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What is Financial Management? Objectives, Scope & Importance

24th Jun, 2024
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    What is Financial Management? Objectives, Scope & Importance

    Having a sound and sustainable financial condition is imperative to start a business. Finances create the framework of an economic establishment. An amount of money and effective financial planning is necessary to ensure a business's longevity. If a company has maintained solid financial management throughout its tenure, it is beneficial even at the time of dissolution.

    Every company has a sum of funds to manage and specific procedures to balance the same. Thus, a company must also have a system to examine the business's financial reports in its runtime. In addition, many online training courses provide a clear understanding of financial management. Nevertheless, to put it simply, a company that manages its finances expertly sees growth and development. In comparison, a company with poor financial management indulges in questionable activities and suffers losses. In this article, we will learn more about what is financial management, its scope, objectives, and importance for any business. 

    What is Financial Management?

    Financial Experts Guthman and Dougal define financial management as "Financial Management is the procedure concerned with planning, raising, controlling, and administering the funds used in the business." 

    The most important aspect of the term financial management is to fabricate a system that increases the profitability and the scale of the business organization and achieves short-term goals. Generally, it is the responsibility of the Chief Financial Officer or the Vice President of finance to frame specific data that indicates how and where to invest and generate the company's funds. To define financial management is to understand that it consists of liquidity, profitability, and cash revenue procedures.

    In other words, financial management is a business solution that invests a company's financial capital to generate a higher return on investment (ROI). The role of experts working under the financial management department is to map out the transactions of an organization, make plans to control it, and create procedures to maximize scalability. These professionals also monitor the original investment by the founder, debt financing, venture funding, public issue, or other available financial resources. With the help of all this data, financial management professionals of a business provide real-time financial fluidity. At the same time, they also keep track of day-to-day transactions for a smooth period-end closing of books. 

    Types of Financial Management

    Financial management consists of various types of management processes that ensure effective handling of financial activities within an organization. Key types include: 

    1. Strategic Financial Management: Focuses on long-term financial planning, aligning financial goals with those of the organizations. 
    2. Tactical Financial Management: Deals with short-term financial operations, such as cash flow management and working capital optimization. 
    3. Operational Financial Management: Involves day-to-day financial activities, including budgeting, forecasting, and financial reporting. 
    4. Compliance Financial Management: Ensures adherence to regulatory requirements, accounting standards, and financial policies, providing protection against any legal and financial risks.

    4 Phases of the Financial Management Cycle

    The financial management cycle is crucial for ensuring the efficient and effective use of financial resources within an organization. It consists of four key phases: planning and budgeting, resource allocation, operations and monitoring, and evaluation and reporting. Each phase plays an important role in maintaining financial stability and achieving organizational goals. 

    1. Planning and Budgeting: This initial phase involves setting financial goals and developing a comprehensive plan to achieve them. It includes forecasting revenues, estimating expenses, and creating a budget that aligns with the strategic objectives of an organization. 
    2. Resource Allocation: Once the budget is established, the next phase involves distributing resources according to the priorities outlined in the plan. This includes allocating funds to various departments, projects, or activities based on their importance and potential return on investment.   
    3. Operations and Monitoring: This phase focuses on the implementation of the financial plan and the day-to-day management of resources. It involves tracking expenditures, managing cash flow, and ensuring compliance with financial policies and procedures. 
    4. Evaluation and Reporting: The final phase involves assessing the financial performance of the organization and reporting the results to stakeholders. This includes analyzing financial statements, comparing actual performance against the budget, and identifying areas for improvement.

      By adhering to these four phases, organizations can achieve financial stability, optimize resource use, and ensure long-term success.

    Scope of Financial Management

    After understanding what financial management is, we'll now understand the different scope of financial management. 

    1. Capital Budgeting

    The company's financial management executives are responsible for making predictions regarding all the business transactions and costs of operations. Based on this estimate, they generate the probable estimate of fixed capital and working capital required by the company in a particular period. Moreover, the financial professionals also have to make projections for any additional funds the company may receive from investors. Accordingly, they create a budget for the allocation of those funds.  

