In our article on personal finance, we shared how adopting good personal finance management can help you create a sustainable and secure financial future. But what is financial management exactly?
Financial management involves planning, organising, and controlling an organisation’s or individual’s financial resources. Sound financial management will ensure you use your funds efficiently and effectively regardless of your capital or financial goals.
In this article, we’ll explain what it really means by exploring a real-life example. Then, we’ll dive into the concept’s scope, components and objectives before jumping into the types of financial management and career opportunities in the field. Let’s begin!
What is financial management (and what does it mean for your finances)?
Let’s say you’re a new entrepreneur interested in a lucrative business like agriculture — specifically growing pineapples, processing the fruit and selling jam in Nigeria. To start, you’ll need to estimate the cost of a big enough farmland and pineapple crowns. Then, you’ll need to factor in labour, transportation, processing and packaging costs.
Afterwards, you’ll need to explore how to raise the money you need for your business (say, a bank loan) and dive into how best to spend the money you need to ensure the success and sustainability of your business.
We refer to all these activities — as well as the overall process of fundraising and profit-making — as financial management.
But financial management doesn’t just apply to businesses. As an individual, you can use it to achieve your money goals and build sustainable wealth through principles like restraint and financial planning.
What is the scope of financial management?
In the real world, financial management is integral to the success of businesses, governments, and individuals. However, it primarily focuses on crucial aspects — which we’ll explore in this section.
Financial management focuses on the following areas:
- Planning. This involves setting financial goals, creating solid strategies, and outlining the steps necessary to achieve your objectives. Planning is the foundation that guides decision-making and resource allocation for short-term needs and long-term growth.
- Budgeting. We’ve explored the concept of budgeting several times on the PiggyVest Blog. In a nutshell, it is the structured allocation of resources to meet your financial goals. Budgeting involves creating a financial roadmap that aligns spending with priorities, ensuring you efficiently use your funds.
- Risk assessment and management. This aspect involves identifying potential risks that could impact your financial goals and developing strategies to mitigate these risks. It’s about understanding uncertainties and having measures in place to safeguard against them.
- Supervision. This area encompasses the continuous oversight and control of all financial activities. It involves closely monitoring spending, ensuring compliance with financial plans and regulations, and adjusting as needed to stay on track with your established objectives.
Now you know!
What are the components of financial management?
Like public finance and financial intelligence, financial management also consists of core elements you’ll see when applying the concept. Understanding these components will help you manage your finances better.
The components of financial management are:
- Financing. This involves deciding how to raise money for expenses, business operations and investments. It encompasses strategies for acquiring capital — through debt, equity or retained earnings (including wages and salaries) — to ensure sustainable and effective financial operations.
- Investments. Investments in financial management refer to allocating resources to various assets or projects to generate returns. It involves assessing opportunities, managing risks, and strategically placing funds into areas that align with your financial objectives.
- Dividends. Dividends are simply the distribution of profits to shareholders. Financial management includes decisions about the portion of profits to be distributed as dividends versus retained for future investments, striking a balance between rewarding shareholders and reinvesting for even more profits.
These components are also sometimes referred to as financial management decisions.
What are the objectives of financial management?
So, what’s the point of financial management? Why do businesses, governments and individuals need to know and understand the concept?
The following are the objectives of financial management:
- Profit maximisation. The primary goal of financial management is to maximise profits while maintaining a balance between risk and profitability. This involves making strategic decisions that lead to increased revenues and optimised costs.
- Liquidity tracking. Maintaining adequate liquidity is crucial for financial stability — whether you’re running a business or not. This objective involves managing the availability of cash to meet short-term financial obligations, ensuring the smooth functioning of operations without facing cash flow constraints.
- Compliance. Ensuring adherence to legal and regulatory requirements is a critical objective in financial management. It focuses on meeting these standards — covering financial reporting, tax compliance — and other legal aspects that govern financial operations.
- Financial forecasts. Forecasting financial outcomes is essential for effective planning. This objective involves using historical data and market trends to predict future economic scenarios, aiding decision-making and goal-setting.
- Relationship management. Another financial management objective is building and managing relationships with stakeholders (such as investors, creditors and suppliers). Maintaining these relationships fosters trust, helps secure resources, and supports financial health.
These are general objectives, so you or your business might have specific goals for financial management.
What are the types of financial management?
We’ve already learnt so much about financial management. Now, let’s dive into its types.
Here are the types of financial management:
- Personal financial management. This focuses on individual or household financial planning. It involves budgeting, saving, investing and managing personal debts to achieve financial goals such as buying a home, japa-ing, funding education or planning for retirement.
- Public financial management. This pertains to managing finances within the public sector. It involves budgeting, allocating resources for public services, ensuring transparency and maintaining accountability in government spending.
- Corporate financial management. This deals with managing finances within business entities. It includes financial planning, capital structure decisions (whether funding should come from borrowing or equity) and investments to support the company’s growth and profitability.
- International financial management. This type of financial management deals with financial decisions in a global context. It involves managing risks associated with foreign exchange and international investments, while navigating various financial systems and regulations in different countries.
- Non-profit financial management. This focuses on companies prioritising social causes rather than profit (like Mentally Aware Nigeria Initiative). It includes managing funds, donations and grants to support the organisation’s mission while maintaining financial sustainability.
Each type of financial management carries its unique challenges and rewards. For instance, while corporate financial management often focuses on maximising profits, non-profit financial management finds creative ways to achieve social impact with limited resources.
International financial management navigates the exciting complexities of global markets, while personal financial management empowers individuals to shape their financial destinies. It’s a diverse world where each type brings its dynamics and goals!
What is the importance of financial management?
Let’s highlight some of the top benefits of financial management.
Financial management is essential for the following reasons:
- It helps you maintain financial stability by allowing you to strike a balance between income and expenses.
- It ensures you get a high and efficient return on investment — whether you’re investing in risky markets or safer opportunities (like the ones PiggyVest offers on Investify).
- It helps entrepreneurs develop and implement effective business plans for growth and expansion.
- It helps businesses organise their finances and secure essential capital.
At its core, financial management is concerned with helping you achieve clarity and efficiency in money-related decisions — whether you’re an individual, a business or the government.
What are the career opportunities in financial management?
You should learn financial management if you’re an individual navigating your finances or an entrepreneur building a business. However, if the field interests you, several career opportunities exist to explore.
The following are some of the career opportunities in financial management:
- Commercial banking
- Compliance and internal financial management
- Corporate finance
- Financial planning
- Investment banking
- Portfolio management
- Risk management
You can take courses like the Financial Management Specialization from the University of Illinois at Urbana-Champaign (via Coursera) to get started or explore a Bachelor’s in Accounting for a strong foundation.
Financial management is a simple but powerful concept that can help individuals, businesses and governments make the most of their financial resources. You should learn as much as you can about it (as well as concepts like personal finance and financial intelligence) if you’re looking to make the most of your money.
The articles on the PiggyVest Blog are developed by seasoned writers who use original sources like authoritative websites, news articles and academic journals to perform in-depth research. An experienced editor fact-checks every piece before it is published to ensure you are always reading accurate, up-to-date and balanced content.
- Financial Management: An Introduction by Jim Mcmenamin
- Understanding Financial Management: A Practical Guide by H. Kent Baker and Gary Powell