How to Successfully Handle Your Company's Finances (2024)

In business, financial management is the practice of handling a company’s finances in away that allows it to be successful and compliant with regulations. That takes both ahigh-level plan and boots-on-the-ground execution.

What Is Financial Management?

At its core, financial management is the practice of making a business plan and then ensuringall departments stay on track. Solid financial management enables the CFO or VP of financeto provide data that supports creation of a long-range vision, informs decisions on where toinvest, and yields insights on how to fund those investments, liquidity, profitability, cashrunway and more.

ERP software can help finance teams achieve thesegoals: A financial management system combinesseveral financial functions, such as accounting, fixed-asset management, revenue recognitionand payment processing. By integrating these key components, a financial management systemensures real-time visibility into the financial state of a company while facilitatingday-to-day operations, like period-end close processes.

Video: What Is Financial Management?

Objectives of Financial Management

Building on those pillars, financial managers help their companies in a variety of ways,including but not limited to:

• Maximizing profits: Provide insights on, for example, rising costs ofraw materials that might trigger an increase in the cost of goods sold.
• Tracking liquidity and cash flow: Ensure the company has enough moneyon hand to meet its obligations.
• Ensuring compliance: Keep up with state, federal and industry-specificregulations.
• Developing financial scenarios: These are based on the business’ currentstate and forecasts that assume a wide range of outcomes based on possiblemarket conditions.
• Manage relationships: Dealing effectively with investors and the boards of directors.

Ultimately, it’s about applying effective management principles to the company’sfinancial structure.

Scope of Financial Management

Financial management encompasses four major areas:

1. Planning

   The financial manager projects how much money the company will need in order tomaintain positive cash flow, allocate funds to grow or add new products or servicesand cope with unexpected events, and shares that information with businesscolleagues.

   Planning may be broken down into categories including capital expenses, T&E andworkforce and indirect and operational expenses.

2. Budgeting

   The financial manager allocates the company’s available funds to meet costs,such as mortgages or rents, salaries, raw materials, employee T&E and otherobligations. Ideally there will be some left to put aside for emergencies and tofund new business opportunities.

   Companies generally have a master budget and may have separate sub documentscovering, for example, cash flow and operations; budgets may be staticor flexible.

   See Also

   What is Financial Management | Dynamics 365 FinanceBasic Finance Skills All Managers Should Have | HBS OnlineHow to Successfully Handle Your Company’s FinancesBest Finance Courses Online [2024] | Coursera

   Static vs. Flexible Budgeting

   Static	Flexible
   Remains the same even if there are significantchanges from the assumptions made during planning.	Adjusts based on changes in the assumptions usedin the planning process.

3. Managing and assessing risk

   Line-of-business executives look to their financial managers to assess and providecompensating controls for a variety of risks, including:

   • Market risk

     Affects the business’ investments as well as, for public companies,reporting and stock performance. May also reflectfinancial risk particular to the industry, such as a pandemicaffecting restaurants or the shift of retail to a direct-to-consumermodel.

   • Credit risk

     The effects of, for example, customers not paying their invoices on time andthus the business not having funds to meet obligations, which may adverselyaffect creditworthiness and valuation, whichdictates ability to borrow at favorable rates.

   • Liquidityrisk

     Finance teams must track current cash flow, estimate future cash needs and beprepared to free up working capital as needed.

   • Operational risk

     This is a catch-all category, and one new to some finance teams. It mayinclude, for example, the risk of a cyber-attack and whether to purchasecybersecurity insurance, what disaster recovery and businesscontinuity plans are in place and what crisismanagement practices are triggered if a senior executive is accusedof fraud or misconduct.

4. Procedures

   The financial manager sets procedures regarding how the finance team will process anddistribute financial data, like invoices, payments and reports, with security andaccuracy. These written procedures also outline who is responsible for makingfinancial decisions at the company — and who signs off on those decisions.

   Companies don’t need to start from scratch; there are policy and proceduretemplates available for a variety of organization types, such as this one fornonprofits.

Functions of Financial Management

More practically, a financial manager’s activities in the above areas revolve aroundplanning and forecasting and controlling expenditures.

The FP&A function includes issuing P&L statements, analyzing which product lines orservices have the highest profit margin or contribute the most to net profitability, maintaining the budgetand forecasting the company’s future financial performance and scenario planning.

