Financial management refers to organizing, directing, and control of commercial operations like disbursal and procurement of revenue from the individual or business. It also comprises the application of particular principles to financial assets of the firm, and even playing a role in revenue management. The scope of financial management comprises financial decisions associating with raising money from different sources; the cost of financing projects; and the potential returns obtained during the process. It also offers investment decisions in the fixed and current assets, which consist the working capital decisions.
According to Joseph Stone Capital sound financial management leads to enhanced visibility within the operations, and it supports understanding of the numbers at each level in the business or institute. The benefits of financial management ensure there is investor confidence. Investors are usually keen to look for signs of security within business operations. Effective financial management enables for the correct balance between risk and profit maximization.
Financial management also supports better decision making. When the relevant facts are easily accessible due to digitization and organization, it becomes simpler to derive solutions based on the circumstances of the situation. As an incredible benefit, financial management helps with taxation. Taxes have frequently been frowned upon as one of the limitations of financial system. There are tax loopholes and exceptions for enterprises and institutes which can be taken benefit of if the terms are satisfied. For example, a business can claim tax deductions based on their amount of office space.
One of the vital limitations of financial management as per Joseph Stone Capital is the inflexibility it ensures within enterprises. The standards of operation are fixed by incorporating particular accounting parameters; but, when the tasks are done, the conditions may alter from the original situation. The rules are not able to keep up with the active changes in the market environment, and that leads to bureaucracy and lost revenue.
In the same way, implementing standards of practice within a business or an organization comes with a cost. It necessitates both hardware and software installation and orientation for the entire staff so they can adjust to the new system impeccably.
Financial statements exemplify the company’s financial position at the time. Unluckily, it usually does not offer trend analysis unless the reader is knowledgeable in financial ratios. The users of financial statements who are the primary stakeholders are more involved in the future of the institution for the long term and short term which are not indicated.
Accounting also uses historical costs to evaluate the values, and this does not consider such things like price changes or inflation.
Lastly, accounting and financial statements do not measure things which do not have a monetary value. Factors related to a business such as customer loyalty cannot be expressed in financial figures irrespective of their importance. Other qualities like reputation and management ability also have no place within financial statements.
Financial planning also involves cash flow management, which means identifying revenue requirements periodically. If there are slow payables or bad debt, then it is likely to lose the ability to order services that maintain the enterprise.
Effective financial planning also guarantees that the business stays on the right side of the law by budgeting for all affiliated taxation required to keep the institute tax compliant. Financial planning keeps the practitioner buoyant and continuously out of trouble, except for an extreme event.