financial management importance essay

Financial Management Explained: Scope, Objectives & Importance

In business, financial management is the practice of handling a company’s finances in a way that allows it to be successful and compliant with regulations. That takes both a high-level plan and boots-on-the-ground execution.

What Is Financial Management?

At its core, financial management is the practice of making a business plan and then ensuring all departments stay on track. Solid financial management enables the CFO or VP of finance to provide data that supports creation of a long-range vision, informs decisions on where to invest, and yields insights on how to fund those investments, liquidity, profitability, cash runway and more.

ERP software can help finance teams achieve these goals: A financial management system combines several financial functions, such as accounting, fixed-asset management, revenue recognition and payment processing. By integrating these key components, a financial management system ensures real-time visibility into the financial state of a company while facilitating day-to-day operations, like period-end close processes.

Video: What Is Financial Management?

Objectives of Financial Management

Building on those pillars, financial managers help their companies in a variety of ways, including but not limited to:

• Maximizing profits: Provide insights on, for example, rising costs of raw materials that might trigger an increase in the cost of goods sold.
• Tracking liquidity and cash flow: Ensure the company has enough money on hand to meet its obligations.
• Ensuring compliance: Keep up with state, federal and industry-specific regulations.
• Developing financial scenarios: These are based on the business’ current state and forecasts that assume a wide range of outcomes based on possible market conditions.
• Manage relationships: Dealing effectively with investors and the boards of directors .

Ultimately, it’s about applying effective management principles to the company’s financial structure.

Scope of Financial Management

Financial management encompasses four major areas:

The financial manager projects how much money the company will need in order to maintain positive cash flow, allocate funds to grow or add new products or services and cope with unexpected events, and shares that information with business colleagues.

Planning may be broken down into categories including capital expenses, T&E and workforce and indirect and operational expenses.

The financial manager allocates the company’s available funds to meet costs, such as mortgages or rents, salaries, raw materials, employee T&E and other obligations. Ideally there will be some left to put aside for emergencies and to fund new business opportunities.

Companies generally have a master budget and may have separate sub documents covering, for example, cash flow and operations; budgets may be static or flexible .

Static vs. Flexible Budgeting

Managing and assessing risk.

Line-of-business executives look to their financial managers to assess and provide compensating controls for a variety of risks, including:

Affects the business’ investments as well as, for public companies, reporting and stock performance. May also reflect financial risk particular to the industry, such as a pandemic affecting restaurants or the shift of retail to a direct-to-consumer model .

The effects of, for example, customers not paying their invoices on time and thus the business not having funds to meet obligations, which may adversely affect creditworthiness and valuation, which dictates ability to borrow at favorable rates .

Finance teams must track current cash flow, estimate future cash needs and be prepared to free up working capital as needed.

This is a catch-all category, and one new to some finance teams. It may include, for example, the risk of a cyber-attack and whether to purchase cybersecurity insurance , what disaster recovery and business continuity plans are in place and what crisis management practices are triggered if a senior executive is accused of fraud or misconduct.

The financial manager sets procedures regarding how the finance team will process and distribute financial data, like invoices, payments and reports, with security and accuracy. These written procedures also outline who is responsible for making financial decisions at the company — and who signs off on those decisions.

Companies don’t need to start from scratch; there are policy and procedure templates available for a variety of organization types, such as this one for nonprofits.

Functions of Financial Management

More practically, a financial manager’s activities in the above areas revolve around planning and forecasting and controlling expenditures.

The FP&A function includes issuing P&L statements, analyzing which product lines or services have the highest profit margin or contribute the most to net profitability, maintaining the budget and forecasting the company’s future financial performance and scenario planning.

Managing cash flow is also key. The financial manager must make sure there’s enough cash on hand for day-to-day operations, like paying workers and purchasing raw materials for production. This involves overseeing cash as it flows both in and out of the business, a practice called cash management.

Along with cash management, financial management includes revenue recognition, or reporting the company’s revenue according to standard accounting principles. Balancing accounts receivable turnover ratios is a key part of strategic cash conservation and management. This may sound simple, but it isn’t always: At some companies, customers might pay months after receiving your service. At what point do you consider that money “yours” — and report the good news to investors?

Finally, managing financial controls involves analyzing how the company is performing financially compared with its plans and budgets. Methods for doing this include financial ratio analysis, in which the financial manager compares line items on the company’s financial statements.

Strategic vs. Tactical Financial Management

On a tactical level, financial management procedures govern how you process daily transactions, perform the monthly financial close, compare actual spending to what’s budgeted and ensure you meet auditor and tax requirements.

On a more strategic level, financial management feeds into vital FP&A (financial planning and analysis) and visioning activities, where finance leaders use data to help line-of-business colleagues plan future investments, spot opportunities and build resilient companies.

Importance of Financial Management

Solid financial management provides the foundation for three pillars of sound fiscal governance:

Strategizing

Identifying what needs to happen financially for the company to achieve its short- and long-term goals. Leaders need insights into current performance for scenario planning , for example.

Decision-making

Helping business leaders decide the best way to execute on plans by providing up-to-date financial reports and data on relevant KPIs.

Controlling

Ensuring each department is contributing to the vision and operating within budget and in alignment with strategy.

With effective financial management, all employees know where the company is headed, and they have visibility into progress.

What Are the Three Types of Financial Management?

The functions above can be grouped into three broader types of financial management:

Capital budgeting

Relates to identifying what needs to happen financially for the company to achieve its short- and long-term goals. Where should capital funds be expended to support growth ?

Capital structure

Determine how to pay for operations and/or growth. If interest rates are low, taking on debt might be the best answer. A company might also seek funding from a private equity firm , consider selling assets like real estate or, where applicable, selling equity.

Working capital management

As discussed above, is making sure there’s enough cash on hand for day-to-day operations, like paying workers and purchasing raw materials for production.

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What Is an Example of Financial Management?

We’ve covered some examples of financial management in the “functions” section above. Now, let’s cover how they all work together:

Say the CEO of a toothpaste company wants to introduce a new product: toothbrushes. She’ll call on her team to estimate the cost of producing the toothbrushes and the financial manager to determine where those funds should come from — for example, a bank loan.

The financial manager will acquire those funds and ensure they’re allocated to manufacture toothbrushes in the most cost-effective way possible. Assuming the toothbrushes sell well, the financial manager will gather data to help the management team decide whether to put the profits toward producing more toothbrushes, start a line of mouthwashes, pay a dividend to shareholders or take some other action.

Throughout the process, the financial manager will ensure the company has enough cash on hand to pay the new workers producing the toothbrushes. She’ll also analyze whether the company is spending and generating as much money as she estimated when she budgeted for the project.

NetSuite: Financial Management for Startups and Beyond

At the outset, financial management responsibilities within a startup include making and sticking to a budget that aligns with the business plan, evaluating what to do with profits and making sure your bills get paid and that customers pay you.

Financial management gets more complicated as the company grows and adds finance and accounting contractors or staffers. You must ensure your employees get paid with accurate deductions, properly file taxes and financial statements, and watch for errors and fraud.

This all circles back to our opening discussion of balancing strategic and tactical. By building a plan, you can answer the big questions: Are our goods and services profitable? Can we afford to launch a new product or make that hire? What might the coming 12 to 18 months bring for the business? Solid financial management provides the systems and processes to answer those questions.

Financial management challenges can be daunting for both startups and growing businesses. This is where NetSuite's financial management software comes into play. With its comprehensive, cloud-based solutions, NetSuite ensures that your financial data is accurate, up-to-date, and accessible anytime, anywhere.

From automating complex financial processes to offering real-time visibility into performance, NetSuite is the go-to solution for businesses aiming for seamless integration and efficient financial operations. As your company expands, NetSuite scales with you, ensuring you have the right tools to make informed strategic decisions at every stage. Make the smart choice for your business's financial future with NetSuite.

Financial Management

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Introduction to Financial Management – A Complete Guide

• What is Financial Management?
• Importance of Financial Management
• Objectives of Financial Management
• Elements of Financial Management
• Functions of Financial Management
• An Example of Financial Management
• Frequently Answered Questions

Financial Management is one of the most important aspects for individuals and organisations in this rapidly growing world. It is no longer about saving money; it is about managing and growing money. To run a business efficiently and effectively and achieve business goals , one needs to have a good knowledge and understanding of financial accounting and management.

According to the Financial Experts Guthman and Dougal,

“Financial management is the activity concerned with planning, raising, controlling and administering of funds used in the business.”

It manages the finances in a way where the business/organization is profitable and scalable in the near future.

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Financial Management is vital for businesses and organisations as it lays the right pathway to achieve business goals and objectives. Here are some of the reasons why financial management is essential in a business:

• Helps in Financial Planning
• Assists in acquiring and managing funds
• Helps in funds allocation
• Provides insights to make critical financial decisions
• Cuts down financial costs
• Improves profitability and value of the organization
• Makes employees aware of financial savings and investments
• Helps in planning the future growth of the organization
• Helps in achieveing economic stability

Just like we all used to save money during our student life and be mindful about it while spending, organisations need to manage the finances effectively to scale and be successful. Here are some crucial objectives that organisations need to be kept in mind:

1. Profit Maximisation

One of the most critical objectives is to ensure maximum profits in both the short and long run. A finance manager should consider this on top of his priority list and ensure that outcomes related to business performance are profitable.

2. Proper Mobilization

Just like you do not waste your savings all in one go to buy something and have nothing in hand, managing funds is crucial for any business. Financial managers need to evaluate and make vital decisions on the allocation and utilization of various funds. Whether it is shares, products, or investing in small companies, all the critical factors must be considered before investing.

3. High Efficiency

Financial Management tries to increase the efficiency of all the departments of the company. Proper distribution of finances or funds to all the departments considering the resources and work involved increases the organization’s efficiency as a whole.

4. Reduce Risks

There are always risks involved in running a business, especially with the uncertainties that come along. Financial managers need to avoid high-risk situations/opportunities and take calculated risks under the consultation of experienced leaders and subject matter experts.

5. Business Survival

Amidst the competitive world, the survival of the business is a primary goal. Darwin said, “Survival of the fittest” in Biology, which is applicable for companies. Companies need to make decisions intuitively. They can always take the help of expert consultants if needed.

6. Balanced Structure

Like they say – Balance is key to everything. This applies not just in life but to businesses too. Financial managers need to prepare a robust capital structure considering all capital sources. This balance is vital for liquidity, flexibility, economy, and stability.

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Financial Management is made of the following key elements. These are:

1. Financial Planning

Financial Planning is a way of calculating the capital required by an organization and adequately allocating resources accordingly. To do this effectively, one needs to have answers to the following questions:

• Do you have well-established business goals and objectives?
• What is your long-term plan as a brand?
• What is the capital required for the organization to sustain itself?
• What are the different policies and regulations involved in your business?

Answers to each of these questions and many more are all related to Financial Management. So, it is crucial to plan things properly that help you achieve your business goals. 

2. Financial Control

It is a pivotal activity to ensure the business is working to meet its objectives. It is more about setting proper KIPs rather than reducing costs. It is essential to ensure everyone in the team is aware of both financial and business goals.

3. Financial Decision-making

Once you have a proper plan and understanding of all the financial aspects, decision-makers should access and decide on fundings, resource allocations, profit distributions, and many more.

The financial management team in any organization is led mainly by the Finance Manager or someone from the Core Leadership team. Here are a few functions which the team generally is responsible for:

1. Capital Estimation

A finance manager has to estimate the capital required for the company. This will include expected costs, profits, future programs, and expected losses, if any. The estimate had to be made in such a way that the earning capability of the company increases steadily.

2. Deciding Capital Structure

Once the estimate has been made, it is now time to form the capital structure. This includes debt analysis in both the short and long term and is dependent on the capital the firm owns and raised external fundings(if any).

3. Choice of Funds

When significant funds are required, the capital structure needs to be expanded. The organization can take options like Bank Loans and Issues of Share and Debentures. It is essential to evaluate these options considering the interest rates, returns and risk involved. A pro and con list of each of these options will be helpful.

4. Investments

The organization cannot just sit on funds or profits. Growing money is more important than saving money for sustainable growth. The finance Manager needs to allocate funds into profitable ventures or make investments that give reasonable returns with safety on the investment made.

5. Profit Allocation

Profit allocation plays an important role. Once the business makes profits, it is essential to allot them properly. Various factors to be considered here are – employee bonuses, dividends, returns to investors, funds for future growth, and other basic cashflows. It is essential to plan and allocate profits to achieve business objectives.

6. Money Management

The team is also responsible for money or cash management. Cash is required for various purposes such as salaries, electricity and water bills, real estate bills, buying raw materials, storage costs, etc.

7. Financial controls

The finance manager has to plan and utilize the funds and needs to have complete control over the finances considering both short term and long term. This can be achieved using risk analysis and mitigation tools, financial forecasting, ratio analysis, cost reduction, and profit control.

Now you have had a fair idea of Financial Management, let us look at an example of Financial Management.

Suppose you decide to start your own business along with 4-5 partners. You choose to rent a small office in Bengaluru, Karnataka. You will need to consider the following:

• Which area is best suited for office locations?
• Should I go for a small independent office or go for a co-working space?
• What will be the rent cost per annum?
• What if I buy the property? What will be the evaluation 15 years from now? Will it be lesser than the rental cost for the next 15 years?

