Financial Management – Methods and Tools
Financial Management is the process of translating strategies and business plans into actions that will help achieve the company's financial goals. In this process, you aim to align the goals of employees with those of the company by implementing control, measurement, and follow-up.
Historically, Financial Management has been more focused on cost control, but over time it has expanded to include more than just financial measures and objectives. Today, different forms of planning, measurements, controls, compliance, revenue and cost analysis, cash flow management, budgeting, and budget monitoring are all part of Financial Management.
By considering more than just the financial events of the organisation and the conclusions that can be drawn from them, Financial Management can also guide and look to the future.
Financial Management often boils down to helping managers in the organisational control and plan by providing financial decision-making support and ensuring financial monitoring at both local and central levels.
A broader concept related to Financial Management is Business Control, which is defined as all the measures that management takes at different levels to achieve a specific outcome.
Financial Management in Practice
In practice, follow-up is an important part of Financial Management. It begins with the fact that different managers in the business have different budgets and goals. These are often monitored by a controller and by the managers themselves, to ensure that their part of the business is following the budget and working towards the set goals.
Another important part of Financial Management is analysis. In many cases, this work takes unnecessarily long because of the manual work required to compile and quality-assure data. Therefore, most companies strive to streamline and automate their work in order to free up time for actual analysis and more forward-looking work.
This allows for better decision-making support, which often consists of insights and information gathered from a decision-support system such as Hypergene. There, business metrics, profitability metrics, and financial metrics are available in role-based reports and dashboards.
In summary, the work of Financial Management can be reduced to:
- Assess the current financial situation.
- Define financial goals linked to business objectives.
- Allocate financial resources according to strategy and business plans to achieve the goals.
- Translate the plan and budget into action.
- Monitor and develop plans and control.
3 approaches to Financial Management
There are three main approaches to financial management, and in order to be successful, your approach should match the needs of the company. Action control, personnel control, and result control differ from each other but are usually combined.
1. Action control: This approach controls the actions of personnel by preventing certain actions or ensuring that they follow certain regulations or processes. It is important to know which actions help the company achieve its financial goals.
2. Personnel control: This is a softer approach than action control, and is a decentralised approach where employees take more responsibility as individuals and as a group. However, this can lead to unclear goals and a corporate culture where people monitor each other.
3. Result control: This approach focuses on results and goal achievement. For example, a CFO may receive a bonus for successfully implementing a cost reduction in their department. It is important to have realistic goals that support the company's long-term goals in result control. For example, finance departments have reduced their costs by 29 percent in the past decade.
It is often more successful to combine these approaches (and management tools) because focusing on just one approach can have many negative consequences.
Formal Management Tools
When working with financial management, it is important to be aware of the various management tools used. Formal management tools are those most commonly associated with financial management.
- Budgeting is the process that leads to a budget, which is a forecast/plan for a company's financial events. Budgets are often laid out for different business areas in a company and aim to control and manage revenues and costs. Budgeting is an important part of financial management.
- Calculation, whereas a controller processes financial data that is then presented as a calculation and a basis for decision making. The calculations are in turn based on calculation models, and the calculation usually determines which model to use (for example, product calculation, investment calculation, or cost calculation).
- Internal reporting: The reporting summarises information related to a company's operations, and the internal reporting provides financial information about internal financial events in the form of historical data such as transactions within the company.
- Standard costs are pre-calculated costs for an object (such as a product, unit, or activity). Standard costs can be compared to actual costs and help in decision-making as part of planning.
- Performance measurement measures something that has been done (outcome), how long it took, and how well it went.
- Benchmarking is about comparing your company to other companies. It usually involves selected parts of your business, and the comparison is often made with other companies in the same industry or with similar conditions. It almost always involves selected parts of the business and selected industry colleagues.
- Risk management: In risk management and risk analysis, finance is almost always a factor or a risk in itself. Risk management should also be taken into account when working with financial management.
Organisational structure is often considered a crucial aspect of a company's management. For example, the choice of organisational form and how employees are rewarded can be critical in achieving goals. Examples of what can be included in organisational structure are:
- The company's governance model: The governance model that the company has chosen affects how the company and its finances are managed and controlled.
- The organisational form affects how the company is governed, both through laws and regulations (including financial ones) and the overall purpose. There may also be different organisational forms within an organisation, such as product organisations and divisional organisations.
- Responsibility is closely linked to organisational form, organisational model, and personnel structure. Who is responsible for what is often related to the company's hierarchical structure? For example, a centralised finance department may have more say in decision-making.
- Reward systems usually involve compensating employees in exchange for performance related to goal fulfillment. This can be given individually, to a group, or to the entire company.
- Decision-making process: How decisions are made is a critical part of management. Finance typically has a role in decision-making, but historically, it has been more of a retrospective approach. Nowadays, it is fully possible to look forward.
Less Formalised Control
Although financial management is often described in terms of formal control mechanisms, there are also less formalised controls that are influenced by (and influence) financial management and are therefore included.
These concepts can also be seen as independent and have recently taken up more space in how companies are managed. Modern financial management takes into account factors such as employees. Examples of less formalised controls are:
- Company culture affects how the company is managed, and a culture that is helpful, forward-thinking, and willing to accept insights about the company's finances can significantly impact financial management.
- Employee engagement: This involves the individual's willingness to take responsibility for supporting the company's goals and giving feedback. Employee engagement can be improved and controlled to indirectly support financial management by having managers delegate responsibility to employees to improve their relationship with the company and other employees. Employee engagement is closely related to personnel management.
- Management support: When referring to management support, it often means a management system (such as quality management) or a person who supports the management team. It can also refer to an advisory board appointed by a company's board or owners to provide strategic advice.
- Competency development: Having the right competencies in the group that handles financial management is crucial, but it is also important to have competency in receiving financial management (just like mandates, resources and time). Developing competencies can help the company and financial management move in the right direction.
- Learning: Learning is closely linked to competency development but is more about knowledge transfer in everyday life and openness about the lack of understanding and the possibility of creating understanding.
Hypergene's software provides Decision Support through the collection and presentation of business data to management teams, managers, and those who need to stay on top of Operational Management. Hypergene helps you make decisions, steer towards goals, and achieve higher levels of performance and efficiency.
10-minute video demo of Hypergenes solution: