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Financial Management Explained:

Scope, Objectives & Importance
Suzy Strutner | Marketing Specialist
September 5, 2023

In business, financial management is the practice of handling a company’s finances in

a way that allows it to be successful and compliant with regulations. That takes both a
high-level plan and boots-on-the-ground execution.
What Is Financial Management?
At its core, financial management is the practice of making a business plan and then
ensuring all departments stay on track. Solid financial management enables the CFO
or VP of finance to provide data that supports creation of a long-range vision, informs
decisions on where to invest, and yields insights on how to fund those investments,
liquidity, profitability, cash runway and more.

ERP software can help finance teams achieve these goals: A financial management
system combines several financial functions, such as accounting, fixed-asset
management, revenue recognition and payment processing. By integrating these key
components, a financial management system ensures real-time visibility into the
financial state of a company while facilitating day-to-day operations, like period-end
close processes.

Video: What Is Financial Management?

Objectives of Financial Management

Building on those pillars, financial managers help their companies in a variety of
ways, including but not limited to:

 Maximizing profits: Provide insights on, for example, rising costs of raw materials that
might trigger an increase in the cost of goods sold.
 Tracking liquidity and cash flow: Ensure the company has enough money on hand to
meet its obligations.
 Ensuring compliance: Keep up with state, federal and industry-specific regulations.
 Developing financial scenarios: These are based on the business’ current state and
forecasts that assume a wide range of outcomes based on possible market conditions.
 Manage relationships: Dealing effectively with investors and the boards of directors.
Ultimately, it’s about applying effective management principles to the company’s
financial structure.
Essential Financial KPIs
Narrowing down the right KPIs for your business is critical to your short and long-term success. Whether
you’re newly tasked with establishing KPIs for your finance company or looking for best practices on
improving existing KPIs, this quick and simple guide is designed for you.

Get Your Free Guide(opens in a new tab)

Scope of Financial Management

Financial management encompasses four major areas:

1. Planning
The financial manager projects how much money the company will need in
order to maintain positive cash flow, allocate funds to grow or add new
products or services and cope with unexpected events, and shares that
information with business colleagues.

Planning may be broken down into categories including capital expenses, T&E
and workforce and indirect and operational expenses.

2. Budgeting
The financial manager allocates the company’s available funds to meet costs,
such as mortgages or rents, salaries, raw materials, employee T&E and other
obligations. Ideally there will be some left to put aside for emergencies and to
fund new business opportunities.
 Companies generally have a master budget and may have separate sub
documents covering, for example, cash flow and operations; budgets may be
static or flexible.

Static vs. Flexible Budgeting

Static Flexible

Remains the same even if there are significant Adjusts based on changes in the
changes from the assumptions made during assumptions used in the planning
planning. process.

3. Managing and assessing risk

Line-of-business executives look to their financial managers to assess and
provide compensating controls for a variety of risks, including:

 Market risk
Affects the business’ investments as well as, for public companies,
reporting and stock performance. May also reflect financial
risk particular to the industry, such as a pandemic affecting restaurants or
the shift of retail to a direct-to-consumer model.

 Credit risk
The effects of, for example, customers not paying their invoices on time
and thus the business not having funds to meet obligations, which may
adversely affect creditworthiness and valuation, which dictates ability to
borrow at favorable rates.

 Liquidity risk
Finance teams must track current cash flow, estimate future cash needs
and be prepared to free up working capital as needed.

 Operational risk
This is a catch-all category, and one new to some finance teams. It may
include, for example, the risk of a cyber-attack and whether to purchase
 cybersecurity insurance, what disaster recovery and business continuity
plans are in place and what crisis management practices are triggered if a
senior executive is accused of fraud or misconduct.

4. Procedures
The financial manager sets procedures regarding how the finance team will
process and distribute financial data, like invoices, payments and reports, with
security and accuracy. These written procedures also outline who is responsible
for making financial decisions at the company — and who signs off on those
decisions.

Companies don’t need to start from scratch; there are policy and procedure
templates available for a variety of organization types, such as this one for
nonprofits.

Functions of Financial Management

More practically, a financial manager’s activities in the above areas revolve around
planning and forecasting and controlling expenditures.

The FP&A function includes issuing P&L statements, analyzing which product lines
or services have the highest profit margin or contribute the most to net
profitability, maintaining the budget and forecasting the company’s future financial
performance and scenario planning.

Managing cash flow is also key. The financial manager must make sure there’s
enough cash on hand for day-to-day operations, like paying workers and purchasing
raw materials for production. This involves overseeing cash as it flows both in and out
of the business, a practice called cash management.

Along with cash management, financial management includes revenue recognition, or

reporting the company’s revenue according to standard accounting principles.
Balancing accounts receivable turnover ratios is a key part of strategic cash
conservation and management. This may sound simple, but it isn’t always: At some
companies, customers might pay months after receiving your service. At what point
do you consider that money “yours” — and report the good news to investors?

5 Tips to Improve Your Accounts Receivable Turnover Ratio

1. Invoice regularly and accurately. If invoices don’t go out on time, money will not
come in on time.

2. Always state payment terms. You can’t enforce policies that you haven’t
communicated to clients. If you make changes, call them out.