You might not have answers to all these questions and might decide to consult a real estate agent. Basis his advice, you might also consult the finance team on how much % of the funds should be invested in real estate so that it does not affect business profitability. 

So basis all this financial information, you might decide whether to rent an office or buy a property. Even Work from Home is an option during the initial stages until the team grows. 

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1. What are the different types of job roles in financial Management?

• Financial Manager
• Investment Banker
• Corporate Manager
• Budget Analyst
• Financial Planner

2. What is the average salary of a Finance Manager in USA?

The average salary of a Finance Manager in USA is $1,03,000/yr.

3. What is the average salary of a Finance Manager in India?

The average salary of a Finance Manager in India is ₹11,00,000/yr.

4. What are the courses available to learn Financial Management?

There are several courses available online. You can go for free short-term courses to kick-start your financial management journey and later pick up a PG Program or an MBA in Finance. Here are a few courses for you:

• Business Finance Foundations
• Basic Accounting Certificate
• Executive PG Program in Management
• Online MBA Degree

Quick Read: Scope of MBA Finance in 2021: Top Job Roles, Skills & Opportunities

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Table of contents

Essay on Financial Management

After reading this essay you will learn about:- 1. Introduction to Financial Management 2. Definition of Financial Management 3. Scope 4. Role in a Business 5. Financial Goals and Objectives 6. Functions.

Essay Contents:

• Essay on the Functions of Financial Management

Essay # 1. Introduction to Financial Management:

A business organisation seek to achieve their objectives by obtaining funds from various sources and then investing them in different types of assets, such as plant, buildings, machin­ery, vehicles etc. Financial management is managing the finances through scientific decision­-making.

For making right decisions, financial management needs to understand financial envi­ronment within which these decisions operate. Financial management will then be able to analyse these financial information’s to predict likely future results and to plan more carefully their proposed course of action.

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Financial management is concerned with the acquisition (investment), financing (arranging funds), and management of assets with some overall goal in mind. Invest­ment decisions begin with a determination of the total amount of assets required by the firm and to determine the money value of the same. Assets that cannot be economically justified, may be reduced, eliminated or replaced.

Financing decisions include decisions regarding mix of financing, type of financing em­ployed, dividend policy and method of acquiring funds i.e., getting a short term loan, or a long term lease arrangement, sale of bonds or stock.

Asset management decisions means managing the assets efficiently after their acquisition.

Success of a firm depends on the ability to raise funds, invest in assets and manage wisely.

Essay # 2. Definition of Financial Management:

Financial management is an internal part of overall management and not a staff function of the organization. It is not only restricted to fund raising process but also covers utilization of funds and monitoring its uses. The finance function is concerned with the process of acquiring an efficient utilization of funds of a business system, in order to maximize the value of the enterprise.

Financial management involves the application of principles of general management to the finance function. These functions influence the operations of other crucial functional areas of the enterprise or firm such as marketing production and personnel. Thus the overall survival of the firm is effected by it financial operations.

“The financial management deals with how the corporation obtains the funds and how it uses them.” —Hoagland

“The financial management refers to the application of skills in the manipulation, use and control of funds.” —Mock, Schultz and Schuckectat

Financial management can also be defined as that part of management, which is related mainly with raising or acquiring the funds for the enterprise or firm in the most economical way, utilizing those funds as profitably as possible, for a given risk level, planning the future investment of those funds and controlling the current performance plus future development by adopting budgeting, cost accounting and financial accounting.

Essay # 3. Scope and Functions of Financial Management :

The main objectives of financial management are to arrange the sufficient funds for meeting short term long term requirements of the enterprise. These finances are procured at minimum cost in order to maximize the profitability.

In view of these factors the financial management scope concentrates on the following areas of finance function.

(i) Estimating the Financial Requirements :

The first job of the finance manager of an enterprise is to estimate short term and long term financial requirements of his business. He will prepare a financial plan for present as well as future for this purpose.

The finance required for procuring fixed assets as well as the working capital needs will have to be ascertained. The estimations should be based on sound financial principles so that funds available with the firm are neither inadequate nor excess.

(ii) Determining the Capital Structure :

After estimating the financial requirements, the finance executives have to decide about the composition of capital. The capital structure refers to the type and proportion of different securities for raising funds. After deciding the quantum of funds needed it should be decided which type of securities should be raised.

The finance executives have to determine the relative proportions of owner’s risk capital and borrowed capital along with short term and long term debt equity ratio.

A decision regarding various sources of funds should be linked with the cost of raising funds. A decision about the kind of securities to be employed and the proportion in which these should be utilized is an important decision which affects the short term and long term financial planning of an enterprise.

(iii) Choice of Sources of Finance :

After preparing a capital structure an appropriate source of finance is chosen. Various sources from which finance may be raised include: shareholders’ debenture holders, banks and other financial institutions and public deposits etc. Finance executive has to evaluate each source or method of finance and select the best source keeping in view the various factors.

The need, purpose, objective, cost involved may be the factors affecting the selection of a suitable source of financing, for instance, if the finances are required for short periods then banks, public deposits and financial institutions may be appropriate, and for long term financial requirements, the share capital and debentures may be useful.

(iv) Investment Decisions :

When the funds have been poured then a decision regarding pattern of investment has to be taken. The funds raised are to be intelligently invested in various assets so as to optimize the returns on investment. The funds will have to be used first for the purchase of fixed assets and then an appropriate part will be retained as working capital.

The utilisation of long term funds requires a proper assessment of different alternatives through capital budgeting and opportunity cost analysis. While spending on various assets, management should be guided by three important principles of safety, liquidity and profitability. A balance should be struck even in these principles for the purpose of optimum returns on investment.

(v) Management of Profits :

The utilisation of surpluses or earnings is also an important factor in financial management. A judicious utilisation of earnings is essential for expansion and diversification plans of the enterprise.

A certain amount out of the total profit may be kept as reserve voluntarily, a portion of surplus may be distributed among the ordinary and preference shareholders, yet another portion may be reinvested. The finance executive must take into consideration the merits and demerits of the alternative scheme of utilizing the funds generated from the enterprise’s own earnings.

(vi) Management of Cash Flow :

Cash flow management is also an important task of finance executive. He has to assess the various cash requirements at different times and then make arrangements for cash needed. Cash may be required to (i) make payments to creditors (ii) for purchase of materials (iii) to meet wage bill (iv) to meet everyday expenses.

The cash management should be such that neither there is shortage of it and nor it is idle. Any shortage of cash will damage the credit worthiness of the firm. The idle cash with the enterprise will mean that it is not properly utilized. In order to know the cash requirements during different periods, the management should arrange for the preparation of cash flow statement in advance.

(vii) Implementation of Financial Controls :

An efficient system of financial management needs the use of various control of devices. Financial control devices generally adopted are (i) Return on Investment (ii) Budgetrary Control (iii) Cost control (iv) Break Even analysis (v) Ratio analysis. The use of various control techniques by the Finance Manager will help him in evaluating the performance in different areas and take corrective action whenever needed.

Essay # 4. Role of Financial Management in a Business:

An effective financial management plays a dynamic role in a modern company’s develop­ment.

In earlier days, financial managers were primarily engaged in:

(a) Raising funds, and

(b) Managing the firms cash flow.

But now-a-days with the developments and increasing complexi­ties in the business, responsibility of the financial managers have increased and they are now concerned with the decision-making process involving finance, i.e., capital investment.

Today external factors, like competition, technological change, economic uncertainty, infla­tion problem etc., create financial managers problem more complicated. He must have flexibil­ity to adopt to the changing external environment for the survival of his firm.

Thus in addition to the job of acquisition, financing and managing the assets, the financial manager is supposed to contribute to the fortunes of the firm and to the optimal growth of the economy as a whole.

He is required to take decisions on:

(i) Investing funds in assets, and

(ii) Obtaining best mix of financing and dividends.

In order to understand the environment in which a finance manager is required to take decision, a sketch indicating business system is given hereunder:

The Financial Management’s main role is therefore to create profit on the capital invested (fixed as well as working capital). Each and every decision related to finance/economy must be optimal. Every business enterprise is set up to earn profit, and no one is interested in taking risk unless he is assured of fair return on the investment. However government organisations have no profit motive but are created to serve the public.

The profit earned by a firm is used for:

(a) Future expansion.

(b) Distributing profit as rewards to owners/shareholders.

Profit earned also serves as an indicator of efficiency and performance of the firm. So as to enable to perform the role of financial management, financial managers must be given proper authority, autonomy, freedom of actions, supporting staff, system for providing necessary information. He should be accountable also for his role.

Essay # 5. Financial Goals and Objectives :

There may be various objectives of a firm, but the goal of a firm is to maximise the wealth of the firm’s owners. Thus we can say that, “the improvement of shareholders value is the one mission that continually guides all corporate decisions and actions” or “the goal of a firm is maximizing the shareholders’ value”. This maximisation of value should be achieved from long term point of view.

The financial goal can be expressed as:

(a) Required profit levels,

(b) Earnings per shares, and

(c) Required rate of return on investment.

For a large firm, where shareholders do not have direct say and the firm is managed by the management, an ordinary shareholder can judge the performance by the market price of the firm’s share. Market price serves as a gauge for business performance, it indicates how well management is doing on behalf of its shareholders.

Management is the agents of the owners or shareholders, and financial management acts for achieving the goal of profit maximization in the shareholders’ best interests.

Social Goals :

While profit maximisation is the primary goal for any business organisation, social respon­sibility is also important for them. In case of Government organisations and public sector organisations, social responsibility is the primary goal and profit is secondary.

Social responsi­bility includes service to the people, protecting the consumer, paying fare wages to the employ­ees, upliftment of the weaker sections, welfare facilities like medical education, environment improvement programmes etc.

Financial Objectives :

In making financial decisions, it is important to set out clear objectives.

Following are the basic financial objectives:

(a) Profit maximisation.

(b) Maximisation of shareholders’ owners’ wealth.

(c) Reduction in cost.

(d) Minimising risks.

(e) Sustained increase in the value of firm

(f) Wealth maximisation.

Essay # 6. Functions of Financial Management :

Financial manager is concerned with the following aspects:

1. Identifying the present strengths and weaknesses of the organisation, and the scope for improvement, by conducting the financial analysis.

2. Planning the financial strategies. This involves the consideration of methods and levels of funds raising, profitability and the financing of expansion plan of the organisation.

3. Arranging the funds when required, in the form needed in the most economical way.

4. Conducting financial appraisal of the possible courses of action. The appraisals are needed in respect of possible take overs and mergers, analysis of capital projects, or alternative methods of funding.

5. Advising about capital structure.

6. Consideration of an appropriate level for drawings by dividends to the owners/ share­holders.

7. Ensuring that assets are controlled and used in an efficient manner.

8. Cash management. Preparation of detailed cash budgets and/or forecast funds flow statement so that future problems can be foreseen and remedial measures taken in advance. These take care of both shortage and excess of cash. Finance managers must find ways of raising more funds needed, or investing excess funds for an appropriate length of time.

9. Finance managers are likely to draw attention on other disciplines also, like account­ing and budgeting.

In order to enable financial managers to perform above functions satisfactorily, he must have good knowledge of accounting, economics, mathematics, statistics, law especially taxa­tion, financial market etc.

The functions of finance thus involve three major decisions the firm must make:

(a) The investment decisions,

(b) The financing decisions, and

(c) The dividend decisions.

Each of these decisions are taken in relation to the objective of the firm, an optimal combi­nation of these three will maximise the value of the firm to its shareholders. Since the decisions are interrelated, their joint impact on the market price of the firm’s stock must be considered.

(a) Investment Decisions:

This is the most important decision. Capital investment, i.e., allocation of capital to investment proposals is the most important aspect, whose benefits are to be realised in future. As future benefits are not known with certainty, the investment proposals involve risk.

These should, therefore, be evaluated in relation to expected return and risk. Considerable attention is paid to determine the appropriate required rate of return on the investment.

In addition to taking capital investment decisions, finance managers are concerned with the management of current assets efficiently in order to maximise profitability relative to the amount of funds tied up in asset. Investment decisions also include the decisions about mergers and acquisition of another company.

(b) Financing Decisions:

Finance manager is required to determine the best financing mix or capital structure. An optimal financing mix is one in which market price per share could be maximised. Financing decision are taken in relation to the overall valuation of the firm.

Various methods of obtaining short, intermediate, and long term financing are also explored, examined, analysed and a decision is taken. While taking financing decisions, the influence of inflammation on financial markets and on the cost of funds to the firm is also considered.

(c) Dividend Decision:

The dividend decision includes the percentage of earnings paid to stockholders in cash dividends, stock dividends and splits, and the repurchase of stock.

To Meet Funds Requirement of a Firm :

Funds requirement is assessed for different purposes, namely for feasibility study of a project, detailed planning of a project, and for operation and expansion of the business.

For feasibility study, only broad estimates are sufficient and are generally obtained from the past experience of the similar works by interpolating the present trends and the condition of the proposed project in comparison to the one whose figures are being adopted. While during detailed plan­ning, estimated requirement is comparatively more realistic, and prepared after going into details more thoroughly.

Here we are discussing the funds requirement for a running business including its long term planning for expansion.

The main function of financial management is to ensure that the firm must have sufficient funds to meet financial obligations when they are needed and to take advantage of investment opportunities. To achieve this objective, a thorough study is conducted about ‘flow of funds’ i.e., statement of funds requirement indicating the amount of fund needed and at what time.

