company. Financial managers must be capable of checking each department’s budgets and arranging for resources required by them while staying within the company’s spending limits.
Analyzing Variation
There can always be variation between planned and achieved objectives. This can be in sales, profits, expenses, and in completing various internal tasks. Financial managers must be skilled in analyzing such deviations and find why they happened. They must be able to see what impact they will have on a company’s total performance and profitability. There can be both positive and negative variations, and it is essential to study both. Experts in finance should be able to connect these deviations with events that could have caused them.
Management Skills
As financial heads, they must be able to manage their departments well. This will involve managing a team of finance and accounting personnel. These managers must ensure that all of them complete their jobs well. As this is a department that is crucial for the efficient functioning of a company, it is essential that this team is managed well for generating up-to-date information. As financial managers must perform multiple tasks simultaneously, they must be able to manage them well. This will help them complete jobs as per their priority.
Business Acumen
Financial managers don’t just deal with money. They are responsible for ensuring that business interests are maintained while ensuring proper management of finance. Every action taken by them will impact the business. To ensure making correct decisions, it is necessary to have excellent knowledge of how a company functions. They must also know about industry procedures and market conditions. This means that they must know the business and its mechanisms as much as its owners. A deep interest in that industry will help financial managers function in a better way.
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Skills To Innovate
Most will not probably associate innovative thinking with finance. Many people, even those at a lower level in the finance department, consider it a routine job that doesn’t require any creativity. However, that is far from true. Increasing productivity will require a lot of innovative thinking, which is part of a financial manager’s job. A primary purpose of financial management is to analyze existing and past data to find patterns that will help in future activities. This requires a lot of creative thinking.
Communication Skills
Financial managers must deal with a lot of people both inside and outside their company. They must do a considerable amount of written and oral communication as part of their job. Developing excellent communication capabilities help in putting across funding requests to shareholders and financial institutions. These persons must also be able to convey new methods of cost-cutting to employees convincingly. They are also tasked with explaining company financial results to stakeholders. It is also necessary to put across complex financial equations in a simple manner.
Self Motivation
Working as a finance manager will force one to face situations that can be highly distressing. They understand a company’s position when it is in trouble and must find solutions to come out of it without getting demotivated. There are also occasions when they see their planning go awry and adverse results emerge. Sometimes even the most accurate investment plans can get derailed. Monitoring various aspects like loans, expenses, receivables, and tax burdens can be tiring at times. These professionals must be able to motivate themselves and get back on track immediately.
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Being A Team Player
It is not possible to perform a financial management role completely by a single person. Every financial manager needs a team to complete his or her work. This means that these professionals must be team players. While they are ultimately responsible for completing their tasks successfully, they must depend on others to perform them. This makes it essential to carry a team together and motivate them to give their best. They must develop a team that can be trusted completely to fulfill all duties perfectly.
Problem-Solving Skills
If there is one department that everyone turns to when there is a problem, it is the finance department. This is because most issues happen because of lack of funds or non-receipt of receivables. Roles of a financial manager include arranging money for all needs. The person must solve cash shortage issues, and this is not easy. This is why these professionals must possess excellent problem-solving qualities. They must also be skilled at prioritizing various needs and attending to them accordingly.
Analytical Skills
Financial analytics is being used increasingly by businesses. It is a process where existing or old data is used to solve current problems. Analyzing operations in a company can lead to reducing costs. This process is also used to predict market conditions that will help to know if there is going to be a low season where revenues will be less. Analytics helps in planning investments perfectly. One can also find which products and market segments are giving more returns. This helps to optimize marketing activities and use funds to get better returns.
Skills for Right and Left Hemisphere on Blackboard
Ease Of Using Technology
Modern technology is finding increasing use in businesses. As new developments happen, companies make them part of their functioning to save time and human efforts. Finance is not different in this. There are various tools that will help finance managers perform their duties well. This is especially true when it comes to forecasting market conditions and revenues. Software packages are allowing many companies to carry out accounting work with ease. They also make it easy to maintain records properly. Financial managers must be familiar with them.
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A financial management online certification is a prerequisite for most jobs in the financial industry, but what if you don’t possess one and want to work in this domain? Whilst it is more grueling for someone with a non-finance degree to secure a job in finance, there is still hope.
Types of Financial Managers
Controllers
Controllers facilitate the preparation of financial statements that summarize the organization’s financial position, be it making financial reports, analyzing income and expenses, structuring the balance sheet, etc.
Credit Managers
Somebody needs to oversee the organization’s credit business, and this comes under the responsibility of a credit manager. Credit managers monitor the collection of due accounts, foresee credit ceilings, and set the credit-rating criteria, etc.
Insurance Managers
Insurance managers oversee losses and shortcomings of the organization and how best the losses can be reimbursed through insurance policies. Their role is most important during times of risk or when costs are imposed by a lawsuit against a company.
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Treasurers / Finance Officers
Treasurers, also known as finance officers, oversee fund investment of the organization and make sure the budget meets the organizational goals. They further develop plans to raise capital.
Cash Managers
Cash managers abide by the annual budget that is initially made and keep track of the cash flow in and out of the organization’s business and investments.
Risk Managers
Risk managers make sure that the company is never exposed to financial uncertainty. On the off chance that the organization faces risks or financial loss, it is the risk manager’s responsibility to develop strategies to control the financial risk.
Every employer wants smart, committed, and highly motivated employees who can do their jobs well. A financial management online certification imparts skills such as financial modeling and analysis but may not do much to provide other skills required for success in any profession, such as communication, time management, and problem-solving.
Skills You Can Develop as a Finance Manager
Here are the four best ways to learn financial management online and demonstrate to potential employers that you possess the skills they desire in their employees, as well as the passion necessary for a successful career in finance.