    2. Capital Structure

    After projecting the financial budget, the financial management experts must formulate a plan for structuring this capital. First, they have to control the transactions and divide the available money into different parts, such as the owner's risk capital, borrowed capital, and short-term and long-term debt-equity ratio. Subsequently, the executives also have to consider various financial components like the cost of assembling the capital from investors and other external sources and the amount of time for which this capital will be utilized.

    3. Financial Decision

    Financial decisions include all sorts of choices regarding sources to generate funds, investment decisions, and cash flow management. The business can raise funds from different sources like investors, shareholders, banks, public deposits, and other financial lenders. The financial management department scrutinizes all these sources and chooses the source with maximum profit and minimum liability. In addition to generating funds, financial professionals also make plans for wise investment of these funds to improve the company's return on investment. They carry out capital budgeting through opportunity cost analysis and make investments while ensuring the business's safety, liquidity, and profitability. 

    4. Working Capital Management

    Working capital management is an important element of financial management. It requires three primary tasks to maintain a solid financial position for the company:

    First, financial executives record the company's assets and liabilities to ascertain the cash flow. This cash flow is used to cover short-term operational costs and short-term liabilities.

    The finance department scans different ratios to manage the working capital. These include the working capital ratio, the collection ratio, and the inventory ratio. The results obtained after the study help professionals carry out smooth operations in the business.

    Proper working capital management enables cash flow and revenue maintenance, allowing the organization to utilize its resources in profitable directions.  

    5. Dividend Decision

    A company has two options: pay dividends to shareholders or hold on to the profits. Financial management meaning focuses on the decision between these two options that will support the company's growth. The main aim of a financial manager is to optimize the shareholder's wealth as it works in the company's goodwill. The dividend decision is the essential scope of financial management. Dividends are payouts to shareholders and are calculated using Earning Per Share. The distributed amount is directly proportional to the shareholder's favor and the company's right set of investment conditions.  

    6. Profit management

    The financial management has to take steps to distribute the company's revenues and profits appropriately. The company has various debatable requirements, and the funds must be assembled according to priorities and returns. Sometimes, companies keep aside some funds as a reserve. This is taken from the business's earnings. In addition, some amount of funds is either pulled out or reinvested. The financial department's responsibility is to draw out the strengths and shortcomings of different sources for using the company's profits and earnings before coming to a conclusion.

    Objectives of Financial Management

    1. Assessing Capital Needs

    Financial professionals' duties entail them to get a measure of certain attributes. These attributes include the cost of current fixed assets, the cost of promotions, the requirement, and measure of buffer capital, long-term expenses, and human resource operations. As a result, organizations that constantly develop in the financial domain have predefined their short-term and long-term finances and conduct their business according to these estimates.  

    2. Capital Structure

    Suppose a company has a solid capital structure. In that case, it means that there is sustainable groundwork for financial decision-making, like projections of debt-equity ratio in the short-term and long-term.  

    3. Business Survival

    According to the exceptionally renowned scientist Charles Darwin, the phrase 'survival of the fittest' warrants adapting to one's surroundings to persist through life. The same goes for business decisions. A company endures and abides by market conditions with the help of secure financial management.  

    4. Balanced Structure

    Maintaining a balance is crucial to keep running smoothly under any circumstances. When pertaining to business, the role of financial executives is to ensure this structure by fabricating a plausible capital strategy. This is possible after considering all capital sources and assessing the business's liquidity, current economic conditions, and financial stability.  

    5. Effective Financial Policies

    Apart from making sound financial decisions, it is also essential for the funds' manager to create profitable financial policies that administer cash flow and lending and borrowing procedures.  

    6. Resource Optimization

    The best financial management executives have the skill and efficiency to use all obtainable financial resources and maximize their ratio. This results in little expense and an exponential rise in cash flow to produce a greater return on investment.  