This ‘statement of funds’ is a summary of a firm’s changes in financial position from one period to another. This indicates that how the funds will be used and how it will be financed over specific period of time. This includes the cash as well as non-cash transactions.

Forecast, financial statements are prepared for selected future dates, generally for middle term and long term plans of the firm. Budgets are used for one year, and are prepared only to fulfill the firms’ objectives envisaged in the forecast for that particular year.

These forecast financial statements are based on the sales forecast and future strategies for expanding the business, and includes, forecast income statements, forecast assets, liabilities, shareholders, equity etc.

Related Articles:

• Essay on Financial Management: Objectives, Scope and Functions
• Essay on Financial Management: Top 5 Essays | Branches | Management
• Top 3 Types of Financial Decisions
• Shareholder Value Analysis (SVA) | Firm | Financial Management

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Why is Financial Management important in life?

Financial Management is an essential aspect of our daily life. We are caught up in our daily life so much that we forget to realise the importance of financial management.

Without the knowledge of financial management it is not possible to live a life of bondage and know how to adequately pay your bills and get out of your financial debts. Having necessary financial management skills will make sure that your money is managed well. 

Here we discuss financial management at an individual level. It includes how you manage your money through Savings, investments and manage your expenditure. Broadly speaking other aspects of financial management are banking, budgeting, insurance, retirement planning and others. 

Importance of financial management in life

Financial Management is about meeting long term and short term financial goals. There are numerous reasons why Financial Management is important but here we focus on a few of them. 

• Ensures that financial needs are fulfilled
• Helps in managing your income
• Budgeting, Savings and expenses 
• Personal Finance 
• Ensures financial security 
• Increase your Assets
• Increase in Standard of Living

Check Here: What financial lessons you can learn from the COVID-19 crisis?

1. Ensures that financial needs are fulfilled

Money matters are most important for any individual. Earning money is one aspect and ensuring that money fulfills your needs is another aspect. 

Having a plan that establishes how much is an individual income, what are the expenses, making plans about spending the income, planning for future goals are important aspects that ensure financial needs are fulfilled. 

Financial management ensures the financial needs of an individual are fulfilled if the following are managed effectively. 

• Creating a monthly budget and following it
• Payment of bills on time
• loan management
• Savings for retirement 
• Managing credit cards and tracking credit score

When you have good knowledge of personal finance and money management skills, you have the advantage of facing financial challenges, use opportunities and work on responsibilities that come your way. 

2. Helps in managing your income 

If you do not have a plan for your income you will end up spending more than you earn or spend on items that you do not need. With a good financial management plan, you can manage your income effectively. 

If you have a good financial plan then you will spend on what is necessary, save money for your future and make proper investments. 

Financial management helps in knowing which expense to handle first and which one later. You will effectively make tax payments, do savings and pay monthly bills.

3. Budgeting, Savings and Expenses 

If you spend your income without a plan on unnecessary expenses or if you spend your income according to your whims and fancies you will fall into a huge debt. This may happen because you spend more than required and you will become financially unstable. 

Financial management helps you in Budgeting your income. Budgeting helps in planning your income where your money should be spent, how much income should be saved, how much should be invested.

According to your lifestyle plan, stick to what you have budgeted, avoid overspending and direct your money towards savings. Savings and Investments money will rescue you in tough times. 

Check Here: What is a budget and how to make a budget?

4. Personal Finance

Personal finance helps you to increase your cash flow. Financial management helps you in tracking your expenses and spending patterns. It helps you to easily increase your cash flows. 

Cash flow can be increased through the following.

• Tax planning 
• Spending wisely
• Proper Budgeting 

When you follow all these it will ensure that your money is not spent unnecessarily. Having a personal financial plan is very important because it ensures the right financial track.

5. Ensures Financial Security

Financial management ensures financial security for you and your family. Proper management of finance gives financial freedom. By having the Financial freedom it gives financial security. 

Having a right investment plan, right insurance plan, proper savings, will ensure that it gives you and your family financial security. 

Check Here: 9 golden rules for financial success

6. Increase your Assets

When you better understand your finances you have a possible chance of increasing your assets. When you own assets you are in a good financial position. Sometimes assets are attached with liabilities.  Determining the value of assets you own will increase your net worth. 

Financial management will help you to increase your assets. Settlement of your liabilities by paying off your debts and increasing your investments in fixed assets will make you financially sound. This way you can grow your assets by effectively managing your finances.

Check: Today’s Live Gold Rate in Dubai

7. Increase your Standard of Living 

Financial management increases your standard of living. The more you are planning for your savings, the more you are increasing your net worth. The more you plan for your finances, the more your savings will be. Savings can help you to face financial challenges. Effective financial management will increase your wealth thereby increasing your standard of living. 

Conclusion  

Understanding your finances is the first step in financial management. If financial management is not effective then you will fall into a deep financial crisis. Make financial management so effective that it will make your future safe.

About the author

Vinay Kumar

Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.

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Essay on Financial Management

Students are often asked to write an essay on Financial Management in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Financial Management

What is financial management.

Financial management is taking care of money. It’s like being smart with your allowance. You plan how to spend and save. Companies do this too. They decide where to use their money to grow and make more.

Why It’s Important

Good financial management helps you not run out of money. It’s like making sure you have enough lunch money for the whole week. For businesses, it means they can pay workers and buy what they need.

Making a Budget

A budget is a plan for your money. You write down what you earn and what you spend. It’s like planning your snacks so you don’t eat them all at once.

Saving and Investing

Saving money means keeping it for later. Investing is using your money to try to make more money, like buying a lemonade stand to earn more.

Being Careful with Debt

Debt is borrowing money. It can help you when you need it but remember to pay it back. It’s like borrowing a toy and making sure to return it.

Also check:

• Advantages and Disadvantages of Financial Management

250 Words Essay on Financial Management

Financial management is about how to handle money in a way that is smart and helps achieve goals. It’s like planning a budget for a family or figuring out how to save up for a big purchase. In businesses, it’s about making sure they have enough money to run smoothly and grow.

Creating a Budget

One part of financial management is making a budget. A budget is a plan that shows how much money you expect to get and how you plan to spend it. It’s like when you decide to save part of your allowance for a new bike. Companies do the same by setting aside money for new projects or to pay workers.

Saving money is another key point. It means keeping some money aside for later rather than spending it all. Investing is a step further, where you use your savings to make more money, like buying shares in a company or saving in a bank account that earns interest.

Making Smart Choices

Financial management also involves making decisions about what to buy and when. It’s important to think about if something is really worth the money or if there might be a better way to use it. This can help avoid wasting money and make sure there’s enough for important things.

Good financial management helps avoid money troubles and can even lead to having more money in the future. It’s a skill that is useful for everyone, from kids saving their allowance to adults running a big company. Learning about it early can make life a lot easier and more successful.

500 Words Essay on Financial Management

Financial management is like being the boss of your money. Imagine you have a piggy bank; taking care of it, deciding when to put money in, and when to take some out is a bit like financial management. But for grown-ups, it’s more complex because they deal with things like budgets, savings, investments, and loans. It’s all about making sure that money is used wisely and that there’s enough for the things we need, both now and in the future.

The Importance of Budgeting

A budget is like a shopping list for your money. It helps you keep track of how much money you have, what you need to spend it on, like food and rent, and how much you can save for fun things, like toys or vacations. By making a budget, you can make sure you don’t spend too much and end up with no money when you need it. It’s like planning your spending so that you can always buy what you need and sometimes what you want.

Saving money means putting it away for later, like in a savings account. It’s important because it can help you buy big things in the future, like a car or a house. Investing is a bit like planting a seed and watching it grow. You use your money to buy things that could make more money over time, like stocks or bonds. Both saving and investing are ways to make sure you have enough money for the future.

Financial management also means making smart choices with your money. This means thinking carefully before you buy something. Ask yourself, do you really need it? Can you afford it? Sometimes, it’s better to wait and save more money before buying something big or expensive. This helps you avoid debts, which is money you owe to others.

Understanding Loans and Debts

Loans are like borrowing money from a friend, but you have to pay it back with a little extra, called interest. Debts are the total amount of money you owe others. Managing loans and debts is important because if you borrow too much, it can be hard to pay back. It’s like taking too much food on your plate and not being able to eat it all. You need to be careful and borrow only what you can pay back.

Planning for Surprises

Sometimes, things happen that we don’t expect, like a bike breaking down or getting sick. That’s why part of financial management is putting some money aside for emergencies. This money can help pay for these surprises so that they don’t cause big problems with your finances.

Financial management is all about taking good care of your money. It helps you make smart choices, save for the future, and be ready for unexpected events. Just like you take care of your toys and belongings, taking care of your money is important too. It means you’ll always have enough for the things you need and some of the things you want. Remember, being the boss of your money is a big responsibility, but it can also be fun when you do it right!

That’s it! I hope the essay helped you.

If you’re looking for more, here are essays on other interesting topics:

• Essay on Financial Crisis 2008
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116 Financial Management Essay Topics

🏆 best essay topics on financial management, ✍️ financial management essay topics for college, 👍 good financial management research topics & essay examples, 🎓 most interesting financial management research titles, 💡 simple financial management essay ideas.

