The importance of financial management in your business
Financial management enables the company to allocate the funds efficiently for investment, purchasing equipment and develop dividend policy in order to achieve the objectives of the company. Financial management has many important roles including preparing and monitoring the internal financial information, maintaining the financial records, payment of accounts and credit control, and payment of salaries. Financial management determines the success or failure of a company. Effective financial management ensure that the company has enough funds to meet its objectives including payment of bills, wages, acquisition of resources and develop new products.
Financial management involves watching the cash inflows and cash outflows of a business over a period of time. The cash outflow involves the checks that the company writes to the employees, suppliers and creditors. The cash inflows refer to the money that is going into the company from the customers, lenders and investors. If the company is receiving more funds, it will have a positive cash flow. Positive cash flow indicates that the company has a good financial status. If more cash is going out than more cash is coming in, the company will experience a negative cashflow. Negative cashflow is based on a number of factors including outdated inventory, and poor management of the account receivables.
Good financial management involves knowing when, where and how to allocate the company funds. The financial manager also must know the best sources to borrow money for the company. In addition, the company must have good relationship with the bankers and credit companies when they are in need of more funds. A good financial analyst must have a good understanding of the company objectives in order to measure its performance. The objective of the company is to increase that value of the owner’s interest in firm. If the company is an investor oriented firm (IOF), financial management will increase the firm’s value which is based on the earnings that is used to pay the investors. Proper financial management enables the company to reinvest in the productive assets in order to increase future earnings.
Ratio is used to measure the performance of the company against other competitors in the same industry. The profitability ratio measures the profits, assets return and equity return. The asset utilization ration measures how fast a business can convert the assets into sales and cash. Proper financial management can help the business manager to draw the right conclusion about the health of the business. The liquidity ratio measures the current and quick ratio which informs the company whether it has ability to settle the short term obligations. The ratio analysis measures the performance of the company. The horizontal analysis compares the ratios of a company financial statement within a specified period. The vertical analysis gives an overview of the relationship between the sales and income statements. The results of the ratio analysis help the company to determine its position in the industry. It also informs the company about the past and future financial situation.
As a conclusion, financial management enables the company to compare its performance with other competitors so that it can become profitable in the long term.