Financial management in companies: what is it, what is it for and how to do it?

In the end, financial management within a company comprises problems of endless counts, but it doesn’t have to be that way. In this article, we will give you a little more information on the subject and also offer some tips on how to do it in your business.

What is financial management?

Financial management is a set of actions that a company takes to control expenses, earnings and investments within the business. It therefore involves controlling, analyzing and planning financial activities.

What is financial management for?

Financial management is essential for a company to avoid, first of all, the scenario mentioned in the first paragraph: bankruptcy.

This will be helpful to the entrepreneur in terms of good financial management with the investments that are to be done. For instance, let’s take a hairdresser as an example. What would make more sense, investing in a marketing consultancy firm or purchasing a new sink for the salon?

These are two difficult bets, don’t you agree? In some cases, the professional may invest in both. But how can you know that? By observing the financial management reports.

Now that you know how much capital the salon has to invest, which one would be the best investment if you only have one? Financial projections made with financial management can also help.

What are the 4 pillars of financial management?

Financial management has 4 essential pillars, which we have already briefly discussed in the paragraphs above. They are:

  • Planning;
  • Control;
  • Analysis;
  • Investment.

1 – Planning

Financial management planning is when the company will look for the “first time” at everything it has up to now. Based on this, it will make the first projections, define the necessary investments and achieve its short, medium and long-term objectives.

This is when you should think about optimizing resources and drawing up plans for the various possible future scenarios for the company.

2 – Control

The control pillar of financial management deals with the verification and execution of processes, as well as inspections of the company’s expenses and earnings.

Here, it is not just about financial control, but also about activities, since they determine the results and, consequently, the company’s earnings (or rather, profit).

Through this control, it is then possible to anticipate errors, improve processes, optimize them and make corrections more quickly.

Here, it is important to separate activity controls, financial executions and accounts.

Account control is essential to keep cash flow up to date.

3 – Analysis

Financial analyses will focus more on the company’s results and execution, but in a data-based manner.

It is in the financial management analysis pillar that it will be possible to identify some bottlenecks that go unnoticed in control. This is what will help the company to move from the “stable” scenario to a growth scenario.

3 – Investment

The analysis would be worthless, however, if it did not include the investment pillar. Therefore, the sector responsible for financial management must observe the data and results presented in the analyses to make better investment choices, as we have already illustrated above.

This involves recruitment of new staff to even buying a new company, that is, mergers and acquisitions.

What are the most common mistakes in a company’s financial management?

We can list several errors when we talk about financial management, but the most common ones are:

  • Not frequently analyzing business performance;
  • Not carrying out inventory control (for companies that offer products);
  • Mixing personal and company finances (especially for microentrepreneurs);
  • Not considering working capital;

What are the main risks in financial management?

Of course, when discussing the financial perspective, one has to consider the risks facing the company. We can conditionally distinguish three main groups in this respect: strategic, financial, and operational.

Strategic risks are those related to decision-making. In deciding on a certain matter, an entrepreneur is always open to the risk of choosing the wrong option or at least one that doesn’t turn out in the expected way. However, with data from financial analyses, these decisions can become more accurate.

As for financial risk, this involves loans or leverage to finance certain operations. And finally, operational risk is the risk related to the company’s daily activities.

In addition to these, we can also consider credit risk, that is, the company does not have enough value to pay its debts. There is also interest rate risk, which also occurs due to a lack of money for some payments; exchange rate risk, when the company negotiates with companies abroad; liquidity risk, when the company is unable to meet its financial obligations; and of course, market risk, after all, you never know when the company’s assets may lose their value.

6 financial management tips for your business

But how do you actually start good financial management? Here are 6 tips that can help you with this activity:

1 – planning

It is no wonder that planning is the first pillar of financial management, after all, it is through planning that we know “where to go”. What are the objectives, difficulties, what we have, what we don’t have, etc.

2 – Separate personal and business finances

Keep your personal finance apart from your business finance. This will help you in understanding the expenses of your company, how much to invest, how much money you spend per month, etc.

3 – Control costs

Unnecessary expenses in the company? It’s time to cut back, right? Good financial management requires controlling what is spent. Divide them into fixed costs, variable costs, and fixed and variable expenses. Eliminate what is not necessary and project expenses for the coming months.

4 – Define performance indicators

Performance indicators will greatly assist your financial management. This is because they allow you to measure whether the investments you have made are paying off, i.e., calculate the ROI. You can also identify what has brought the most results in your operations and monitor how close your company is to achieving its established goals (you can even reevaluate your goals if they are unattainable or too easy).

5 – Consider using a management tool

Technology can be a great ally for your financial management. Today, the market offers several financial management tools that can be used in your business.

Look for the one that best fits your needs and consider it a valid investment.

6 – Analyze the results

Analyze your results routinely. This can be every 6 months, 1 year, or even monthly. This way, you can monitor your business growth quickly and easily.

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