• Financial Operation Exposure Management Principles
• Strategic Financial Management: The Link Between Valuation and Financial Decisions
• Amazon Company: Financial Management
• Coca-Cola Company’s International Financial Management
• BP and Royal Dutch Shell Companies’ Financial Management
• Nokia Company’s Financial Analysis and Management
• Euroland Foods S.A. Strategic Financial Management
• BMW: Global Financial Management and Summary In the case study, the foreign exchange risk management strategy of BMW, discussed in order to identify the effectiveness of the strategies followed by it to get the optimum results.
• IBM’s Management Accounting & Financial Practices The financial tradition at IBM is that those who are charged with the responsibility to handle finances do that. Accounting is an important part of IBM as a corporation.
• JD Sports and Sports Direct Companies Financial Management This paper focuses on the financial analysis of two companies, JD Sports Fashion PLC and Sports Direct International PLC. Both are based in the UK but have a presence in other parts of the world.
• Financial Management of Marks & Spencer vs. Next Marks and Spencer demonstrates higher profit and liquidity than Next does. However, Next has more capability to pay off its debts judging by its interest cover ratio.
• Financial Planning. Money Management Skill Financial literacy can be defined as knowledge about financial planning and management that allows making reasonable choices about money spending and saving.
• Expo2020 Dubai’s Accounting and Financial Management This paper compares costs and revenues at two levels: state and organizational. Moreover, a comparison with other exhibitions that have been held in the last decade is presented.
• Financial Management Role in Healthcare With the introduction of the Affordable Care Act, electronic health records, and the Medicare billing system, the financial aspect of healthcare requires extra attention.
• Financial Management in Nokia Nokia is part of the mobile communications industry which is now one of the most rapidly growing industries in the world.
• Alibaba Corporation’s Financial Management This report offers an examination of Alibaba’s major financial ratios and performance indicators, assessing the firm’s cash flow, liquidity, solvency, and profitability ratios.
• Personal Financial Management and Financial Literacy By understanding the basic principles and minor aspects of money management such as the compound interest method, people can avoid bankruptcy and enhance their chances for the side income.
• Puma SE: Financial Management The paper examines Puma’s outlook as it will grow through sustainability-based initiatives, profitability options, and potential risks such as the uncertain economic situation.
• British Airways Group: Financial Management In this report, a critical analysis is made of the financial statements of the British Airways Group for the period February 28, 2008 to March 31, 2009.
• Financial Management During the Recession This paper shall set out to establish whether the recent financial crisis was in any way affected by global financial management or by other economic factors.
• Financial Management: Annual Savings for Retirement The paper will focus on estimating the annual savings that the client needs to make in order to achieve the retirement plan.
• Financial Management in the Healthcare Industry In this essay, the author focuses on the significance of financial management and the most crucial data for overall management.
• Project Cost and Finance Management Challenges The cost management functions are complex as projects come with different complexities. Many emerging projects pose different challenges in terms of their characteristics.
• Southwest Airlines’ Financial Management This paper analyzes the financial and trend ratios of Southwest Airlines, predicts future financial performance, and determines the return on equity.
• Accounting and Financial Management for Expo 2020 Dubai The use of technology is a fundamental aspect of the organizational development adopted in every aspect of the innovation exhibitions hosted by the association in Dubai.
• International Finance and Responsible Financial Management COVID-19 has a variety of ramifications for businesses in the future. Due diligence processes should focus on the target industry and the risks.
• EasyJet: Financial Management ​To ensure its survival during lockdowns and travel bans, EasyJet could take every step necessary to reduce costs, conserve cash burn, and enhance liquidity.
• Children’s Programs: Financing and Management This research paper will examine the domains specific to the financial management and planning of children’s programs.
• Strategic Financial Management: Diageo plc and SAB Miller plc Both Diageo and SAB Miller have strategic financial management that helps make complex decisions that increase their competitive advantages and eventually increase revenue.
• Financial Management of Aldar Properties UAE UAE has seen a massive growth in all business sectors and promises more to the investors, but recent financial scam has cast many things under doubts.
• Carnival Corporation’s Financial Management This paper details an account of the cost behavior of Carnival Corporation Inc. – a large multi-vessel cruise operator.
• The Neqi Firm’s Financial Management Due to the face mask sales during COVID-19, the Neqi firm, which creates and markets face masks, rose to the top of the list of profitable businesses.
• ABC Manufacturing: Financial Management In this research paper, it is required to evaluate the effectiveness of the financial management of ABC Manufacturing.
• Ramsay Health Care: Financial Management The results of this analysis reveal that Ramsay Health Care is engaging in desirable efforts and strategies that have led to considerable financial gains.
• Capital Investment and Financial Management A company’s capital investment is the money it spends on fixed assets like land, machinery, and buildings. Cash, assets, or loans may be used to fund the project.
• Rules of Financial Accounting: Economics and Management It is vital to describe control methods to show how an organization works to stop and curtail dishonest behavior and needless mistakes in its accounting records and data.
• Data Management and Financial Strategies By adopting comprehensive supply chain management, businesses can maximize the three main streams in the supply chain— information flow, product flow, and money flow.
• Possum Inc.’s Multinational Financial Management While Possum Inc. wants to become a multinational corporation, it is expected to know the nature of the local currency of the host currency and its conversion rates.
• Anne Arundel County: Public Finance and Management Analysis of revenue sources is extremely important to understand how the financial health of the county can be improved.
• Financial Management: Growth Financing Growth financing is an important topic of consideration for managers to continue the development of a business.
• Financial Management: Where Does the Money Go It is increasingly possible to hear about the importance of financial literacy in the modern world, which largely boils down to thoughtful money management.
• Jim’s Auto Body: Financial Management This paper examines the financial management of Jim’s Auto Body. Profitability is among the core elements considered in evaluating financial performance.
• Importance of Financial Management The implementation of non-monetary policies is proven to be useful as governments were able to overcome the financial recession.
• Valero Energy and Chevron Corporations’ Financial Management Valero Energy and Chevron Corporations faced a drastic decline in total revenues in 2020, mainly due to economic upheaval and uncertainty caused by COVID-19.
• Financial Management and Quality of Healthcare It is important for managers to understand how these facts are used to improve the financial position of the organisation.
• Sarbanes-Oxley Act and Financial Management The main concern regarding the Sarbanes-Oxley Act is whether it offers effective frameworks for preventing the falsification of a firm’s financial statements or not.
• Financial Management. Some Important Generalizations The article identifies several financial management approaches and perspectives, which when put in place are likely to hamper financial performance.
• Financial Management Competencies Discussion This article is about financial management: the author considers the most important competencies of a financial manager, liquidity risk, risk, and return scenarios.
• Healthcare Financial Management Association (HFMA) Healthcare Financial Management Association (HFMA) provides learning, analysis, and direction to its affiliates on the subjects relating to healthcare finance.
• Financial Management: Evaluation of the New Machine This report evaluates the viability of new trucks that are to be purchased by Southern Suburbs Transport by calculating the net present value.
• Stock Ticker Symbol: Financial Management of the Company The analysis of the company shows that the company has hardships with financial sustainability and adequate management of its assets and liabilities.
• Medical Centers Financial Management Factors that affect the financial performance of these hospitals include the indigent care load, case mix, payer mix, which also includes different levels of self-pay.
• Cyberchamp Inc.’s Ethics and Financial Management This paper aims at discussing the factors to consider while resolving ethical issues and making recommendations for the assistant finance manager in the Cyberchamp Inc. scenario.
• Clayton County Library’s Financial Management Study Limited funding has created financial constraints for Clayton County Library, Georgia. American Libraries experience the greatest threat to their financial stability.
• Financial Management of Healthcare Organizations Healthcare is one of the salient aspects of human beings since it determines their ability to do their daily activities. Sick people cannot perform their roles.
• Terms Used in Financial Management It is important to be aware of some of the general terms the organization uses in its financial management system: a balance sheet, an income statement and the operating cash flow.
• Financial Management and the Secondary Market for Common Stocks This paper will focus on the changes that the secondary market for common stocks in the USA has faced since the 1960s as the reflections of the financial situation in the country.
• Financial Management and Investment Banking This paper will focus on the primary markets, analyze the functions that investment bankers perform in the traditional process for issuing new securities.
• Thai-Lay Fashion Company Ltd.’s Financial Management There are several methods that will help managers make capital investment decisions. These will be discussed here with reference to the Thai-Lay Fashion Company Ltd.
• Public Budgeting Leadership and Financial Management To control the field of public budgeting correctly, one should have ideas about the practical methods of work and the theoretical aspects of this practice.
• A Company’s Value: Financial Management The current paper is aimed to discuss the aspects of financial management of an organization and its stakeholders.
• Financial Ratios: Management and Analysis A high price to earnings ratio suggests that the investors are expecting an enhanced earnings growth in the future as compared to other companies having a lower price to earnings ratio.
• Financial Institutions Management and Sources of Finance Finance is important to any business as it serves different functions which allow the business to run effectively. A company may need additional funds to expand its business operations or expenses.
• Management in Organizations: Financial Issues Creating the environment in which the staff delivers the performance of the finest quality is a necessity for managers in the contemporary business environment.
• Healthcare Organizations Financial Management The suggested paper describes the central components of the healthcare finance and lists phenomena that might impact decision-making regarding particular scenarios.
• Government Budgeting and Financial Management The public budgeting leaders have the responsibility of fulfilling various roles including planning, reforming, and budgeting.
• What Is Financial Management and How to Do It Effectively
• The Role of Financial Management in Elaborating and Implementing Organization’s Strategies
• Effective and Ineffective Financial Management Practices in Health Care
• Innovation in Financial Management: The Impact of Technology
• Building Financial Management Capacity in Fragile and Conflict-Affected States
• Debt Elimination Through Financial Management
• How Financial Management and Corporate Strategy Affect a Firm’s Performance
• Profit vs. Wealth Maximization: A Financial Management Perspective
• Financial Statement and Ratio Analysis: Key Tools to Successful Financial Management
• Hierarchical Clustering Algorithms and Data Security in Financial Management
• Public Financial Management Intervention and Its Impact on Corruption
• Financial Management and Forecasting Using Business Intelligence and Big Data Analytics
• Economic Performance and Corporate Financial Management of Shipping Firms
• Microsoft’s International Financial Management: An Analysis
• Financial Management Practices and Their Impact on Organizational Performance
• Computer Applications for Financial Management
• Antecedent Factors of Financial Management Behavior Among Young Adults
• Financial Management Information Systems and Open Budget Data
• Household Financial Management: The Connection Between Knowledge and Behavior
• Modern System of International Financial Management in Multinational Corporations
• International Financial Management: Exchange Rate Exposure
• Fiscal Decentralization and Public Subnational Financial Management
• Best Practices for Non-Profit Financial Management
• Public Financial Management, Health Financing, and Under-Five Mortality: A Comparative Empirical Analysis
• Entrepreneurial Finance: Fundamentals of Financial Planning and Management for Small Business
• How Technological Evolution in Financial Management Implies a Company’s Success
• Challenges Facing Financial Management in Schools
• Time to Reboot: Rethinking Public Financial Management and Budgeting in Greece
• Financial Management of a Non- vs. For-Profit: Which Is Harder?
• Examining Financial Management in Promoting Sustainable Business Practices & Development
• Banking, Finance, and Financial Management: What’s the Difference
• Improving Public Financial Management in India: Opportunities to Move Forward
• Essential Instruments in the Financial Management of the Companies
• Short-Term Financial and Working Capital Management
• Examining Financial Management Practices in the Context of Smart ICT Use
• Family Financial Management: A Real-World Perspective
• Reforming Public Financial Management Systems in Developing Countries as a Contribution to the Improvement of Governance
• Accounting Use & Abuse in the Australian Public Sector Financial Management Reform Program
• Financial Management Explained: Scope, Objectives, and Importance
• Regional Financial Management Strategies to Improve the Community Welfare
• Financial Management for Public, Health, and Not-for-Profit Organizations
• Technical Efficiency and Financial Management in the Agriculture Industry
• Poor Financial Management Behavior as a Factor Why Students Are Facing Financial Difficulties
• Strengthening Public Financial Management: Exploring Drivers & Effects
• Balancing Long- and Short-Term Financial Management
• Financial Management and Control Procedures for the EU Structural Funds Programs
• The Environment of Public Financial Management: An Economic Perspective
• Introducing Financial Management Information Systems in Developing Countries
• Managing Post-Disaster Reconstruction Finance: International Experience in Public Financial Management
• Lessons From Australian and British Reforms in Results-Oriented Financial Management

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StudyCorgi . 2023. "116 Financial Management Essay Topics." May 7, 2023. https://studycorgi.com/ideas/financial-management-essay-topics/.

These essay examples and topics on Financial Management were carefully selected by the StudyCorgi editorial team. They meet our highest standards in terms of grammar, punctuation, style, and fact accuracy. Please ensure you properly reference the materials if you’re using them to write your assignment.

This essay topic collection was updated on January 8, 2024 .

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Finance Essay: Importance of Financial Management

Prepare a detailed and well-researched finance essay discussing the importance of finance management within an organization.

Introduction to Finance Essay Organizational management is a significant part of organizational development. This leads the entire organization to walk on the path that tends to ensure the achievement of the goals of the organization at a lower cost (De Roover, 2017). Several factors are needed to manage the organization among which finance is important for organization. Management of finance is an efficient and important part of the organizational development (Lewin et al., 2016). Financial management systems help to improve the areas that will help to bring the highest level of transparency and accountability in the organization. The aim of the essay is to discuss the importance of management of finance in an organization. Hence to achieve the aim of the essay, a clear description of financial management has been addressed. Apart from that, significance of management of finance and the need of the manager to balance the company have been elaborately discussed. And lastly, the source of finance has also been discussed.

Define financial management The term financial management is described as planning, organizing, directing, and controlling of the activity related to finance. This includes activities that comprise of the procurement and utilization of the funds of the endeavor. The financial management approaches help in applying the general management principles on the financial resources of the endeavor (Bulturbayevich et al., 2020). The purpose of the financial management considered the estimations of capital requirement, establishment of composition of capital, choice of source of funds, disposal of surplus, investment of capital and controls on financial factors (Prihartono & Asandimitra. 2018).

Importance of financial management It is quite clear that financial management is important for the development of the organization and to reduce the economic risk of the organization. It is necessary to be aware of the source of money and the expenditure of the organization. The financial management at the primary stage of the organizational development is necessary as it helps to provides guidelines for financial planning. It supports the organization and makes it aware of the collection of funds from the different sources and increase the scope to invest in several funds. It supports the organization to reduce the delay of the production, and also reduce the unnecessary financial costing (Boateng, Akamavi & Ndoro, 2016). The financial management ensures the appropriate use of the funds and encourages the organization to make a decision that will support the financial factors. Apart from that, the increase in wealth and managing the profit with minimum costing helps a lot in the development of the organization. It has controlled the financial factors of the business, and has informed the organization about the deprivation and elevation through financial reporting. This allows the organization to be stable and well balanced between the input and output of the organization. Along with that, it provides the scopes that will encourage the business (Buil, Catalán & Martínez, 2016).

Role of the financial manager in a company It is commonly found that without the financial manager, it is not possible to manage the financial factors. The primary function of the manager handling finance in a company is to estimate the amount of capital that is required to enhance the required amount of the areas in order to increase profitability and productivity of the organization (Oelze et al., 2016). The financial managers help in ensuring the structure of the capital and assess and evaluate the accurate sources of the funds. Apart from that, they work to ensure whether the attainment of funds is working in favor of the organization.

Sources of finance Multiple sources of finance are available for business purposes; the crisis is the correct way of investing. The most common supportive hands in the business sector to provide finance are bank loans. This is one of the traditional forms of business finance and ensures several things before providing the loan (Amaliyah, Apriyanto & Sihwahjoeni, 2019). Secondly, business credit cards are also a convenient way of source of finance. This allows having quick funding and purchasing of stock, and different types of equipment. Thirdly, merchant cash advances which are a short-term funding solution are designed to have card payments. This also includes invoice factoring, a process that includes selling open invoices to a factoring company. Crowd funding is also one of the popular ways for businesses to enhance the business in a new direction (Squires et al., 2016).

There are several options that businesses have to get the funds to start or run the business. Some of the options are small-term while some are long-term finance options.

Short term options Working capital loans: The working loans help to provide financial options for daily operations. Small business owners can maintain payrolls and equipment management at tough times.

Unsecured business loans: The unsecured loans do not require having collateral. Small businesses should explore these types of loans; as it is much faster than the secured loans (Pauw, 2017).

Equipment financing: This is a type of loan that helps to provide support to purchase or lease new equipment that is needed by the company (Gabriel & Kirkwood, 2016).

Long-Term options Banking loans: They are the long-term options for the company to start a business. The entrepreneurs can have funds directly from the bank by showing the business plan and the valuation in detail.

Government startup programs: The capitals that are being provided by the government for establishing the program can be of a good long term option. In general, these have a very low-interest rate; hence it is helpful (Gherhes et al., 2016).

Conclusion It is clear from the above discussion that, financial management is important for the development of the organization. It helps in multiple ways and provides information that benefits the organization's development. Financial management can be best done by the help of financial manages and hence, the management needs to have a financial manager to build the organization. The above-mentioned sources of finance are the most commonly used mediums and are believed to be extremely helpful for the people. The options for the short term or long term both work equally to enhance the organization’s development. However, it completely depends on the management of the company that whether they want a long term funding source or short term based on the nature of the organization.

