Financial management definition 4 pillars common mistakes importance
Financial management is the set of practices and actions that, within a company, seek the analysis, planning and control of any and all financial activities. In this article we will provide you the definition of financial management.
Its importance is enormous for any business to be able not only to remain active but also to prosper and grow gradually.
Running a business is far from an easy task – and you know it very well. The daily challenges are enormous and worries are sometimes unavoidable.
Therefore, seeking efficiency in all processes is a constant. Within this reality, it is essential to have a financial management that is:
- and that gives peace of mind to business is essential.
More than maintaining, it is necessary to invest. After all, competition is increasing, customers are increasingly demanding. So, to stand out, you have to do more.
Today’s article addresses the concept of this practice. And also how it can occur more safely within companies.
Let’s cite the advantages that organizations have when this mission is successfully accomplished. And we’ll still show you how technology helps right now.
Stay with us. Good reading!
Understand what financial management is
Plan, analyze and control finances. Financial management involves practices, actions and routine. The aim is to ensure that this work is always done well within the companies.
In other words, these are procedures that aim to maximize the gains of any business. And this must be done regardless of your size and/or segment.
These practices involve investments, variable and fixed expenses. They also include profits, financing, loans and the company’s book value.
This is, of course, crucial to ensure good results all the time. But more than that.
It is only possible to establish the goals and objectives of a business when there is really efficient financial management.
Stipulating deadlines and analyzing whether the results are within or below expectations are also possible realities in such situations.
So please answer. Do you know how your company’s finances are going? Or better. Which sectors generate the most profit and expenses?
And which ones need assertive decision-making for a change of course? If you don’t have enough subsidies to answer a question, pay attention! A yellow light needs to be turned on.
The financial health of your business is very important. Do not neglect this task at any time. This can’t be a headache.
Therefore, it is vital to carry out close administrative management . An administration that takes care of all the details relevant to the business.
What are the main functions of financial management?
As we have shown, within the organizational process, financial management plays important roles in business strategy. In practice, it must perform functions that improve results and ensure the best use of resources.
We will highlight the main functions below. Follow up!
Financial planning and analysis
Every process starts with planning. This is because it establishes parameters and directions to follow. In the case of financial management, we can better understand this stage according to the definition made by Dr. José Eduardo Zdanowicz, author of the book “Financial Planning and Budget”:
“It is through the financial planning and budget that you can visualize the measures that must be carried out, as well as the expectations regarding the future of the company. Important decisions, when based on financial planning and control, have a great possibility of being effective and successful in the company.”
Financial planning follows the company’s strategic planning. That is, it should indicate how the resources should be used to achieve the goals set. That’s why Zdanowicz makes the association between financial planning and budgeting, because, in practice, everything will depend on the budget available.
All business directions must consider costs to scale what the financial impact will be, the prospects for return on investments and whether or not there are enough resources to sustain the company’s goals.
This is also why financial analysis is an indispensable part of this process. After all, it is necessary to have an exact idea of the company’s economic situation before putting together an action plan.
As you can see, planning, budgeting and analyzing finances are functions that must be carried out in a unified way. It is important to remember that they play a strategic role for the business.
Financial planning must contain:
- projection for the future;
- actions to be taken;
- costs and benefits as to what must be done;
- available and necessary resources for the action plan;
- standards to be followed;
- metrics for measuring results.
The importance of financial management for a company
By now you must have realized why you should carry out an organized and disciplined financial management. But it doesn’t hurt to reinforce and discuss a few more points. Is not it?
Especially because, the more efficient it is, the greater the results achieved and the quality of delivery. Managing finances well involves having a complete overview of how the company works today.
Knowing this, reduce unnecessary costs and reallocate them. No one better than the manager to know where they are needed right now.
Is your business today operating at a profit or at a loss? Do you know how to answer this and do you have numbers “on the tip of your tongue” to expose?
It doesn’t mean that having surplus cash makes a profit. And vice versa. Take a good look – and here is the central point of the advantages of correct financial management:
- this practice is essential for any type of decision to be taken in the company .
