Importance of financial management in business planning and controlling
The body of the car can be engineered to any specifications, painted in any color and be fitted with any type of interiors to look sleek and powerful. However, the car won’t get anywhere without an engine. No matter what type of business it is, financial management is like the engine of the car that will drive the peak performance of your business.
You may be wondering what financial management exactly means. In simple words, it is the process by which you put your numbers to work in order to make the business more successful. With a good financial management system, you will be empowered to make important decisions that will improve the operation of your business.
Why is Financial Management Important?
If you are a company that sells well, but has a poor financial management system, then you are sure to stumble. Financial management involves more than just maintaining an accurate set of books and balancing your account. Effective finance management is needed to manage your business finances so that you don’t overspend and remain prepared for all types of expenditures including profit distribution.
The growing complexity of the business world today has brought finance right to the core of all processes. There is a growing demand for finance professionals and many are pursuing courses in financial management to gain a financial perspective.
Let’s see why financial management is at the heart of business planning and control:
Objectives of Financial Planning
What to spend? How to spend? How much to spend? Financial planning is as important for organizations as it is for individuals. The larger the quantum of funds, the more the effort required planning its usage for business efficiency. Below are the reasons why financial management is important in business planning:
- Availability of Funds
In order to meet the day-to-day expenses, purchasing long-term assets and dealing with unforeseen costs, planning is done to ensure that funds are available in a timely manner. Too little money is bad and so is too much of it. Planning helps in gathering, storing and using the right amount of funds.
- Source of Capital
How are the funds needed for the business is going to be raised? Once you determine what funds are needed to run the business operations, it’s time to decide how to raise that much money. Will the company issue shares, opt for bank loans or use a mix of all avenues?
- Manage Cash Flow
Finance has to continuously flow into the business so that operations proceed without any hindrances and at no point; there is a shortage of raw materials. Financial planning is very important to manage the day-to-day cash flow of the business.
- Allocation of Funds
Funds need to be allocated precisely for all aspects of the business including investment purposes, emergency situations and more. One of the roles of financial planning is to make sure that there are enough funds for such cases and these reserves are renewed without getting depleted.
- Budgeting
Which department gets how much funds and at what point is a constant activity of financial planners. Determining the budget and making sure that all work within that stipulated budget is a very important task.
- Strategic Growth
Financial planning contributes to the strategic moves of the business. When there is a new opportunity in the market, the organization should be ready to invest and expand. Also, financial planning is at the base of the strategic plans of the business and plays a vital role in framing the strategic policies.
Role of Financial Management in Business Operations Control
The process of financial control is very critical in order to track performance and evaluate progress towards the financial goals of the company. The business makes strategic decisions and financial control is needed to evaluate how well they are following the strategic plans.
- Checking That Everything is Running on the Right Lines
Are the sales, earnings and expenses of the business in tandem with the projected levels? The company thus becomes more confident and secure when it meets its operating standards and achieves its objectives.
- Detecting Errors and Areas of Improvements
An irregularity in the business finances will put the company in jeopardy. Therefore it is important to detect them quickly and take the necessary measure to make any improvements. The basic financial statements including the balance sheet, profit/loss account and cash flow statements are analyzed thoroughly to detect any anomalies.
- Communicate and Motivate Employees
When you have precise knowledge of the state of the company including its problems and mistakes, it enables you to give the right information to employees and communicate with them. It thereby motivates them to perform better and follow the correct line of action.
An effective financial management system gives you a powerful access to a great decision-making tool to achieve your business objectives. It plays an integral role in planning and controlling the financial resources and drives your business towards success. Become a financial analyst by pursuing online courses in finance and contribute to the growth of your business.
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