Reference Amaliyah, A. R., Apriyanto, G., & Sihwahjoeni, S. (2019). The Effect of Competence Financial Manager, Internal Control System, and Utilization of Technology Information on the Quality of Financial Report (A Study on Credit Unions In The Kepanjen District). Research Journal of Finance and Accounting, 10(4).

Boateng, A., Akamavi, R. K., & Ndoro, G. (2016). Measuring the performance of non?profit organizations: evidence from large charities. Business Ethics: A European Review, 25(1), 59-74.

Buil, I., Catalán, S., & Martínez, E. (2016). The importance of corporate brand identity in business management: An application to the UK banking sector. BRQ Business Research Quarterly, 19(1), 3-12.

Bulturbayevich, M. B., Sharipdjanovna, S. G., Ibragimovich, A. S., & Gulnora, M. (2020). Modern features of financial management in small businesses. International Engineering Journal For Research & Development, 5(4), 5-5.

De Roover, R. (2017). The Medici Bank: its organization, management, operations, and decline. Pickle Partners Publishing.

Gabriel, C. A., & Kirkwood, J. (2016). Business models for model businesses: Lessons from renewable energy entrepreneurs in developing countries. Energy Policy, 95, 336-349.

Gherhes, C., Williams, N., Vorley, T., & Vasconcelos, A. C. (2016). Distinguishing micro-businesses from SMEs: a systematic review of growth constraints. Journal of Small Business and Enterprise Development.

Lewin, A. Y., Chiu, C. Y., Fey, C. F., Levine, S. S., McDermott, G., Murmann, J. P., & Tsang, E. (2016). The critique of empirical social science: New policies at management and organization review. Management and Organization Review, 12(4), 649-658.

Oelze, N., Hoejmose, S. U., Habisch, A., & Millington, A. (2016). Sustainable development in supply chain management: the role of organizational learning for policy implementation. Business Strategy and the Environment, 25(4), 241-260.

Pauw, W. P. (2017). Mobilizing private adaptation finance: developed country perspectives. International Environmental Agreements: Politics, Law and Economics, 17(1), 55-71.

Prihartono, M. R. D., & Asandimitra, N. (2018). Analysis Factors Influencing Financial Management Behaviour. International Journal of Academic Research in Business and Social Sciences, 8(8), 308-326.

Squires, G., Hutchison, N., Adair, A., Berry, J., McGreal, S., & Organ, S. (2016). Innovative real estate development finance–evidence from Europe. Journal of Financial Management of Property and Construction.

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The Importance of Financial Management

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• 15th September 2023
• Written by LSBF Staff

Financial management is one of the most important aspects of business. To start up or even run a successful business, you will need excellent knowledge of financial management. So, what exactly is this form of management and why is it important? Read on to find out more.

What is financial management?

Financial management refers to the strategic planning, organising, directing, and controlling of financial undertakings in an organisation or institute. It also includes applying management principles to the financial assets of an organisation, while also playing an important part in fiscal management. Here are some of the objectives involved:

• Maintaining enough supply of funds for the organisation
• Ensuring shareholders of the organisation get good returns on their investment
• Optimum and efficient utilisation of funds
• Creating real and safe investment opportunities

Financial management is also made up of certain elements. These include:

• Financial planning: This is the process of calculating the amount of capital that is required by an organisation and then determining its allocation. A financial plan includes certain key objectives which are:
• Determining the amount of capital required
• Determining the capital organisation and structure
• Framing of the organisation’s financial policies and regulations
• Financial control: This is one of the key activities in financial management. Its main role is to assess whether an organisation is meeting its objectives or not. Financial control answers the following questions:
• Are the organisation’s assets being used competently?
• Are the organisation’s assets secure?
• Is management acting in the best financial interests of the organisation and the key stakeholders?
• Financial decision-making: This involves investment and financing with regard to the organisation. This department makes decisions about how the organisation should raise finances, whether they should sell new shares, or how the profit should be distributed.

The financial management department of any firm is handled by a financial manager. This department has numerous functions such as:

• Calculating the capital required: The financial manager has to calculate the amount of funds an organisation requires. This depends on the policies of the firm with regard to expected expenses and profits. The amount required has to be estimated in such a way that the earning capability of the organisation increases.
• Formation of capital structure: Once the amount of capital the firm requires has been estimated, a capital structure needs to be formed. This involves debt-equity analysis in the short and long term. This depends on the amount of capital the firm owns and the amount that needs to be raised via external sources.
• Investing capital: Every organisation or firm needs to invest money in order to raise more capital and gain regular returns. Hence, the financial manager needs to invest the organisation’s funds in safe and profitable ventures.
• Allocation of profits : Once the organisation has earned a good amount of net profit, it is the financial manager’s duty to efficiently allocate it. This could involve keeping a part of the net profit for contingency, innovation, or expansion purposes, while another part of the profit can be used to provide dividends to the shareholders.
• Effective management of money: This department is also responsible for effectively managing the firm’s money. Money is required for various purposes in the firm such as payment of salaries and bills, maintaining stock, meeting liabilities, and the purchase of any materials or equipment.
• Financial control: Not only does the financial manager have to plan, organise, and obtain funds, but they also have to control and analyse the firm’s finances in the short and long term. This can be done using financial tools such as financial forecasting, ratio analysis, risk management, and profit and cost control.

Why is financial management important?

This form of management is important for various reasons such as:

• Helps organisations in financial planning
• Assists organisations in the planning and acquisition of funds
• Helps organisations in effectively utilising and allocating the funds received or acquired
• Assists organisations in making critical financial decisions
• Helps in improving the profitability of organisations
• Increases the overall value of firms or organisations
• Provides economic stability
• Encourages employees to save money, which helps them in personal financial planning

Examples of financial management

Example 1 : Suppose you decide to start your own business along with seven partners. You choose to rent a small office in New York, USA. You may ask the following questions:

• Is New York best suited for my office location?
• Should I opt for an independent office or a co-working space?
• What is the office rent in New York per annum?
• What if I buy the office property? What return on investment can I get from such a deal 15 years from now?

A financial manager and real estate specialist would be able to solve these issues with ease. They would provide you with the clarity you need to understand where your funds must go and what your business goals should look like for increased profitability.

Example 2: Let’s assume that you are a small bookstore business that has received funding to take your business online.

Given the new financial disposition, your new areas of interest would be:

• What should I do to achieve my business goals?
• What investments should I make to take the business online?
• What is my current market value proposition and how can I increase that?
• What is my finance strategy for doubling the capital I have right now?
• Where do I see myself in the next five years as a business?
• How do I repay my business loans and meet the business goals to receive my next funding?

A financial manager would answer all these questions and point you in the right direction in each case through their business and financial expertise.

Why study financial management?

• Diverse career opportunities: Studying financial management opens up a lot of diverse career opportunities. It could be in the private or public sector. Some of the career options include investment banking, entrepreneurship, financial analysis, financial and managerial accounting, and strategic financial management. It is also beneficial for those people who are interested in starting their own business. Doing a financial management course or obtaining a finance degree can help people get promotions or better accounting jobs.
• Improve interpersonal skills: Doing a course in this field will allow you to build better communication and teamwork skills through developing relationships with your colleagues. 
• Builds personality: Doing a course in this field will also improve your soft skills. People who wish to work in this sector should be excited to talk about finance for hours on end, showing that they’re passionate about their careers. This makes them appear more personable and more knowledgeable in their field.
• Greater job prospects: According to the USA’s Bureau of Labour Statistics (BLS), there has been a spike in demand for finance manager jobs in the US due to a “growing range of financial products and the need for in-depth knowledge of geographic regions”. This is further proven by the fact that the demand for careers in financial management has increased by 14%, careers in financial advising by 32%, and careers in financial analysis by 23%.
• Higher salary packages: People working in this sector are usually paid very well, whether it is at entry or management level. This is a highly skilled job role that is always in demand, even during recessions.
• Career growth: There is always an opportunity to develop your professional skills and climb the career ladder. You can quickly acquire in-depth knowledge of financial management systems and financial management software once in this field. If you possess this knowledge and great aptitude skills, this field is perfect for you.

Scope of studying financial management

Doing a management course related to finance or gaining a finance degree offers excellent career opportunities. Here are some of the diverse career options available:

• Corporate manager
• Investment banker
• Financial advisor
• Financial analyst
• Financial examiner
• Financial manager
• Personal financial planner
• Budget analyst
• Investor relations associate or executive
• Credit analyst

If you are interested in doing a course in this field, the London School of Business and Finance (LSBF) offers a number of courses in this field such as a Postgraduate Certificate in Finance , an Online MA in Finance & Investment as well as short courses in finance .

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Essay on Financial Management

After reading this essay you will learn about Financial Management:- 1. Nature of Financial Management 2. Approaches of Financial Management 3. Objectives 4. Goals 5. Responsibilities.

• Essay on the Responsibilities of Financial Management in the Firm

Essay # 1. Nature of Financial Management:

The nature of financial management refers to its functions, scope and objectives. Financial management itself is concerned with the planning and controlling of the financial resources of the firm. As an academic discipline, it has undergone fundamen­tal changes in relation to its scope, functions and objectives.

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In the past, when it was simply a branch of economics, it was treated as the raising of funds. But, at present, it is used in a broader sense which includes the efficient use of resources in addition to procurement of funds.

At the same time, the academic thinking relating to the objective of financial management has also undergone changes over the years. Howev­er, the object of the present study is to describe the functions and objectives of financial management in the academic literature in order to serve as a background to its various aspects which are very important.

Essay # 2. Approaches of Financial Management :

The scope and functions of financial management are divided into two following broad categories, viz.:

(i) Old or Traditional Approach; and

(ii) New or Modern Approach.

(i) Old/Traditional Approach :

Financial management, at the initial stage of its evolution, was a separate branch of academic study in the academic literature and the term, ‘corporation finance’ was used. At present, this term is being replaced in the academic world by ‘financial management’ which deals with the financing of corporate enterprises.

According to this approach, the scope of financial management and the role of financial manager are considered to be confined to the procurement of funds in a broader sense.

As a result, the entire financing technique was treated as encompassing three interrelated aspects of raising and administering resources from outside:

(i) The organisation of capital market in the form of financial institution;

(ii) Funds are raised from the capital markets through financial instruments along with the practices and procedural aspects of capital markets;

(iii) The legal and accounting relationships between the sources of fund and a firm itself.

Therefore, the area of corporation finance was limited to the covering of complex of capital market institutions, practices and instruments through which funds are obtained. Besides, since the problem of raising funds is more intensely felt in case of an episodic event, detailed description of the events like mergers, consolidations, re-organisation, recapitalisation etc. are contained in the field of academic story.

The traditional approach to financial management did not allow the financial manager to take any decision regarding the allocation of the firm’s funds although he was required to raise the needed funds from various sources. The traditional approach evolved in the 1930s and 1940s which dominated the academic thinking during 1940s and early 1950s.

But, subsequently, the same was discarded due to the following snags:

(i) Since the basic conceptual and analytical framework of the definitions and scope of the finance are limited and

(ii) The treatment of various topics and their emphasis is not enough.

Besides, the traditional approach was criticised for the following reasons:

(a) The traditional approach emphasises on raising and administering funds. The subject of finance is treated from the investors’ point of view. No importance was given to the point of view of the financial decision-maker (i.e., who had to make internal financial decisions). In short, the traditional view is the outsider-looking-in approach.

(b) The traditional approach is considered as the episodic financing function since it stresses overemphasis on topics of securities and its markets, incorporation, promo­tion, merger etc.

(c) Since the traditional approach stresses more emphasis on the long-term problem, it ignores the importance of working capital management.

(d) The traditional approach plays a significant role to the financing problems of non-corporate enterprises.

The shortcomings of the traditional approach were primarily due to the fundamental weaknesses other than the treatment and/or emphasis of different aspects. Its concep­tual and analytical limitations arose from the fact that it recognised only the problem of procuring the external funds and ignored the dimensions of allocations of capital which Solomon described as the central issues of financial management.

Of course, certain ‘traditional’ authors like Gerstenberg and Lincoln emphasised and initiated discussion on the topics of day-to-day financial operations including sales forecasting, budgeting, financial control, cost control, etc., along with the discussion on episodic financial events.

(ii) Modern Approach :

The traditional approach was criticised for its conceptual and analytical grounds by the proponents of modern or contemporary approach since the former neglects the problems of allocation of capital to different assets and the problems of optimum combination of finance, which, in other words, omitted the following two important matters, as pointed out by Dewing:

(i) The traditional approach does not recognise the relationships between financing- mix and the cost of capital and fails to solve the problems relating to optimum combination of finance; and

(ii) It also fails to deal with the problems relating to the valuation of the firm and the cost of capital.

The traditional approach evolved its utility during the 1940s and mid-1950s. But, during and after mid-1950s, an efficient and effective utilisation of a firm’s resources necessitated, as there were a number of economic and environmental factors, like the increasing pace of industrialization, technological inventions and innovations, intense competition, government intervention, population growth etc.

Fortunately, a number of management skills and decision-making techniques were devel­oped which facilitated implementing the optimum allocation of a firm’s resources. In other words, the approach and scope of financial management changed, i.e., the emphasis shifted from raising of funds to the efficient and effective use of funds or from episodic financing to the managerial financial problems.