    7. Profit Maximization

    Profit maximization is probably one of financial management's most important and tricky attributes. The company has to frame means to generate profits in the short-term and long-term. As a result, a financial manager has to focus more on profit optimization and ensure that all business operations' actions are sustainable and correct.  

    8. Proper Mobilization

    Mobilizing profits is as critical as maximizing them. One does not simply spend all their earnings without creating separate criteria for savings. In a business, the financial management department has to assess and project the allocation and application of available funds. This is achieved through investment in shares, new products, or acquiring a portion of small companies. However, there are various factors to evaluate before coming to these decisions.  

    9. High Efficiency

    The meaning and definition of financial management entail the creation of a stable work relationship with other company departments. It tries to improve performance by appropriate allocation of funds to different departments. This distribution is carried out considering the resources and effort required to amplify the company's efficiency.  

    10. Reduce Risks

    Along with maintaining the performance, it is also necessary to minimize the risks. Risks often present themselves in unforeseen circumstances or unexpected market conditions. Financial managers need to have a foolproof plan against such situations. In addition, they must calculate potentially risky situations beforehand with the help of professionals and try to steer clear of those.  

    Functions of Financial Management

    1. Financial Planning and Forecasting 

    For social and non-profit organizations, the ultimate goal of running a business is the greater good of society. But most companies have the objective of getting more return on investment. These profits act as a buffer between the current financial status of the company and its future standing. An appropriate allocation of funds enables the financial management to plan and forecast the company's future. It allows them to make decisions regarding the generated profits, whether an organization will benefit from pulling out the funds and procuring assets or reinvesting the profits in the company and improving marketing strategies.  

    2. Cash Management 

    The financial department is in control of all the cash flow operations. A company needs cash for several reasons, such as paying salaries, electricity bills, property bills, purchasing goods, and maintaining storage space. 

    3. Estimating Capital Expenses 

    The financial executive must devise projections for the capital needed to run daily operations. These projections include cost estimates, profits, future expenses, and a window for plausible losses. The capital expenses are calculated so that the company's revenue grows uninterruptedly.  

    4. Determining Capital Structure 

    After creating the framework for capital expenses, the financial management creates a capital structure. The capital structure portrays the debt analysis in the short-term and long-term future. Therefore, it is directly proportional to the available financial resources and the potential procurement of funds.  

    5. Procurement of Funds 

    The following function of financial management is to devise strategies to procure funds for the organization. A business needs credibility in the market to ensure stable cash fluidity. Thus, a company procures funds with the help of equity or debt financing.  

    6. Investment of Funds 

    Once the organization has acquired funds, it needs to allocate them to efficient businesses that help grow the business and give profitable returns with a window for safety.  

    7. Surplus Disposal 

    Every company reaches a point where it has a surplus amount of funds after the allocation and smooth operation. Financial management is responsible for strategically taking care of the earned and capital surplus.

    Importance of Financial Management

    1. Helps organizations in financial planning

    To understand what financial management is and examples of financial management, you must know that financial planning is a crucial part of an integrated and sustainable organization because it assists in branding the company among competitors. In addition, financial management helps the company to ascertain fund requirements and decides the necessary steps to meet those requirements.  

    2. Assists in acquiring funds from different sources

    Another important role of financial management is to understand available sources and acquire funds for the business. This acquisition must be made keeping in mind the cost and liabilities.  

    3. Helps in investing an appropriate amount of fund

    The very definition of financial management entails managing and allocating available finances. The proper functioning of the finance department boosts the growth and efficiency of the organization. When the funds are utilized in a precise manner, the financial management can work toward holding the cost of capital and amplifying the company's worth. This will ultimately solidify the financial standing of the organization.  

    4. Increases organizational efficiency

    Financial management focuses on establishing a firm position for the company in the market. It achieves this through a framework for increasing the investors' and shareholders' wealth. The main objective of an organization is to perform well and optimize profits while stumping up the economy.  

    5. Reduces delayed production

    Production delays are the root cause of poor financial management. It causes inefficiency in every department. Secure financial planning monitors production timelines and deadlines and tries to reduce production delays.  

