One of the foundations that sustains every company is its financial management and when done well, it can be the key to the success of any business.
It supplies the other areas and, without resources, there is no way for them to carry out their activities regularly.>
But it is common to come across businesses that present an excellent economic result but close the box in the red.
That is, companies that present positive results in the analysis by competence (when the taxable event occurs and not necessarily when the money leaves the cash register), and show an evolution in the debtor balance with financial institutions.
Therefore, it lacks due attention so that the business as a whole can remain healthy.
Continue reading the article to understand what Financial Management is and why it is important.
What is Financial Management?
The Financial Management of a company goes hand in hand with making long-term strategic decisions. Both investment (application of resources) and financing (resource raising).
It aims to increase the value of a company using cash management techniques, capital structure optimization and the analysis of value creation through projects with the aid of financial tools.
Therefore, it comprises a set of administrative actions and procedures aimed at maximizing the company’s economic and financial results.
It is the function of Financial Management to analyze and control the entire financial movement of the company, in addition to carrying out its strategic planning and managing equity and capital. Thus, it is able to analyze past performance, visualize and control the current situation and plan for the future.
Functions and Objectives of Financial Management
We can highlight the functions and objectives of Financial Management:
- Analysis and planning of resources, financial transactions, results, main sources of revenue and costs;
- Control of planned financial transactions;
- Strategic analysis of planning effectiveness;
- Re-planning for adjustments to the deviations that occurred, involving the company’s operating sectors;
- Application and raising of financial resources for the growth and proper functioning of the company;
- Analysis of the granting of credit to customers and their collection;
- Making payments and receipts to control the cash balance;
- Elaboration of the Cash Flow with the future forecast of the financial movement;
- Control of accounts payable and receivable;
- Wise use of available resources;
- Integrated accounting and accounting reporting;
- Tax processes;
- Issuance and management of invoices.
Where is your company’s money going?
Understanding that financial management needs to be meticulous and detailed is important for every decision to be made. This makes it possible to perceive possible flaws in financial management and where it is possible to improve.
But here comes another important question: where is your company’s money going? Despite the fact that, in these cases, partners and investors often look for evidence of theft within the company itself, the fault lies in a simple error that has significant consequences for cash.
Presenting positive results in the Income Statement – Income Statement for the Year , but granting deadlines to customers beyond the company’s financing capacity, can generate serious cash problems in the short term. Consequently, this reduces profitability in the medium and long term.
But why does this happen?
Knowing the company’s Operating Cycle and Cash Cycle is the first step toward understanding what happens in its cash flow.
The Operational Cycle is the sum of the Average Storage Period ( PME ) with the Average Receipt Period ( PMR ). That is, an indicator that indicates the average time that the company bought the product and waited to receive the sale.
The Cash Cycle is calculated by the Operating Cycle minus the Average Payment Term ( PMP ). That is, the average time the company took to pay its suppliers.
To exemplify, imagine that your company has an average of 40 days of Average Storage Period (PME) and 28 days of Average Receipt Period (PMR). In total, 68 days of the Operational Cycle. If the Average Payment Period (PMP) is 30 days, it means that your Cash Cycle is 38 days. In short, you receive your sales within 68 days but pay for them within 30 days. In this case, you need funds to fund your customers for the remaining 38 days.
The worst happens when, in times of adversity and economic crisis, the company needs to sell and increases the Average Payment Period, offering installment conditions as far as the eye can see, without knowing the cycles of the business itself.
Result? Lack of cash to pay fixed expenses, resorting to revolving credits. Such as overdraft, credit cards, guaranteed account, and other financial devices that have a pre-approved limit and that are easy to hire, but with very high interest rates.
In this way, if not planned, your entire profit margin may be gone, in just one financial mismanagement.
Importance of Financial Management
As already mentioned, the company’s Financial Management supplies the other areas, so if it stops working, all the others are compromised.
All company processes, whether human resources, inventory, sales, etc., are directly linked to financial control . In addition, a consolidated Financial Management allows the company to remain economically and financially healthy, avoiding unpleasant situations in its balance.
Keeping financial information up-to-date allows for better management of the company’s resources, in addition to enabling planning in relation to future forecasts.
If the control is effective, it is possible to identify how the resources were used in the past and how the current situation of the company is. Allowing, in this way, to identify failures, unnecessary expenses, source of funds and, thus, optimize such use in order to achieve goals of greater profitability and better results. In addition, by controlling financial ratios, it is possible to compare performance with that of other companies.
Such management is mainly based on indicators, statements, strategies, indices, planning, monitoring of best market practices and standards of excellence in financial management.
Based on these points, it is possible to align the company’s operations, obtain better performance, define and control the budget more effectively, establish and achieve goals. In addition to strengthening the business and giving continuity and consistency to the company in general, based on more assertive decisions aimed at achieving strategic objectives.
Financial Management Tools
The main tools used by the financial manager are:
1- Cash flow: responsible for recording the financial movements of the business, including cash inflows and outflows, which allows analyzing the balances. In addition, it is possible to make future cash flow projections based on previous flows, enabling financial organization and avoiding unpleasant and unexpected situations.
2- Company cycles: by analyzing the company’s cycles, it is possible to optimize the work of managers. There are financial cycles (period of time between supplier payment day and customer receipt date), economic cycles (average time that the organization spends to produce and sell a product) and operational cycle (period that goes from the date of purchase of a good until the day of receipt for the sale).
3- Management Statements: Statement of Income for the Year ( DRE ), Statement of Cash Flow ( DFC ) and Balance Sheet that provide a complete overview of the business results in a certain period, the financial transactions that took place, the changes in equity, the profit and possible damages, among others.
4- Financial management system: a technological system is essential for the company to optimize its control, automate tasks and reduce the risk of errors.
Advantages of Financial Management
Regarding the other advantages, the following stand out:
- Efficiency in working capital management;
- Greater synchronization between payables and receivables, making payments occur in synchrony with receipts and defining a schedule of inflows and outflows;
- Improved pricing when considering aspects such as profitability, profitability and billing;
- Optimization in the use of resources;
A company that does not practice Financial Management properly may default or even go bankrupt.In addition, it may fail to present records of cash balances and inventory values, lose control of payables and receivables, face problems in company management, fail to provide working capital, fail to prepare income statements, fail to recognize their financial health, pricing inappropriately, among others.
