Financial management blends accounting with economics to help companies identify and achieve their financial objectives. Financial management is an activity critical to the overall management of a company since virtually all business decisions involve finance. In the modern world information is more prevalent making it easier for companies to access capital. Therefore, in modern times financial management has shifted from raising capital to properly and effectively utilizing capital.
Financial management involves creating and analyzing financial statements to help make sound financial decisions. As part of financial management companies plan and allocate their financial resources. Financial management entails risk assessment, evaluation of purchase and investment opportunities, assessment of capital needs and determination of the best sources of capital. Sound financial management helps companies achieve two major objectives — operate efficiently and effectively and provide owners with a suitable return on their investment.
Companies exist to maximize profit and return wealth to their owners. This sometimes can run counter to the needs of the community in which a company operates. In addition societal expectations have changed over time impacting the way companies interact with society. For example, tobacco companies were extremely profitable in the U.S. for most of the 20th century due to high cigarette sales. As Americans learned about the dangers of cigarette smoke, cigarette sales began to drop. Later, sales plummeted. Tobacco company financial managers advocated a shift to overseas markets and other products to maintain company profitability.
Before faxes, emails, voicemail and cell phones it was harder for companies to share information with their employees, vendors and other. As a result companies often used the information they produced to make decisions that affected that area. For example, accounting used information about accounts receivable aging to update or change its invoice or collections policy but often did not share the information about delinquent payments with the sales team. In this environment financial managers focused almost exclusively on ensuring the company had enough external sources of financing to meet its cash needs.
Technology and Innovation
With the rise of large mutual fund companies that increased investment in publicly traded companies, financial managers could shift their focus from raising money to helping better manage their companies’ resources. With the advent of more private equity and venture capital firms who raise larger pools of funds which they then invest in companies, it is easier for smaller businesses to do the same. In addition, technological developments have also removed most of the communication barriers. People can reach others almost anywhere, anytime and can send information over data lines instead of through the mail or by carrier.
- Sacramento State: Financial Management – Principles and Practice [http://www.csus.edu/indiv/k/kuhlej/finance 101/1.docx]
- http://www.newagepublishers.com/samplechapter/001541.pdf Aims and Functions of Finance