    6. Financial costs planning

    This involves projections regarding the company's financial requirements to meet its short-term and long-term objectives. Financial management executives provide a vision for daily operations and enable planning for cost reduction and profit maximization.  

    7. Provides economic stability

    Maintaining economic stability is a prerequisite for an organization to achieve constant growth. Sound financial resources will help an organization expand its horizons and thrive in the business. To achieve financial stability, it is important to have efficient financial management in place.  

    8. Financial decisions making

    Financial professionals assist the senior professionals in the company in forming rules and creating policies by giving a precise report of the daily finances and data on appropriate key performance indicators.

    9. Guideline for earning maximum profits with minimum cost

    Maximizing profits is the end goal for every organization. And the earrings and revenues are solely based on the productive employment of financial resources. A solid financial foundation comprises different attributes such as budget control, cost control, ratio analysis, trend analysis, and cost-volume-profit numbers. Thus, financial management is crucial to enhancing profits and minimizing operations costs. 

    10. Increases shareholders' wealth

    Shareholders act as assets for an organization. They are investors in the company. This is why a company's main objective should be to maximize its shareholders' wealth. It will retain the funds and benefit the economy.  

    11. Encourages employees to save money

    A transparent and sustainable financial management system enables employees to understand the available resources. In addition, it authorizes professionals in every department to work toward the company's betterment by functioning under a budget.

    Financial Management Strategies

    Financial management for organizations is crucial for stability and growth. Here are some key strategies: 

    • Financial Planning & Analysis (FP&A): Forecast future financial performance, create budgets to allocate resources, and analyze financial data to identify trends and make informed decisions.
    • Capital Budgeting: Evaluate potential investments like equipment and projects by considering their cost, expected return, and impact on cash flow. Prioritize projects that align with long-term goals and maximize value. 
    • Working Capital Management: Optimize the balance between current assets (like inventory and cash) and liabilities (like short-term debt) to ensure smooth daily operations and meet short-term financial obligations. 
    • Risk Management: Identify and assess financial risks, such as economic downturns and currency fluctuations, and develop strategies to reduce their impact. This could involve hedging, insurance, or maintaining a cash reserve. 
    • Cost Control: Implement strategies to minimize expenses without sacrificing quality or efficiency. This might involve negotiating with vendors, streamlining processes, or investing in cost-saving technologies.

    Strategic vs Tactical Financial Management

    To list the differences between strategic and tactical financial management, here's a comparison in table format: 


    Strategic Financial Management 

    Tactical Financial Management 


    Long-term goals and objectives 

    Short-term actions and immediate needs 


    Broad, organizational-wide 

    Specific, department or project-based 

    Planning Horizon 

    Multiple years 

    Monthly, quarterly, or yearly 


    Involves senior management and executives 

    Involves mid-level managers and supervisors 


    Capital investment decisions, mergers, and acquisitions 

    Budget adjustments, expense management 


    Less flexible, as it involves long-term commitments 

    More flexible, allowing for quick adjustments 


    Aims for sustainable growth and competitive advantage 

    Aims for operational efficiency and short-term results 

    This comparison highlights the distinct roles and characteristics of strategic and tactical financial management, emphasizing their importance in achieving both long-term and short-term financial objectives.

    Example of Financial Management

    A good example of financial management is in a non-profit organization. The finance manager creates a budget that outlines how much money will be spent on programs, salaries, and fundraising activities. They monitor donations and expenses regularly to ensure funds are used wisely. Monthly financial statements are reviewed to check for any discrepancies and to stay on track with the budget. At the end of each quarter, the finance manager prepares reports for the board of directors, showing how funds were used and recommending changes if needed. This careful management ensures the organization can continue to support its mission effectively.