Learn the Lingo
If you are interested in building a career in finance and do not want to undertake a financial management course from college or university, you have got to learn the financial language. If you don’t understand the difference between NPV and DCF or equity and dividend, consider learning the financial lingo and concepts by browsing the extensive dictionary of financial terms.
Round off Your Education
What if you have graduated with a degree in a subject other than finance? You can always redress the situation by taking relevant financial management courses with an emphasis on finance or business at the undergraduate or postgraduate level.
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Enroll in Financial Boot Camp
Intensive courses can teach you valuable financial skills that are essential for building a successful career in finance, such as advanced spreadsheet techniques and financial modeling. These crash financial management courses have the advantage of not requiring long-term commitment since they are typically conducted over the course of a few days. One drawback is that, due to these crash course programs, you may need to be already familiar with the basic concepts of financial management to yield the maximum benefits.
Expand Your Digital Finance Knowledge Base
Relevant knowledge cannot just be obtained through a college or university degree. There are plenty of sources available through which you can deepen your digital financial knowledge, such as local libraries or online financial management courses. These resources may be free or available on a paid basis from several online course providers. Being self-taught in a difficult domain like finance demonstrates a number of desirable attributes, such as initiative, passion, and drive.
Latest Trends In Financial Management
Like other functions, financial management is also going through transformations. As companies become global and technology become used, increasingly new trends in this job are emerging. Financial managers must be aware of them and come to terms with changes quickly.
Managing Skill Shortage
As there is increased use of modern technology, there is also a shortage of people who are skilled to use them effectively. With data being the new hero in most businesses, finance managers must look at hiring people who are adept at data analytics. They must hire people skilled at using past and existing information to provide valuable insights. The use of automation is also a trend to look for and ensure skilled people to properly use this technology are available.
Making Decision-Ready Data Available
This is another trend that is fast spreading in many businesses. Unlike conventional methods of using data to arrive at an accurate result, it is now more popular to use data that can support making decisions immediately. This means that a larger volume of information must be analyzed. Decentralizing control of data will also help in managing more information and getting insights to make decisions faster. There is also a heightened focus on data quality improvement. Moving to multiple sources of data is also helping in better decision-making.
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Creating On-Demand Reports
With advanced technology, it is possible to make reports available at any time. There is no need to wait for them to be prepared manually. People can view reports on a real-time basis. This is allowing stakeholders to access them whenever they want. Finance managers must see what technology must be used to ensure that reports are available whenever concerned persons want to see them. AI and ML help to prepare more advanced reports. It is also possible to deliver more relevant insights using analytics and data visualization tools.
Better Supplier Collaboration
As companies go global and competition becomes tougher, it is necessary for them to look at all possible avenues to keep their business edge. This is possible by ensuring customer satisfaction by prompt order fulfillment. Another important way to keep buyers close is to offer competitive prices. Both these are possible only when firms can ensure a smooth supply of raw materials at low prices. There must be an excellent collaboration with suppliers for this. Finance managers can play a highly proactive role in mitigating supplier risk. Such close cooperation also helps in identifying acquisitions for vertical integration.
Controlling Cost To Improve Profits
For several years now, cost increase has far outpaced revenue growth. This has been hurting businesses by decreasing profits a great deal. This is partly because nobody has bothered to give much importance to analyzing the breakdown of costs. With conditions getting worse, it is time for finance managers to look at ways to reduce costs. It will be their duty to compare their costs with peers and find where they are spending more. Companies will start shelving unviable projects and concentrate on activities giving better returns.
Increasing Remote Accounting Work
One good thing that has resulted from the Covid-19 situation is that remote working is almost becoming normal in many firms. This is especially true in accounting firms. With the easy availability of technology, it is now possible for accountants to sit anywhere and provide excellent service to clients. Finance managers must make sure that adequate cybersecurity measures are put in place to ensure no data leak occurs. As most aspects of accounting are getting digitized, it is going to be easier working from anywhere.
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Cloud-Based Accounting
This is another trend that is getting very popular. As cloud services become more secure and safe, more firms are willing to adopt this method. Cloud accounting is a technology that can further help remote working. A big advantage of this method of accounting is that companies need not invest in costly hardware or software. There are no license fees to pay. Moreover, cloud service enterprises are more capable of handling failures and quickly restoring services. This service is also scalable as per requirement.
Modernizing To Include Digital Payments
The move to digital payments is fast increasing everywhere. Even many small towns and villages are adopting these methods. This will put pressure on companies to modernize systems to accept such payments and ensure they are accounted for properly. This trend has gained momentum with an increase in online sales during the present pandemic situation. Unless companies are ready to use this method, they may be left out as competitors move forward.
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Adopting Financial Tools
Financial managers must prepare themselves to adopt modern tools that will do their jobs easily. It is not just accounting software that can make their work easy. There are other tools to help them work more efficiently while saving a lot of time. Expense tracking software is very helpful in keeping spending on track. Budgeting tools help these professionals in controlling cash flow and ensuring no surprises when payments must be made. Payroll management tools are very helpful in making a cumbersome process easy. Financial managers must keep an eye on new advances that can make their jobs easy.
The Bottom Line
Some non-finance degrees are certainly in demand in the industry for performing specific tasks like physics and mathematics for structured products, derivatives, quantitative trading, etc. However, for the vast majority of non-finance degree holders, securing a job in the finance sector is likely to pose a significant challenge. This is so because thousands of positions were eliminated by the bank and financial institutions after the global recession of 2008. However, using a combination of the aforementioned tips and a digital financial management online certification, you can improve your chances of launching a successful career in finance.
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