Updated: Nov 22
Author: Barbora Bělová
Date of Publication: 15/03/2023
Financial management involves managing your money effectively to achieve your financial goals. Actually, it is important to have a strategy to achieve your financial goals. However, this strategy must be in line with the strategy of the entire company. In fact, the company's prosperity is based on well-functioning financial management and this can be achieved by linking all financial information, decisions and strategies.
Characteristics of financial management
Financial management and its knowledge are key for all participants in companies, directors, owners and managers. To clear things up, here is the definition of financial management. According to Bhalla (2014) financial management is a purpose-driven process that involves both artistic and scientific elements. In particular, it involves making key decisions regarding where to invest funds, how to finance those investments, and how to optimise these choices to achieve desired goals. This decision is made with the intention of maximising certain objectives through a strategic combination of financial planning and analysis.
Financial management involves managing money effectively to achieve financial goals. Here are some basic characteristics:
Financial management involves creating a plan for managing your money. This includes setting financial goals, creating a budget, and developing a financial strategy.
Budgeting is a key component of financial management. Specifically, it involves creating a plan for spending and saving money, and tracking your income and expenses.
Saving money is an essential characteristic of financial management. In particular, it is about setting aside a portion of your income for future expenses and emergencies.
Investing is another important characteristic of financial management. More precisely, it involves putting money into assets such as stocks, bonds, and real estate to generate income and increase wealth over time.
Managing debt effectively is a critical characteristic of financial management. In fact, it is about avoiding unnecessary debt, paying off debts as soon as possible, and using debt strategically to achieve financial goals.
Managing financial risks is about protecting against financial losses by purchasing insurance, creating an emergency fund, and diversifying investments.
Last but not least, financial control is an important aspect of financial management. This is because the financial control manager not only has to plan, organise, and secure funds but also needs to analyse and control the company's finances.
Methods and measurement in financial management
Financial management has to do with various measures and metrics to evaluate the financial performance of an individual or organisation. Here are some common measures used in financial management:
Profit and Loss (P&L)
This is a statement that shows the revenue, expenses, and net income of a business or individual over a period of time. Therefore, the P&L is used to determine the profitability of a business or individual.
Balance sheets indicate the assets, liabilities, and equity of a business or individual at a specific point in time. In particular, they are used to determine the financial position of a business or individual.
Cash flow statement
This is a financial statement that shows the inflows and outflows of cash for a business or individual over a period of time. Actually, the cash flow statement is used to determine the cash flow position of a business or individual.
Return on investment (ROI)
This is a measure that shows the return on an investment relative to the cost of the investment. Therefore, ROI is used to evaluate the profitability of an investment.
This is a measure that shows the amount of debt relative to equity in a business or individual. The debt-to-equity ratio is used to determine the level of financial risk of a business or individual.
Last, Gross margin shows the difference between the revenue and the cost of goods sold for a business. So, it determines the profitability of a business.
In conclusion, financial management is a crucial activity that helps individuals and organisations to manage their money effectively. By using various methods and techniques, financial management enables individuals and organisations to plan, budget, save, invest, manage debt, and mitigate risks. So, by doing so, they can achieve their financial goals and build a more secure future. What’s more, it is important to remember that financial management requires discipline, patience, and a long-term perspective. Thus, with the right approach and mindset, anyone can improve their financial management skills and achieve financial success.