Why Is Financial Management So Important in Business?

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Pratibha Devasenapathy | Jul-30-2020

Introduction

Being financially independent is one of the primary objectives when starting a business. Business owners must consider the potential consequences of their management decisions on profits, cash flow and on the financial condition of the company. The activities of every aspect of a business have an impact on the company's financial performance and must be evaluated and controlled by the business owner. Most companies experience losses and negative cash flows during their startup period. Financial management is extremely important during this time. Managers must make sure that they have enough cash on hand to pay employees and suppliers even though they have more money going out than coming in during the early months of the business. This means the owner must make financial projections of these negative cash flows so he has some idea how much capital will be needed to fund the business until it becomes profitable.

As a business grows and matures, it will need more cash to finance its growth. Planning and budgeting for these financial needs are crucial. Deciding whether to fund expansion internally or borrow from outside lenders is a decision made by financial managers. Financial management is finding the proper source of funds at the lowest cost, controlling the company's cost of capital and not letting the balance sheet become too highly leveraged with debt with an adverse effect of its credit rating.

How financial stability triggers overall business growth and sustainability?

  • Financial management in normal operations

Normally a company that deals with a product or a service, makes a sale to its customer, collects the money and starts the process over again. Now to improve this cycle and make it more profitable, sound financial management is required, as it helps move cash efficiently. This means that managing the turnover ratios of raw materials and finished goods inventories, selling to customers and collecting the receivables on a timely basis and starting over by purchasing more raw materials.

The business must also pay its bills, its suppliers and employees. Since all of this must be done with cash, it takes astute financial management skill to ensure that these funds are utilised efficiently. Even though economies have a long history of going up and also occasionally experience sharp declines, businesses must plan to have enough liquidity to sail through these tough waters, otherwise, they may need to close their doors due to lack of cash.

  • Reporting on business operations

Every business is responsible for providing reports of its operations. All relevant stakeholders in the company, want regular updates about the return and security of their investments. State and local governments need reports so that they can collect the tax. Business managers need other types of reports, which identify the company's key performance indicators from various departments. A comprehensive financial management system is able to produce the various types of reports needed by all of these different entities.

  • Statutory adherence

The government is always around to collect taxes. Financial management must plan to pay its taxes regularly to avoid any legal disputes. Financial management is an important skill for every business owner or manager, be it for an MSME or a large enterprise. Every decision that an owner makes has a financial impact on the company, and he has to make these decisions within the total context of the company's operations.

Why is financial management important in a business?

  • Helps organisations in financial planning
  • Assists organisations in the planning and acquisition of funds
  • Helps organisations in effectively utilising and allocating the funds received or acquired
  • Assists organisations in making critical financial decisions
  • Helps in improving the profitability of organisations
  • Increases the overall value of the firms or organisations
  • Provides economic stability
  • Encourages employees to save money, which helps them in personal financial planning

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