Definition
Financial management is the discipline of planning, organising, directing, and controlling the financial activities of a business to achieve its goals. It encompasses decisions about how to raise capital, how to allocate resources, how to manage costs, and how to ensure the business has enough liquidity to operate day to day.
Three Core Functions of Financial Management
At its broadest level, financial management has three core functions. First, investment decisions: determining where to deploy capital to generate the best return, whether that means buying equipment, expanding into a new market, or acquiring another business. Second, financing decisions: choosing the most appropriate mix of debt and equity to fund those investments. Third, dividend and reinvestment decisions: how much of the profits to return to owners and how much to retain for future growth.
Working Capital Management
Working capital management sits within financial management and deals specifically with short-term financial health. It involves balancing current assets (cash, inventory, receivables) against current liabilities (payables, short-term debt) to ensure the business can meet its immediate obligations without holding excess idle cash.
Budgeting and Forecasting
Budgeting and forecasting are planning tools within financial management. A budget sets the financial targets for the coming period, while forecasts are regularly updated projections of where actual results are heading. The gap between budget and forecast is often where the most useful management conversations happen.
Financial Risk Management
Risk management is also part of financial management: identifying financial risks such as currency exposure, interest rate changes, or the loss of a major customer, and putting strategies in place to reduce their impact. For businesses operating internationally, this can include hedging instruments. For smaller businesses, it might be as simple as maintaining an adequate cash reserve.