The modern approach is an analytical way of viewing the financial problems of a firm. No doubt, financial management is an integral part of overall management.

In the words of Solomon, E.:

‘In this broader view the central issue of financial policy is the wise use of funds, and the central process involved in a rational matching of advantages of potential uses against the cost of alternative potential sources so as to achieve the broad financial goals which an enterprise sets for itself’.

Therefore, the primary finance function is to take proper decision about the expenditure and the demand for capital for those expenditures, i.e., the proper and efficient use of allocation of funds.

For this purpose, a financial manager should know the following:

(i) How large should an enterprise be, and how fast should it grow?

(ii) In what form should it hold its assets?

(iii) What should be the composition of its liabilities?

The above questions actually cover the major financial problems of a firm. In short, according to the modern approach, financial management deals with the solution of the above three major problems relating to the financial operations, viz., investment, financing and dividend decisions.

Therefore, financial management includes as functions of finance the three major decisions which are:

(i) The Investment decisions,

(ii) The Financing decisions and

(iii) The Dividend Policy decisions.

The new approach to financial management may be broadened to include profit-planning function also.

Essay # 3. Objectives of Financial Management :

From the discussion we have made so far, it becomes clear that a firm has to take the following three major decisions:

(i) Where to invest fund and what amount? i.e., the Investment decisions;

(ii) Where to raise funds and what amount? i.e., the Financing decisions;

(iii) How much to pay by way of dividends? i.e., the Dividend Policy decisions.

The investment and the financial policies depend 011 the above decisions. It should be remembered that a clear understanding of the objectives which are sought to be attained is necessary in order to make wise decisions. No doubt, the objective provides a framework for optimum financial decision-making. It is generally accepted that the financial objective of the firm is to maximise the owner’s economic welfare.

For this purpose, two well-established and widely-discussed criteria are presented:

(A) Profit Maximisation and

(B) Wealth Maximisation.

A. Profit Maximisation :

How a private firm should behave depends on profit maximisation as a decision criterion. Under this concept, actions that increase the firm’s profit are undertaken and those that decrease profit are avoided. Profit can be maximised either by increasing output for a given set of scarce input or by reducing the cost of production for a given output. That is, there must be efficient use of resources.

According to Modern Micro economic theory, profit maximi­sation is nothing but a criterion for economic efficiency as profits provide a yardstick by which economic performances can be judged under condition of perfect competition.

Besides, under perfect competition, where all prices accurately reflect true values and consumers are well informed, profit maximisation behaviour by firms leads to an efficient allocation of resources and maximum social welfare.

There is no doubt that financial management deals with the efficient use of economic resources, i.e., capital funds. Since the capital is a scarce item, it follows that the profit maximisation should serve as the primary need for the decision taken by the financial managers of private firms which, in practice, it follows.

But the same has to be transformed to provide the necessary principles and guidelines to the financial managers since the profit maximisation concept does not recognise the real-world problems that we feel when we want to take actual decisions about the efficient use of capital funds.

As a result, we cannot implement the fundamental idea which underlies the rationale of Adam Smith’s ‘invisible hands by which total economic welfare is maximised.

Profit maximisation is widely preferred, but, in fact, the concept has been questioned and criticised on the following grounds:

(a) Vague/Uncertainty :

Practically, profit maximisation, as an operational criterion, becomes unsuitable for the problems of uncertainty in relation to the investment and financing decisions since it considers only the size of benefits and gives no weight to the degree of uncertainty of the future benefits.

For example, two alternative courses of action might have the same expected outcome, but one might be far more risky than the other. The following illustration will make the principle clear: Let there be two investment opportunities, A and B, whose profit depend on the state of economy as illustrated in Table 1.1.

Table 1.1: Showing the uncertainty about expected profits :

In other words, the returns associated with the alternative B are more uncertain and/or risky since they fluctuate widely depending on the state of economy. Similarly, alternative A is better from the standpoint of uncertainty and risk. Here profit maximisation criterion fails to express it.

(b) Ambiguity :

Profit maximisation concerns ambiguity since the term ‘profit’ is vague and can vary widely depending on the principles of accounting applied.

(c) Timing :

Profit maximisation ignores timings. The money received to-day has a higher value than money received next-year, a profit seeking organisation must consider the timing of cash flows and profits. Which is more profitable to a firm, if it selects a 3-year project with a return of 20% or a 5-year project with a return of 17%?

No doubt the latter project may result in a greater total profit if the firm could not immediately re-invest its profits when the same was received from the 3-year project. The principle can be explained with the help of the following Table 1.2.

Table 1.2: Showing the timing of anticipated profit :

From the Table 1.2 shown above, it is clear that the total profits shown by the alternatives A and B are equal. Therefore, if profit-maximisation is decision-criterion, both of them should be given equal importance. But the important difference between them is that alternative-A provides a higher return in earlier years whereas alternative-B provides a higher return in the latter years, i.e., they are not strictly equal.

Because, we all know that the earlier the better as benefits received sooner are more valuable than benefits received later on the ground that the former can be reinvested ‘o earn a return. The same is due to the fact that there is a time value of money.

The profit maximisation criterion does not recognize; the distinction between the returns received in different periods of time and treats them at par which is not true in real-world as the profits (benefits) in earlier years should be valued more highly than the profits (benefits) in the subsequent years.

Therefore, it can be taken into consideration that the profit maximisation, as an operational criterion, is unsuitable and inappropriate of a firm from the standpoint of investment, financing and dividend policy.

It is vague and ambiguous and does not recognise the two basic facts, viz:

(a) Risk and

(b) Time value of money.

It can be stated that the appropriate operational-decision criterion should include the following:

(i) It must be precise and exact;

(ii) It should consider both quality and quantity dimension;

(iii) It should be based on the bigger the better principle; and

(iv) It should recognise the time value of money.

For the reasons shown above, value maximisation has replaced profit maximisation as an operational criterion for management decisions.

B. Wealth Maximisation :

The Value Maximisation or Net Present Worth Maximisation — which is universally accepted as an appropriate and operationally feasible criterion in order to choose among the alternative courses of action for financial management — is to maximise the value of the firm over a long run. It removes the limitations suffered by the earlier method — profit maximisation.

Under this method, the net present value or wealth of a course of action is maximised. The net present value is the difference between the gross present value of the benefits of that action and the amount of investment required to achieve those benefits. On the other hand, the gross present value of the same is determined by discounting or capitalizing its benefits at a rate which reflects their timing and uncertainty.

The operational features of wealth maximisation satisfy all the three requirements of a suitable operational objective of financial courses of action. Let us discuss one by one. The value of an asset is best viewed in terms of the benefits it can produce. The worth of a course of action can be judged in terms of the value of benefits it produces less the cost of undertaking it.

The benefits of an investment or financing decision can be measured in terms of the stream of future expected case flows generated by the decisions, rather than the accounting profit which is the basis for the measurement of benefits in the case of profit maximisation criterion.

The next feature of the wealth maximisation criterion is that it recognises both the quantity and quality dimensions of benefits along with the time value of money. The value of a stream of future cash flows must consider not only the expected value of the flows, but also their degree of uncertainty.

Other things being equal, less uncertain flows are valued more highly than more uncertain flows. Besides, money has time value.

That is, the sum of money received in future is less valuable than it is today. In other words, necessary adjustment must be made in the cash flow pattern in order to incorporate the risk and also to make an allowance for differences in the timing of benefits.

Therefore, the value of a stream of cash flows can be calculated by discounting its elements back to the present at a capitalisation rate that reflects both time and risk.

The capitalisation /discount rate is the rate which reflects both time and risk preferences of the owners of capital. Generally, capitalisation rate is expressed in decimal notation, i.e., if the rate of discount is taken as 16%, the same will be recorded as 0.16 (16/100) Capitalisation rate will be higher if the risk is greater and the period is longer.

It is quite clear that net present value maximisation is, no doubt, superior than the profit maximisation criterion as an operational objective. The value maximisation decision crite­rion involves a comparison of value to cost. An action that has a discounted value, reflecting both time and risk, that exceeds its cost can be said to create value.

Such actions should be undertaken. Conversely, actions with values less than cost reduce the value of the firm and should be rejected. In the case of mutually exclusive alternatives, when only one is to be chosen, the alternative with the greatest net present value should be selected.

According to E. Solomon’s symbols and methods, the net present worth can be ascer­tained as under:

Investopedia / Sydney Saporito

Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, and retirement, tax, and estate planning. The term often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities.

Individual goals and desires—and a plan to fulfill those needs within your financial constraints—also impact how you approach the above items. To make the most of your income and savings, it’s essential to become financially savvy—it will help you distinguish between good and bad advice and make intelligent financial decisions.

Key Takeaways

• Few schools have courses on managing your money, so it is important to learn how through free online articles, courses, blogs, podcasts, or books.
• The core areas of managing personal finance include income, spending, savings, investments, and protection.
• Smart personal finance involves developing strategies that include budgeting, creating an emergency fund, paying off debt, using credit cards wisely, saving for retirement, and much more.
• Being disciplined is important, but it’s also good to know when you shouldn't adhere to the guidelines.

Personal finance is about meeting your personal financial goals. These goals could be anything—having enough for short-term financial needs, planning for retirement, or saving for your child’s college education. It depends on your income, spending, saving, investing, and personal protection (insurance and estate planning).

Not understanding how to manage finances or be financially disciplined has led Americans to accumulate enormous debt. In February 2024, the Federal Reserve Bank reported household debt had increased by $3.4 trillion since December 2019, prior to the recession. In addition, the following balances increased from the third quarter of 2023 to the fourth:

• Credit card balances : Up by $50 billion
• Auto loans : Up by $12 billion
• Consumer loans and store cards : Up by $25 billion
• Total non-housing : Up by $89 billion
• Mortgages : Up by $112 billion

Student loans remained unchanged, at about $1.6 trillion.

Americans are taking on an ever-increasing amount of debt to finance purchases, making managing personal finances more critical than ever, especially when inflation is eating away at purchasing power and prices are rising.

The five areas of personal finance are income, saving, spending, investing, and protection.

Income is the starting point of personal finance. It is the entire amount of cash inflow that you receive and can allocate to expenses, savings, investments, and protection. Income is all the money you bring in. This includes salaries, wages, dividends, and other sources of cash inflow.

Spending is an outflow of cash and typically where the bulk of income goes. Spending is whatever an individual uses their income to buy. This includes rent, mortgage, groceries, hobbies, eating out, home furnishings, home repairs, travel, and entertainment.

Being able to manage spending is a critical aspect of personal finance. Individuals must ensure their spending is less than their income; otherwise, they won't have enough money to cover their expenses or will fall into debt. Debt can be devastating financially, particularly with the high-interest rates credit cards charge.

Savings is the income left over after spending. Everyone should aim to have savings to cover large expenses or emergencies. However, this means not using all your income, which can be difficult. Regardless of the difficulty, everyone should strive to have at least a portion of savings to meet any fluctuations in income and spending—somewhere between three and 12 months of expenses.

Beyond that, cash idling in a savings account becomes wasteful because it loses purchasing power to inflation over time. Instead, cash not tied up in an emergency or spending account should be placed in something that will help it maintain its value or grow, such as investments.

Investing involves purchasing assets, usually stocks and bonds, to earn a return on the money invested. Investing aims to increase an individual's wealth beyond the amount they invested. Investing does come with risks, as not all assets appreciate and can incur a loss.

Investing can be difficult for those unfamiliar with it—it helps to dedicate some time to gain an understanding through readings and studying. If you don't have time, you might benefit from hiring a professional to help you invest your money.

Protection refers to the methods people take to protect themselves from unexpected events, such as illnesses or accidents, and as a means to preserve wealth. Protection includes life and health insurance and estate and retirement planning.

Several financial planning services fall under one or more of the five areas. You're likely to find many businesses that provide these services to clients to help them plan and manage their finances. These services include:

• Wealth Management
• Loans and Debt
• Risk Management
• Estate Planning
• Investments
• Credit Cards
• Home and Mortgage

The sooner you start financial planning , the better, but it’s never too late to create financial goals to give yourself and your family financial security and freedom. Here are the best practices and tips for personal finance.

The 2022 Investopedia Financial Literacy Survey surveyed 4,000 adults and found that most Americans are concerned about personal finance basics, retirement funding, and investing in crypto.

1. Know Your income

It's all for nothing if you don't know how much you bring home after taxes and withholding. So before deciding anything, ensure you know exactly how much take-home pay you receive.

2. Devise a Budget

A budget is essential to living within your means and saving enough to meet your long-term goals. The 50/30/20 budgeting method offers a great framework. It breaks down like this:

• Fifty percent of your take-home pay or net income (after taxes) goes toward living essentials, such as rent, utilities , groceries, and transport.
• Thirty percent is allocated to discretionary expenses, such as dining out and shopping for clothes. Giving to charity can go here as well.
• Twenty percent goes toward the future—paying down debt and saving for retirement and emergencies.

It’s never been easier to manage money, thanks to a growing number of smartphone personal budgeting apps that put day-to-day finances in the palm of your hand. Here are just two examples:

• YNAB (an acronym for You Need a Budget) helps you track and adjust your spending to control every dollar you spend.
• Mint streamlines cash flow, budgets, credit cards, bills, and investment tracking from one place. It automatically updates and categorizes your financial data as information comes in, so you always know where you stand financially. The app will even dish out custom tips and advice.