3. Offer multiple ways to pay. New B2B options are coming online. Have you
considered a payment gateway?

4. Set follow-up reminders. Don’t wait until customers are in arrears to start collection
procedures. Be proactive, but not annoying, with reminders.

5. Consider offering discounts for cash and prepayments. Cash(less) is king in retail,
and you can reduce AR costs by encouraging customers to pay ahead rather than on
your normal customer credit terms.

Learn more about maximizing your AR turnover ratios.

Finally, managing financial controls involves analyzing how the company is

performing financially compared with its plans and budgets. Methods for doing this
include financial ratio analysis, in which the financial manager compares line items on
the company’s financial statements.
Strategic vs. Tactical Financial Management
On a tactical level, financial management procedures govern how you process daily
transactions, perform the monthly financial close, compare actual spending to what’s
budgeted and ensure you meet auditor and tax requirements.

On a more strategic level, financial management feeds into vital FP&A (financial
planning and analysis) and visioning activities, where finance leaders use data to help
line-of-business colleagues plan future investments, spot opportunities and build
resilient companies.

Importance of Financial Management

Solid financial management provides the foundation for three pillars of sound fiscal
governance:

1. Strategizing
Identifying what needs to happen financially for the company to achieve its
short- and long-term goals. Leaders need insights into current performance for
scenario planning, for example.

2. Decision-making
Helping business leaders decide the best way to execute on plans by providing
up-to-date financial reports and data on relevant KPIs.

3. Controlling
Ensuring each department is contributing to the vision and operating within
budget and in alignment with strategy.

With effective financial management, all employees know where the company is
headed, and they have visibility into progress.
What Are the Three Types of Financial
Management?
The functions above can be grouped into three broader types of financial
management:

1. Capital budgeting
Relates to identifying what needs to happen financially for the company to
achieve its short- and long-term goals. Where should capital funds be expended
to support growth?

2. Capital structure
Determine how to pay for operations and/or growth. If interest rates are low,
taking on debt might be the best answer. A company might also seek funding
from a private equity firm, consider selling assets like real estate or, where
applicable, selling equity.

3. Working capital management

As discussed above, is making sure there’s enough cash on hand for day-to-day
operations, like paying workers and purchasing raw materials for production.

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What Is an Example of Financial

Management?
We’ve covered some examples of financial management in the “functions” section
above. Now, let’s cover how they all work together:
Say the CEO of a toothpaste company wants to introduce a new product:
toothbrushes. She’ll call on her team to estimate the cost of producing the
toothbrushes and the financial manager to determine where those funds should come
from — for example, a bank loan.

The financial manager will acquire those funds and ensure they’re allocated to
manufacture toothbrushes in the most cost-effective way possible. Assuming the
toothbrushes sell well, the financial manager will gather data to help the management
team decide whether to put the profits toward producing more toothbrushes, start a
line of mouthwashes, pay a dividend to shareholders or take some other action.

Throughout the process, the financial manager will ensure the company has enough
cash on hand to pay the new workers producing the toothbrushes. She’ll also analyze
whether the company is spending and generating as much money as she estimated
when she budgeted for the project.

NetSuite: Financial Management for Startups

and Beyond
At the outset, financial management responsibilities within a startup include making
and sticking to a budget that aligns with the business plan, evaluating what to do with
profits and making sure your bills get paid and that customers pay you.

Financial management gets more complicated as the company grows and adds finance
and accounting contractors or staffers. You must ensure your employees get paid with
accurate deductions, properly file taxes and financial statements, and watch for errors
and fraud.

This all circles back to our opening discussion of balancing strategic and tactical. By
building a plan, you can answer the big questions: Are our goods and services
profitable? Can we afford to launch a new product or make that hire? What might the
coming 12 to 18 months bring for the business? Solid financial management provides
the systems and processes to answer those questions.
Financial management challenges can be daunting for both startups and growing
businesses. This is where NetSuite's financial management software comes into play.
With its comprehensive, cloud-based solutions, NetSuite ensures that your financial
data is accurate, up-to-date, and accessible anytime, anywhere.

From automating complex financial processes to offering real-time visibility into

performance, NetSuite is the go-to solution for businesses aiming for seamless
integration and efficient financial operations. As your company expands, NetSuite
scales with you, ensuring you have the right tools to make informed strategic
decisions at every stage. Make the smart choice for your business's financial future
with NetSuite.

Learn about the unique solutions NetSuite offers businesses to accelerate growth
with a unified suite for financials, operations, and commerce.

Discover The Benefits

In This Article

 What Is Financial Management?

 Video: What Is Financial Management?
 Objectives of Financial Management
 Scope of Financial Management
 Functions of Financial Management
 Strategic vs. Tactical Financial Management
 Importance of Financial Management
 What Are the Three Types of Financial Management?
 What Is an Example of Financial Management?
 NetSuite: Financial Management for Startups and Beyond

of surveyed finance leaders have reduced month-end close time since switching to NetSuite.
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Source: TechValidate

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