Know the amounts payable and receivable. Understand how the balance of financial resources is. These actions are decisive for honoring the commitments.
And to know what can be done to improve. Without this management of finances, it is not possible to take a step forward.
The company will always be afraid of making mistakes or making new commitments. How to walk assertively in the dark? Difficult, right?
After understand the definition of financial management now let read the four pillars of working of financial management.
4 pillars of how financial management should work within organizations
Concept, models, benefits… how about now we talk a little about the practice? About how financial management should occur within companies? Again, always important to reinforce.
It is necessary to respect the peculiarities of each business and also markets. However, there are rules and procedures that are general and basic. And that must be followed.
We separate some tips on how to set up this management within companies. Regardless of your size and also your field of activity, check out the actions:
1 – Plan yourself
It all starts with good planning. Financial management would obviously not be an exception to this rule.
Planning will give the guidelines and path of the business and must be directed towards some specific objective. For example, seeking to reduce operating costs in all areas – or in a specific one.
However, this goal needs to be both attainable and make sense for corporate reality.
After defining this, the next step is to list which strategies will be put into practice. If reducing costs is something that is sought, why not promote a digital transformation in the sector?
It is a way to, in the long run, reduce unnecessary expenses. As the last act of this plan, define the metrics that will be used.
They will serve to monitor the actions and their consequent results. Thus, it will be possible to know whether or not there is a need to promote changes.
They can occur in the goals, strategies or even in the chosen metrics.
2 – Make a budget
A budget needs to be in place when planning. That is to say, without budget planning, there will be no knowledge about the resources available for the business.
It will give a broad, clear view and ensure the identification of sectors and activities that are truly essential.
Still in the example above, the manager needs to invest in software to reduce costs in the sales sector .
However, you don’t need to put money in to buy new office furniture right now.
Therefore, the focus of the budget will be on making the work of the sales team more efficient . And, if that happens, you will have a bigger budget and will be able to better equip the office in a near period.
This is how a well-built budget works. It focuses on the most urgent need, by combating the problem, it creates conditions for the next task to be performed.
3 – Have the right tools
Much of the assertiveness in financial management involves using tools that really help employees and managers on a daily basis.
Software like ERP , for example, specially integrated into a sales system , makes a lot of sense for a company’s operations.
Controlling inventory, which is one of the most important actions, can be done through a sales force application, for example.
But, about technology, we will talk a little more later. It is important at this point to understand how your company’s processes work and map where they can be most efficient.
Ask yourself and evaluate: how much time do your employees spend doing robotic work, from filling out spreadsheets to filing documents?
Put the cost of each professional’s hours at the tip of the pencil and you’ll see what makes sense to be transformed.
4 – Review the results regularly
Last, but not least, is the constant analysis of the results obtained and the measurement of their impacts.
It’s a circle – and the PDCA cycle speaks volumes about that. It is an ongoing process that, by being frequently monitored, is always improving.
Use a system that has complete reports for each industry you want to analyze.
Which, with integrated tools as mentioned above, becomes an even more valuable and complete element of analysis.
Thus, there are many more subsidies to decide and adapt strategies if this is necessary.
The most common mistakes in financial management
When it comes to managing a company’s finances, some mistakes are common – and many of them greatly compromise the operations of a business.
Therefore, we have separated some failures that are quite common and that can be avoided within companies. Are they:
- Perform an absentee management of the company;
- Not knowing how employees work;
- Not analyzing the short, medium and long term performance of the business;
- Neglecting cash flow management;
- Not managing product inventory;
- Poorly managing working capital;
- Mixing company accounts with personal accounts;
- Poor organization of accounting and tax documents;
- Unprepared professionals in the financial sector;
- Lack of management software.
When this occurs, some consequences are inevitable, such as:
- lack of working capital in the company;
- error in calculating the sale price;
- excessive and unnecessary spending;
- products stopped in stock, resulting in losses;
- absence of fundamental information for budget planning;
- without control of what goes in and out, debts can increase;
- dissatisfaction of employees in the work environment and customers;
- weakened organizational culture , etc.
We hope that you have understood the definition of financial management along with other aspects.