3. Pay Yourself First

It’s important to “pay yourself first” to ensure money is set aside for unexpected expenses, such as medical bills, a significant car repair, day-to-day expenses if you get laid off, and more. The ideal safety net is three to 12 months of living expenses.

Financial experts generally recommend putting away 20% of each paycheck every month. Once you’ve filled up your emergency fund , don’t stop. Continue funneling the monthly 20% toward other financial goals, such as a retirement fund or a down payment on a home .

4. Limit and Reduce Debt

It sounds simple enough: Don't spend more than you earn to keep debt from getting out of hand. But, of course, most people have to borrow from time to time, and sometimes going into debt can be advantageous—for example, if it leads to acquiring an asset . Taking out a mortgage to buy a house might be one such case. Still, leasing sometimes can be more economical than buying outright, whether renting a property, leasing a car, or even getting a subscription to computer software.

On the other hand, minimizing repayments (to interest only, for instance) can free up income to invest elsewhere or put into retirement savings while you’re young when your nest egg gets the maximum benefit from compounding interest . Some private and federal student loans are even eligible for a rate reduction if the borrower enrolls in auto pay.

Student loans account for $1.59 trillion of consumer debt—if you have an outstanding student loan, you should prioritize it. There are myriad loan repayment plans and payment reduction strategies available. If you’re stuck with a high interest rate, paying off the principal faster can make sense.

Flexible federal repayment programs worth checking out include:

• Graduated repayment—progressively increases the monthly payment over 10 years
• Extended repayment—stretches out the loan over a period that can be as long as 25 years
• Income-driven repayment—limits payments to 10% to 15% of your income (based on your income and family size)

5. Only Borrow What You Can Repay

Credit cards can be major debt traps, but it’s unrealistic not to own any in the contemporary world. Furthermore, they have applications beyond buying things. They are crucial to establishing your credit rating and a great way to track spending, which can be a considerable budgeting aid.

Credit needs to be managed correctly , meaning you should pay off your entire balance every month or keep your credit utilization ratio at a minimum (that is, keep your account balances below 30% of your total available credit).

Given the extraordinary reward and incentives offered these days (such as cashback), it makes sense to charge as many purchases as possible—if you can pay your bills in full.

Avoid maxing out credit cards at all costs, and always pay bills on time. One of the fastest ways to ruin your credit score is to constantly pay bills late—or even worse, miss payments.

Using a debit card , which takes money directly from your bank account, is another way to ensure that you will not be paying for accumulated small purchases over an extended period with interest.

6. Monitor Your Credit Score

Credit cards are the primary vehicle through which your credit score is built and maintained, so watching credit spending goes hand in hand with monitoring your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, then you’ll need a solid credit report . There are a variety of credit scores available, but the most popular one is the FICO score .

Factors that determine your FICO score include:

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit (10%)

FICO scores are calculated from 300 to 850. Here’s how your credit is rated:

• Exceptional: 800 to 850
• Very good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 579 and below

To pay bills, set up direct debiting where possible (so you never miss a payment) and subscribe to reporting agencies that provide regular credit score updates. In addition, you can detect and address mistakes or fraudulent activity by monitoring your credit report. Federal law allows you to obtain free credit reports once a year from the “Big Three” major credit bureaus : Equifax, Experian, and TransUnion.

Reports can be obtained directly from each agency, or you can sign up at AnnualCreditReport.com, a federally authorized site sponsored by the Big Three.

Some credit card providers, such as Capital One, will provide customers with complimentary, regular credit score updates, but it may not be your FICO score. Instead, Capital One's CreditWise program offers your VantageScore .

Due to the COVID-19 pandemic, the three major credit bureaus are providing free credit reports weekly. The program was extended twice in 2022 and it is now permanent.

7. Plan for Your Future

To protect the assets in your estate and ensure that your wishes are followed when you die, be sure you make a will and—depending on your needs—possibly set up one or more trusts . You also should look into insurance and find ways to reduce your premiums, if possible: auto , home , life , disability , and long-term care (LTC) . Periodically review your policy to ensure it meets your family’s needs through life’s major milestones.

Other critical documents include a living will and a healthcare power of attorney . While not all of these documents directly affect you, all of them can save your next of kin considerable time and expense when you fall ill or become otherwise incapacitated.

Retirement may seem like a lifetime away, but it arrives much sooner than expected. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you benefit from what advisors call the magic of compounding interest—how small amounts grow over time.

Setting aside money now for your retirement not only allows it to grow over the long term but also can reduce your current income taxes if funds are placed in a tax-advantaged plan, such as an individual retirement account (IRA) , a 401(k) , or a 403(b) .

While your children are young, take the time to teach them about the value of money and how to save, invest, and spend wisely.

If your employer offers a 401(k) or 403(b) plan , start paying into it immediately, especially if your employer matches your contribution. By not doing so, you’re giving up free money. Take time to learn the difference between a Roth 401(k) and a traditional 401(k) if your company offers both.

Investing is only one part of planning for retirement. Other strategies include waiting as long as possible before opting to receive Social Security benefits (which is smart for most people) and converting a term life insurance policy to permanent life .

8. Buy Insurance

As you age, it's natural for you to accumulate many of the same things your parents did—a family, home or apartment, belongings, and health issues. Insurance can be expensive if you wait too long to get it. Health care, long-term care insurance, life insurance; it all increases in cost the older you get. Additionally, you never know what life will send your way. If you're the sole breadwinner for the family, or you and your partner both work to make ends meet, a lot depends on your ability to work.

Insurance can cover most of the hospital bills as you age, leaving your hard-earned savings in your family's hands; medical expenses are one of the leading reasons for debt. If something happens to you, life insurance can give those you leave behind a buffer zone to deal with the loss and get back on their feet financially.

9. Maximize Tax Breaks

Due to an overly complex tax code , many people leave hundreds or even thousands of dollars sitting on the table every year. By maximizing your tax savings, you’ll free up money that can be invested in your reduction of past debts, enjoyment of the present, and plans for the future.

You should start saving receipts and tracking expenditures for all possible tax deductions and tax credits . Many office supply stores sell helpful “tax organizers” that have the main categories already labeled.

After you’re organized, you’ll want to focus on taking advantage of every tax deduction and credit available, as well as deciding between the two when necessary. In short, a tax deduction reduces the amount of income on which you are taxed, whereas a tax credit reduces the amount of tax that you owe. This means that a $1,000 tax credit will save you much more than a $1,000 deduction.

10. Give Yourself a Break

Budgeting and planning can seem full of deprivations. Make sure you reward yourself now and then. Whether it’s a vacation, a purchase, or an occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you’re working so hard for.

Last but not least, don’t forget to delegate when needed. Even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks, it doesn’t mean you should. Setting up an account at a brokerage and spending a few hundred dollars on a certified public accountant (CPA) or a financial planner —at least once—might be a good way to jump-start your planning.

The key to getting your finances on the right track is using skills you likely already have. It’s also about understanding that the principles that contribute to success in business and your career work just as well in personal money management. Three key skills are finance prioritization, assessing the costs and benefits, and restraining your spending.

• Finance Prioritization : This means that you can look at your finances, discern what keeps the money flowing in, and make sure that you stay focused on those efforts.
• Assessing the Costs and Benefits : This key skill keeps professionals from spreading themselves too thin. Ambitious individuals always have a list of ideas about other ways that they can hit it big, whether it is a side business or an investment idea. While there is a place and time for taking a flier, running your finances like a business means stepping back and honestly assessing the potential costs and benefits of any new venture.
• Restraining Your Spending : This is the final big-picture skill of successful business management that must be applied to personal finances. Time and again, financial planners sit down with successful people who still manage to spend more than they make. Earning $250,000 a year won’t do you much good if you spend $275,000 annually. Learning to restrain spending on non-wealth-building assets until after you’ve met your monthly savings or debt reduction goals is crucial in building net worth .

Personal money management isn't one of the most popular topics in educational systems. Many college degrees require some financial education, but it isn't geared toward individuals, which means that most of us will need to get our personal finance education from our parents (if we’re lucky) or learn it ourselves.

Fortunately, you don’t have to spend much money to find out how to manage it better. You can learn everything you need to know for free online and in library books. Almost all media publications regularly dole out personal finance advice, too.

Online Blogs

Reading personal finance blogs is a great way to start learning about personal finance. Instead of the general advice you’ll get in personal finance articles, you’ll learn exactly which challenges real people face and how they address them.

Mr. Money Mustache has hundreds of posts full of insights on escaping the rat race and retiring early by making unconventional lifestyle choices. CentSai helps you navigate myriad financial decisions via first-person accounts. Million Mile Secrets and The Points Guy each teach you how to travel for a fraction of the retail price using credit card rewards. These sites often link to other blogs, so you’ll discover more sites as you read.

Of course, we can’t help tooting our own horn in this category. Investopedia offers a wealth of free personal finance education. You might start with our special sections on budgeting , buying a home , and planning for retirement —or the thousands of other articles in our personal finance section.

At the Library

You may need to visit your library in person to get a library card if you don’t already have one, but after that, you can check out personal finance audiobooks and e-books online without leaving home. Some of the following best sellers may be available from your local library: I Will Teach You to Be Rich , The Millionaire Next Door, Your Money or Your Life , and Rich Dad Poor Dad . Personal finance classics such as Personal Finance for Dummies , The Total Money Makeover , The Little Book of Common Sense Investing , and Think and Grow Rich are also available as audiobooks.

Free Online Classes

If you enjoy the structure of lessons and quizzes, try one of these free digital personal finance courses:

• Morningstar Investing Classroom offers a place for beginning and experienced investors alike to learn about stocks, funds, bonds, and portfolios. Some of the courses you’ll find include “Stocks Versus Other Investments,” “Methods for Investing in Mutual Funds,” “Determining Your Asset Mix,” and “Introduction to Government Bonds.” Each course takes about 10 minutes and is followed by a quiz to help you make sure that you understood the lesson.
• EdX is an online learning platform created by Harvard University and the Massachusetts Institute of Technology. It offers at least three courses that cover personal finance: 'Personal Finance, Part 1: Investing in Yourself" from Wellesley College, “Personal Finance” from Purdue University, and “Finance for Everyone: Smart Tools for Decision-Making” from the University of Michigan. These courses will teach you how credit works, which types of insurance you might want to carry, how to maximize your retirement savings, how to read your credit report, and what the time value of money is.
• “Planning for a Secure Retirement” is an online course from Purdue University. It’s broken up into 10 main modules, and each has four to six sub-modules on topics such as Social Security, 401(k) and 403(b) plans, and IRAs. You’ll learn about your risk tolerance , think about what kind of retirement lifestyle you want, and estimate your retirement expenses.

Personal finance podcasts are a great way to learn how to manage your money if you’re short on free time. While you’re getting ready in the morning, exercising, driving to work, running errands, or preparing for bed, you can listen to expert advice on becoming more financially secure. In addition to “The Investopedia Express with Caleb Silver,” you may find these valuable:

• Freakonomics Radio and NPR’s Planet Money both make economics enjoyable by using it to explain real-world phenomena such as “how we got from mealy, nasty apples to apples that actually taste delicious,” the Wells Fargo fake-accounts scandal, and whether we should still be using cash.
• American Public Media’s Marketplace helps make sense of what’s happening in the business world and the economy.
• So Money with Farnoosh Torabi combines interviews with successful business people, expert advice, and listeners’ personal finance questions.

The most important thing is to find resources that work for your learning style and that you find interesting and engaging. If one blog, book, course, or podcast is dull or difficult to understand, keep trying until you find something that clicks.

Education shouldn’t stop once you learn the basics. The economy changes, and new financial tools like the budgeting apps mentioned earlier are always being developed. Find resources you enjoy and trust, and keep refining your money skills through retirement and beyond.

What Personal Finance Classes Can’t Teach You

Personal finance education is a great idea for consumers, especially people starting out who want to learn investing basics or about credit management; however, understanding the basic concepts is not a guaranteed path to financial sense. Human nature can often derail the best intentions to achieve a perfect credit score or build a substantial retirement nest egg. These three key character traits can help you stay on track:

One of the most important tenets of personal finance is systematic saving. For example, say your net earnings are $60,000 per year, and your monthly living expenses—housing, food, transportation, and the like—amount to $3,200 per month.

There are choices to make surrounding your remaining $1,800 in monthly salary. Ideally, the first step is to establish an emergency fund or perhaps a tax-advantaged health savings account (HSA) .

To be eligible for a health savings account, your health insurance must be a high-deductible health plan (HDHP) .

Establishing an emergency fund takes financial discipline—without it, giving in to the temptation to spend rather than save can have dire consequences. In the event of an emergency, you may not have the money to pay the expenses—leading you to finance them through debt.

Once you have your emergency stash, you'll need to develop investing discipline—it’s not just for institutional money managers who make their living buying and selling stocks. Average retail investors tend to do better by setting an investment target and abiding by it rather than buying and selling stocks trying to time the market.

A Sense of Timing

Timing can be crucial. For instance, imagine you're three years out of college, have established your emergency fund, and want to reward yourself. A Jet Ski costs $3,000, but you want to start investing also. "Investing in growth stocks can wait another year," you say. "I have plenty of time to launch an investment portfolio."

However, putting off investing for one year can have significant consequences. The opportunity cost of buying a personal watercraft can be illustrated through the time value of money.