    Financial Management Tools

    Find five essential financial management tools that maybe helpful to you below:  

    1. QuickBooks 

    • Overview: QuickBooks is versatile accounting software designed for small to medium-sized businesses. It helps manage invoices, track expenses, and generate financial reports.  
    • Price: Starts at $25 per month.  
    • Link: QuickBooks 

    2. Xero

    • Overview: Xero is a cloud-based accounting tool that offers features like bank reconciliation, invoicing, and payroll management, making it ideal for small businesses.  
    • Price: Starts at $13 per month.  
    • Link: Xero

    3. SAP Concur 

    • Overview: SAP Concur streamlines travel, expense, and invoice management, providing automated and integrated solutions to enhance efficiency and compliance.  
    • Price: Custom pricing based on business needs.  
    • Link: SAP Concur 

    4. FreshBooks

    • Overview: FreshBooks is user-friendly accounting software that simplifies invoicing, expense tracking, and time management for freelancers and small businesses.  
    • Price: Starts at $15 per month.  
    • Link: FreshBooks 

    5. Oracle NetSuite

    • Overview: Oracle NetSuite offers a comprehensive suite of cloud-based financial management applications, including ERP, CRM, and e-commerce solutions for larger businesses.  
    • Price: Custom pricing based on business needs.  
    • Link: Oracle NetSuite

    How to Work in Finance Management?

    Given below are the basic requirements you should fulfil to work as a financial manager:



    Educational Requirements 

    Bachelor's degree in finance, business management, economics, or a related field. Courses in accounting, economics, and financial analysis. Master's degree (e.g., MBA) for senior roles. 


    Certified Management Accountant (CMA): Requires bachelor's degree and 2 years of experience. Chartered Financial Analyst (CFA): Focuses on investment analysis, beneficial for senior roles.  Certified Treasury Professional (CTP): Emphasizes risk management and corporate liquidity. 


    Analytical abilities, Proficiency in financial software, Strong decision-making, Excellent communication, Leadership qualities, Ability to manage teams, accounting knowledge, Data analysis, Statistical modeling 


    Start with roles like junior financial analyst, loan officer, or accountant. Aim for at least 5 years of experience in finance-related positions. Internships and entry-level jobs for valuable experience and networking opportunities. 

    Career Opportunities in Financial Management

    The table below summarizes average annual salaries for various financial careers. Please have a look: 

    Job Role 

    Average Annual Salary (US) 

    Financial Manager 

    $141,289 per year 

    Financial Advisor 

    $151,965 per year 

    Financial Analyst 

    $111,408 per year 

    Management Accountant 

    $128,836 per year 

    Treasury Analyst 

    $128,836 per year 

    Risk Manager 

    $141,272 per year 

     Source: Glassdoor


    An organization thrives on a secure financial standing. Professions in the financial department are crucial to the organization's growth, development, sustainability, and prospects for expansion. Financial management has ample scope for learning and improving critical thinking skills. KnowledgeHut online training courses offer specialization in financial management. Moreover, these courses also instill leadership values and allow professional growth.

    Frequently Asked Questions (FAQs)

    1What is the primary purpose of financial management?

    The primary purpose of financial management is to predict capital expenses, frame a capital structure, and create policies for the procurement and allocation of funds.  

    2What is the financial management process?

    The financial management process consists of planning, organizing, and monitoring the financial resources invested in an establishment while ensuring a maximum return on investment.  

    3What are the features of financial management?

    The financial management professionals are responsible for ensuring the uninterrupted supply of cash flow for daily operations. They must also gather data on market conditions and understand shareholders' earning expectancy.  

    4What are examples of financial management?

    Examples of financial management include managing costs and expenses, hiring new employees in the business, purchasing raw materials, and estimating the budget.  


    5What are the characteristics of financial management?

    Financial management involves critical thinking and risk management. In addition, it is responsible for maintaining profits and minimizing costs.  

    6What is the role of financial management?

    Financial management involves planning and controlling how a company uses its money. It includes making decisions on spending, saving, and investing to ensure the company remains stable and grows over time.


    Abhresh Sugandhi


    Abhresh is specialized as a corporate trainer, He has a decade of experience in technical training blended with virtual webinars and instructor-led session created courses, tutorials, and articles for organizations. He is also the founder of Nikasio.com, which offers multiple services in technical training, project consulting, content development, etc.

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