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Why Is Financial Management So Important in Business?

Date: Tuesday, September 6, 2022 10:23 AM EDT

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All financial transactions within a company must be properly regulated and configured by a responsible specialist. Yes, to simply keep a business afloat, it is important to understand what the company's budget consists of, in which components it is necessary to invest money to increase profits, and in which ones they will disappear without a trace. It is also important to track each withdrawal of funds, analyze it and evaluate the appropriateness. These issues at each level of the company are solved by proper financial management. Without this component, it will not be possible to achieve even a stable level of income. What is the essence of this management system and why any business cannot do without it - we will understand in the article. 


Financial management: definition

Financial management is the process of properly using every coin in your business budget. It implies not just the distribution of finances, but also an understanding of why this should happen, and what it will bring later.

For example, you have a sum of money in a company. By connecting the control system, you can plan its consumption for various needs soon - a month, six months, or a year. Through analysis, you will be able to calculate how much and where to invest so that each of the participants gets what they want: you are the profit, the company is the name, and the shareholder is the return on investment. In addition, it includes the following tasks:

  • determination of the necessary budget for various purposes;
  • formation of financial policy throughout the company and its structures;
  • maintaining control over the distribution of amounts;
  • creation of expense reports;
  • assessment of the reliability of deposits and assets;
  • making various financial decisions for the benefit of the company.

Many people think that accounting and financial management are the same. It is not. The usual accounting system is just a shell of your company, and the primary mechanism and skeleton is financial management. Even if we estimate the salaries of specialists, the average salary for managers in 2021 was $131 710, and for accountants -$77 250 per year, which indicates a higher value for these employees.


Why Is Financial Management So Important in Business: 5 reasons
 

No. 1. Efficiency of familiar operations

Even a start-up company conducts various operations daily. Finances go both internally, for example, by distributing the budget for advertising or creating a website, and externally, by selling products to customers or purchasing. To make them more efficient, financial management is needed.

In internal operations, it allows you to evaluate how and where to invest money correctly. For example, is there a need to attract employees to solve certain problems, what money should be spent on accounts receivable and paying taxes, etc?

And in external - what and in what volumes need to be purchased to replenish stocks after the sale, how much will be spent on paying suppliers, is there a need to raise the price tag, etc.

It's all part of the budgeting, future planning, and cost optimization needed to keep a company stable.


No. 2. Minimizing the risk of the company's collapse

With improper budget planning or its complete absence, the company has a chance to fail. Financial management can prevent this process, but only if it is properly implemented. Thanks to budget planning, you will be able to calculate the risks and correctly assess the opportunities. With him, you will be able to assess the strengths and weaknesses of your business to see the real picture of your abilities and not overestimate them. It is also bad when a company does not underestimate its capabilities and does not take on larger customers or does not scale the business. It will also decide on a clear plan and study every aspect of the budget and operations. 


No. 3. Timely response to problems

When tracking all the finances that turn around in the company, you can assess whether there are any financial problems in it. This will help to respond in time and take the appropriate steps to respond.


No. 4. Compilation of correct reporting

Each transaction performed in the company is included in the report. If properly structured, they will be able to provide up-to-date information to shareholders, state and local authorities, suppliers, as well as to themselves. For each, it will be possible to choose the optimal type of report. And the less confusion there is, the easier and faster it is to evaluate it, which is also important in the work of the company and interaction with other participants and bodies. In addition, it minimizes the problem of data inaccuracy.


No. 5. Convenient tax payment

The tax payment system can be a pleasant and convenient process when implementing financial management. It will allow you to plan all the work for a long time and make each payment in a timely and most convenient way.


Conclusion

We looked at what financial management is and assessed 5 reasons why every business needs it. From the information received, we can conclude that without proper management it will not be possible to develop a company or keep it afloat for a long time. If you haven't implemented it yet, don't hesitate and reap all possible benefits: solve the problem of operational efficiency, assess your capabilities sensibly, recognize when the system is failing, make the right report, and remember to pay your taxes on time.

Disclaimer: This and other personal blog posts are not reviewed, monitored or endorsed by TalkMarkets. The content is solely the view of the author and TalkMarkets is not responsible for the content of this post in any way. Our curated content which is handpicked by our editorial team may be viewed here.

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