The $3,000 used to buy the Jet Ski would have amounted to nearly $49,000 in 40 years at 7% interest, a reasonable average annual return for a growth mutual fund over the long haul. Thus, delaying the decision to invest wisely may likewise delay the ability to reach your goal of retiring at age 65.

Doing tomorrow what you could do today also extends to debt payment. If you were to put the Jet Ski on your credit card, the $3,000 credit card balance would take 222 months (18.5 years) to pay off if you only made minimum payments of $75 each month. And don’t forget the interest you’re paying: at an 18% annual percentage rate (APR) , it comes to $3,923 over those months. So, if you were to plunk down the $3,000 to pay the balance rather than let it compound, you'd see substantial savings—nearly $1,000.

Emotional Detachment

Personal finance matters are business, and business should not be personal. A difficult but necessary facet of sound financial decision-making involves removing emotions from a transaction.

Making impulsive purchases feels good but can significantly impact long-term investment goals. So can making unwise loans to family members. Your cousin Fred, who has already burned your brother and sister, will likely not pay you back, either. The smart thing to do is decline his requests for help—you're trying to make ends meet also.

The key to prudent personal financial management is to separate feelings from reason. However, when loved ones are experiencing real trouble, it pays to help if you can—just try not to take it out of your investments and retirement.

Many people have loved ones who always seem to need financial help—it is difficult to refuse to help them. If you include planning to assist them in real emergencies using your emergency fund, it can make the burden easier.

The personal finance realm may have more guidelines and tips to follow than any other. Although these rules are good to know, everyone has their own circumstances. Here are some rules prudent people, especially young adults, are never supposed to break—but can break if necessary.

Saving or Investing a Set Portion of Your Income

An ideal budget includes saving a portion of your paycheck every month for retirement—usually around 10% to 20%. However, while being fiscally responsible is important and thinking about your future is crucial, the general rule of saving a given amount for retirement may not always be the best choice, especially for young people just getting started.

For one thing, many young adults and students need to consider paying for their biggest expenses, such as a new car, home, or postsecondary education. Taking away 10% to 20% of available funds would be a definite setback in making those purchases.

Additionally, saving for retirement doesn’t make much sense if you have credit cards or interest-bearing loans to pay off. The 19% interest rate on your Visa card probably would negate the returns you get from your balanced mutual fund retirement portfolio five times over.

Finally, saving money to travel and experience new places and cultures can be especially rewarding for a young person who’s still unsure about their life path.

Long-term Investing/Investing in Riskier Assets

The rule of thumb for young investors is that they should have a long-term outlook and stick to a buy-and-hold philosophy. This rule is one of the easier ones to justify breaking. Adapting to changing markets can be the difference between making money or limiting your losses and sitting idly by and watching your hard-earned savings shrink. Short-term investing has its advantages at any age.

Common investing logic suggests that because young investors have such a long investment time horizon, they should be investing in higher-risk ventures; after all, they have the rest of their lives to recover from any losses that they may suffer; however, you don’t have to take on undue risk in your short- to medium-term investments if you don’t want to.

The idea of diversification is an important part of creating a strong investment portfolio; this includes both the riskiness of individual stocks and their intended investment horizon .

At the other end of the age spectrum, investors near and at retirement are encouraged to cut back to the safest investments—even though these may yield less than inflation —to preserve capital . Taking fewer risks is important as the number of years you have to earn money and recover from bad financial times dwindles, but at age 60 or 65, you could have 20, 30, or even more years to go. Some growth investments could still make sense for you .

Personal finance is the knowledge, instruments, and techniques used to manage your finances. When you understand the principles and concepts behind personal finance, you can manage debt, savings, living expenses, and retirement savings.

What Are the 5 Main Components of Personal Finance?

The five main components are income, spending, savings, investing, and protection.

What Is an Example of Personal Finance?

One of the key ideas behind personal finance is not to spend more than you make. For instance, if you make $50,000 a year but spend $65,000, you'll end up with debt that continues to compound because you'll be spending more than you make to pay for past expenses.

Why Is Personal Finance So Important?

The concepts behind managing your personal finances can guide you in making intelligent financial decisions. In addition, the decisions you make throughout your life on what to buy, sell, hold, or own can affect how you live when you can no longer work.

Personal finance is managing your money to cover expenses and save for the future. It is a topic that covers a broad array of areas, including managing expenses and debt, how to save and invest, and how to plan for retirement. In addition, it can include ways to protect yourself with insurance, build wealth , and ensure wealth is passed on to the people you want it to pass to.

Understanding how to manage your finances is an important life-planning tool that can help set you up for a life without debt; you gain control of financial stresses and have a way to manage the expensive surprises that life can throw at you.

Federal Reserve Bank of New York. " Quarterly Report on Household Debt and Credit; 2023: Q4 (Released February 2024) ." Summary Page.

YNAB. “ Gain Total Control of Your Money .”

Intuit Mint. " What is Mint, And How Does It Work? "

Discover. " Private Student Loans: Automatic Payments & Auto Debit Reward Terms and Conditions ."

Federal Student Aid. " Repaying Student Loans 101 ."

Federal Student Aid. " Repayment Plans ."

myFICO. " What Should My Credit Utilization Ratio Be? "

myFICO. “ What’s the Difference Between FICO Scores and Non-FICO Credit Scores? ”

myFICO. " What's In My FICO Scores? "

myFICO. " What is a FICO Score? "

Federal Trade Commission. “ Understanding Your Credit .”

Capital One. " CreditWise: Get Your Free Credit Report ."

Federal Trade Commission. " You Now Have Permanent Access to Free Weekly Credit Reports ."

Fidelity. " How Much Will You Spend in Retirement? "

Consumer Financial Protection Bureau. " Medical Debt Burden in the United States ."

Internal Revenue Service. " Credits and Deductions for Individuals ."

Mr. Money Mustache. “ Mr. Money Mustache: Financial Freedom Through Badassity .”

CentSai. “ Take the Fear Out of Finance .”

Million Mile Secrets. “ Beginner’s Guide to Credit Cards, Miles, and Points .”

The Points Guy. “ TPG Beginner’s Guide: Everything You Need to Know About Points, Miles, Airlines, and Credit Cards .”

Morningstar. “ Morningstar Investing Classroom .”

EdX. " About EdX ."

EdX. " Catalog ."

Purdue University, College of Agriculture. “ Planning for a Secure Retirement .”

Freakonomics. “ Freakonomics Radio .”

NPR. “ Planet Money: The Economy Explained .”

Apple Podcasts. “ Marketplace: American Public Media .”

So Money Podcast — Farnoosh. “ So Money with Farnoosh Torabi: Candid Conversations for a Richer, Happier Life .”

Internal Revenue Service. " Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans ." Pages 3-4.

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The importance of financial management for students

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Money management is necessary as it has become essential that individuals get the financial skills to be able to survive in the future. Specifically, this study sought to investigate the factors influencing money management behavior among students of Malaysian private universities. Four factors are incorporated in the study namely financial literacy, parent socialization, peer influence, and self-control. A quantitative technique was employed through the use of 351 surveys distributed using a random sampling method to students of private universities in Selangor, Malaysia. The data is analyzed using regression analysis through IBM SPSS software version 24. The result shows that financial literacy has a significant positive influence on money management behavior. Students with the ability to understand the importance of saving money for emergencies tend to have more saving habits. Additionally, the result indicates that self-control has an impact on money management behavior. The rea...

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Essay on Financial Literacy for Students and Children

Importance of financial literacy, an introduction to financial literacy.

We go to schools, colleges, universities to complete our educated and start earning our livelihood. We take up jobs, practise professions or start our own businesses so that we can earn money to make our living. But which of these institutions make us capable of managing our own hard-earned money? Probably a very few of them. 

Our ability to effectively manage our money by drawing systematic budgets, paying off our debts, making buying and selling decisions and ultimately becoming financially self-sustainable is known as financial literacy. 

Financial literacy is knowing the basic financial management principles and applying them in our day-to-day life. 

Financial Literacy – What does it Involve? 

From simple practices like keeping a track of our expenses and understanding the need to spend money if we like a product to striking a balance between the value of time saved and money lost, paying our taxes and filing of tax returns, finalizing the property deals, etc – everything becomes a part of financial literacy. 

Get the huge list of 500+ Essay Topics here

As human beings, we are not expected to know the nitty-gritty of financial management. But managing our own money in a way that it does not affect us and our family in a negative way is important. We certainly do not want to end up having a day with no money at hand and hunger in our stomach. 

Why is Financial Literacy so Important?

Financial literacy can enable an individual to build up a budgetary guide to distinguish what he buys, what he spends, and what he owes. This subject additionally influences entrepreneurs, who incredibly add to financial development and strength of our economy. 

Financial literacy helps people in becoming independent and self-sufficient. It empowers you with basic knowledge of investment options, financial markets, capital budgeting, etc.

Understanding your money mitigates the danger of facing a fraud-like situation. A few strategies are anything but difficult to accept, particularly when they’re originating from somebody who is by all accounts learned and planned. Basic knowledge of financial literacy will help people with foreseeing the risks and argue/justify with anyone learned and well-informed.

What should you read on / get informed about in Financial Literacy?

• Budgeting and techniques of budgeting
• Direct and indirect taxation system
• Direct tax slabs
• Income and expense tracking 
• Loans and debt – EMI management 
• Interest rate systems: fixed versus floating
• Business and organisational transaction studies
• Elementary Book-keeping and Accountancy
• Cash in-flow and out-flow Statements
• Investment & personal finance management
• Asset management:
• Business negotiation skills and techniques
• Make or buy decision-making
• Financial markets 
• Capital structure – owner’s funds and borrowed funds
• Fundamentals of Risk Management
• Microeconomics and Macroeconomics fundamentals

While there are various media to learn about financial literacy, we recommend that you join a short-term, weekend programme which helps you get financially literate.

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Financial Statements Importance Essay

Financial control is “the control of financial resources as they flow out or into the organization” (Gupta 27). Financial control is necessary because it ensures an organization is on the right path towards its business goals. As well, financial control is necessary because it helps managers take “corrective” measures whenever necessary. The basic information used for financial control includes budgets, financial audits, and ratio analyses. Financial statements are essential because they provide the best information for proper financial control. Managers use budgets to measure performance and “control standards” across different departments in an organization (Gupta 64). A budget helps leaders coordinate the available projects and resources.

This makes it easier to evaluate the financial performance of different units in an organization. The other “information” used for financial control is “ratio analysis.” This assesses the financial position of a business organization. Some widely used financial ratios include debt and liquidity. Managers also use audits for financial control. According to Gupta (79), “auditing is necessary because it verifies the accuracy of financial statements and the accounting procedures used.” Audits are necessary because they ensure the financial position of a business is under control. A financial statement also presents the income of an organization within a specific period. This document ensures the organization’s financial position is carefully controlled.

A financial statement is an important “profile” of a business organization. The profile gives a wider picture of an organization’s financial position. That being the case, financial statements play a significant role in any given business or organization. The two main financial statements include an income statement and a balance sheet. A balance sheet (also called financial position statement) is a detailed summary of an organization’s financial “balances” (Pfeiffer and Dyckman 21).

A balance sheet gives a detailed “snapshot profile” of an organization’s financial position. It lists the assets, equities, and liabilities of the organization “as at the end of the business year.” Managers can use the statement to examine the existing difference between the company’s assets and liabilities. The document makes it easier for the manager to understand the “net worth” of a business. This is what determines the financial position of the business. An income statement is a financial document summarizing the actual performance of an organization within a specified period (Pfeiffer and Dyckman 28). A business manager can use the document to establish whether the organization has recorded any losses or profits during its financial year. That being the case, the statement helps the manager examine the financial performance of the organization.

More often than not, the performance of organizations in the same industry is more or less the same. That being the case, a manager can compare an organization’s performance with the existing industry norms. The approach will make it easier to understand the major factors affecting the performance of the major businesses in the industry. After understanding the existing industry norms, the manager will understand the specific factors influencing the performance of different organizations in the industry (Gupta 72).

The identified norms will help the manager have a wider picture of the opportunities, challenges, forces, and barriers that affect the respective companies in the industry. After recording such norms in a specific industry, the manager will then evaluate and understand the current performance of the organization. The performance of an organization, therefore, depends on the profitability or attractiveness of its industry (Pfeiffer and Dyckman 89). This explains how a manager can compare an organization’s performance with the industry norms to understand its current performance.

Works Cited

Gupta, Ambrish. Financial Accounting for Management: An Analytical Perspective. New Delhi: Magic International Pvt. Limited, 2009. Print.

Pfeiffer, Glenn, and R. Dyckman. Financial Accounting. Cambridge: Cambridge Business Publishers, 2008. Print.

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Home — Essay Samples — Economics — Money — Importance of Money Management and Financial Literacy for Students

Importance of Money Management and Financial Literacy for Students

• Categories: Literacy Money Personal Finance

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Words: 1537 |

Published: Aug 14, 2023

Words: 1537 | Pages: 3 | 8 min read

Table of contents

Importance of financial literacy and financial education, how other countries apply financial literacy, what can be done within our current school systems, my own financial literacy level.

• Anderloni, L. and Vandone, D. (2010), “Risk of overindebtedness and behavioral factors”, Working Paper No 25, Social Science Research Network, Santa Monica, CA.
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