What is Financial Management?

Financial management is concerned with all aspects of how the business deals with its financial resources in order to maximize profit over the long term.

COMPONENTS OF FINANCIAL MANAGEMENT

Financial Management involves the following activities:


Financial planning: which predicts the performance of the business in financial terms to give an overall measure of how it is performing and to provide a basis for financial decision-making and for raising finance.


Financial accounting: which clarifies, records and interprets in monetary terms transactions and events of a financial nature. Financial accounting will involve maintaining records of transactions (book-keeping), preparing balance sheets and profit and loss accounts, preparing value added statements, managing cash, handling depreciation and inflation accounting. The accounts prepared by the firm will be audited to ensure that they present a 'true and fair view' of its financial performance and position. But there is scope within the law and accounting rules for company accountants to indulge in 'creative accounting' to improve the picture the accounts present to the outside world (the City and investors).


Financial analysis: which analyzes the performance of the business in terms of variance analysis, cost-volume-profit analysis, sales mix analysis, risk analysis, cost-benefit analysis and cost-effectiveness analysis.


Management accounting: which accounts for and analyzes costs, provides the basis for allocation costs to products or processes, prepares and controls financial budgets and deals specifically with overhead and responsibility accounting. Management accounting provides the data for financial analysis and for capital appraisal and budgeting.


Capital appraisal and budgeting: which selects and plans capital investments based on the returns likely to be obtained from those investments. The capital appraisal techniques comprise accounting rate of return, payback and discounted cash flow.