Why Is Financial Management So Important in Business?

August 16, 2021

Why Is Financial Management So Important in Business?

Why Is Financial Management So Important in Business?

Financial management is one of the most important responsibilities of owners and business managers. They must consider the potential consequences of their management decisions on profits, cash flow, and the financial condition of the company. The activities of every aspect of a business have an impact on the company’s financial performance and must be evaluated and controlled by the business owner.

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Life Cycles of a Business

Most companies experience losses and negative cash flows during their startup period. Managers must make sure that they have enough cash on hand to pay employees and suppliers even though they have more money going out than coming in during the early months of the business.

As a business grows and matures, it will need more cash to finance its growth. Planning and budgeting for these financial needs are crucial. Financial managers must decide whether to fund expansion internally or borrow from outside lenders.

Financial Management in Normal Operations

In its normal operations, a company provides a product or service, makes a sale to its customer, collects the money, and starts the process over again. Financial management is moving cash efficiently through this cycle. This means managing the turnover ratios of raw materials and finished goods inventories, selling to customers and collecting the receivables on a timely basis, and starting over by purchasing more raw materials.
In the meantime, the business must pay its bills, its suppliers and its employees. All of this must be done with cash, and it takes astute financial management to make sure that these funds flow efficiently.
Even though economies have a long-term history of going up, occasionally they will also experience sharp declines. Businesses must plan to have enough liquidity to weather these economic downturns, otherwise they may need to close their doors for lack of cash. Want to get a Master’s degree but are busy with work?

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Reporting on Business Operations

Every business is responsible for providing reports on its operations. Shareholders want regular information about the return and security of their investments. Business managers need other types of reports with key performance indicators (KPIs) that measure the activities of different parts of their businesses.

Filing and Paying Taxes

The government is always around to collect taxes. Financial management must plan to pay its taxes on a timely basis.

Financial management is an important skill for every small business owner or manager. Every decision that an owner makes has a financial impact on the company, and he has to make these decisions within the total context of the company’s operations.


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Source: Chron

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