Managing cash flow is also key. The financial manager must make sure there’s enoughcash on hand for day-to-day operations, like paying workers and purchasing raw materials forproduction. This involves overseeing cash as it flows both in and out of the business, apractice called cash management.

Along with cash management, financial management includes revenue recognition, or reportingthe company’s revenue according to standard accounting principles. Balancing accounts receivableturnover ratios is a key part of strategic cashconservation and management. This may sound simple, but it isn’t always: Atsome companies, customers might pay months after receiving your service. At what point doyou consider that money “yours” — and report the good news to investors?

Finally, managing financial controls involves analyzing how the company is performingfinancially compared with its plans and budgets. Methods for doing this include financialratio analysis, in which the financial manager compares line items on the company’sfinancial statements.

Strategic vs. Tactical Financial Management

On a tactical level, financial management procedures govern how you process dailytransactions, perform the monthly financial close, compare actual spending to what’sbudgeted and ensure you meet auditor and tax requirements.

On a more strategic level, financial management feeds into vital and visioning activities, where finance leaders use data to helpline-of-business colleagues plan future investments, spot opportunities and build resilientcompanies.

Importance of Financial Management

Solid financial management provides the foundation for three pillars of sound fiscalgovernance:

1. Strategizing

   Identifying what needs to happen financially for the company to achieve its short-and long-term goals. Leaders need insights into current performance for scenarioplanning, for example.

2. Decision-making

   Helping business leaders decide the best way to execute on plans by providingup-to-date financial reports and data on relevant KPIs.

3. Controlling

   Ensuring each department is contributing to the vision and operating within budgetand in alignment with strategy.

With effective financial management, all employees know where the company is headed, and theyhave visibility into progress.

What Are the Three Types of Financial Management?

The functions above can be grouped into three broader types of financial management:

1. Capital budgeting

   Relates to identifying what needs to happen financially for the company to achieveits short- and long-term goals. Where should capital funds beexpended to support growth?

2. Capital structure

   Determine how to pay for operations and/or growth. If interest rates are low, takingon debt might be the best answer. A company might also seek funding from aprivate equity firm, consider selling assets like real estate or, whereapplicable, selling equity.

3. Working capital management

   As discussed above, is making sure there’s enough cash on hand for day-to-dayoperations, like paying workers and purchasing raw materials for production.

What Is an Example of Financial Management?

We’ve covered some examples of financial management in the “functions”section above. Now, let’s cover how they all work together:

Say the CEO of a toothpaste company wants to introduce a new product: toothbrushes.She’ll call on her team to estimate the cost of producing the toothbrushes and thefinancial manager to determine where those funds should come from — for example, abankloan.

The financial manager will acquire those funds and ensure they’re allocated tomanufacture toothbrushes in the most cost-effective way possible. Assuming the toothbrushessell well, the financial manager will gather data to help the management team decide whetherto put the profits toward producing more toothbrushes, start a line of mouthwashes, pay adividend to shareholders or take some other action.

Throughout the process, the financial manager will ensure the company has enough cash on handto pay the new workers producing the toothbrushes. She’ll also analyze whether thecompany is spending and generating as much money as she estimated when she budgeted for theproject.

NetSuite: Financial Management for Startups and Beyond

At the outset, financial management responsibilities within a startup include making andsticking to a budget that aligns with the business plan, evaluating what to do with profitsand making sure your bills get paid and that customers pay you.

Financial management gets more complicated as the company grows and adds finance andaccounting contractors or staffers. You must ensure your employees get paid with accuratedeductions, properly file taxes and financial statements, and watch for errors and fraud.

This all circles back to our opening discussion of balancing strategic and tactical. Bybuilding a plan, you can answer the big questions: Are our goods and services profitable?Can we afford to launch a new product or make that hire? What might the coming 12 to 18months bring for the business? Solid financial management provides the systems and processesto answer those questions.

Financial management challenges can be daunting for both startups and growing businesses.This is where NetSuite'sfinancial management software comes into play. With its comprehensive, cloud-basedsolutions, NetSuite ensures that your financial data is accurate, up-to-date, and accessibleanytime, anywhere.

From automating complex financial processes to offering real-time visibility intoperformance, NetSuite is the go-to solution for businesses aiming for seamless integrationand efficient financial operations. As your company expands, NetSuite scales with you,ensuring you have the right tools to make informed strategic decisions at every stage. Makethe smart choice for your business's financial future with NetSuite.