Financial management is about controlling the flow of money in and out of the organization. Every business needs to sell products or services, pay expenses, balance the books, and file taxes. Financial management encompasses all of this, along with more complex processes, such as paying employees, buying supplies, and submitting reports to government agencies to show they’re obeying applicable laws and regulations. The act of overseeing all these transactions for a business is what we mean when we talk about a company’s financial management.
Employees who specialize in financial management are responsible for all the money going into and out of the company. Smaller companies will have at least one accountant or bookkeeper who works with the bank to execute these transactions and track the flow of money.
The finance team’s primary job is to make sure the company stays solvent and never runs out of cash—but it’s not their only job. They’re also responsible for handling loans and debts, balancing the books, overseeing investments, raising venture capital, and managing public offerings (i.e. selling company stock on the open market).
Understanding Financial Management
Financial management includes business processes that span every team and department in the company. A finance team’s responsibilities include:
- Invoicing and receivables: Money that customers pay or have promised to pay to the business. Finance teams are responsible for sending out invoices and processing the payments as they come in. Collections teams are responsible for following up on overdue accounts (this process is sometimes outsourced to third parties).
- Payables: Money that the company owes to its vendors and suppliers. Finance teams are responsible for paying these bills and recording the payments.
- Bank transactions and reconciliations Finance teams work closely with their banks to ensure that every bank transaction is processed correctly. They must also make sure that the bank’s statements match their own records, which are kept in the company’s general ledger and subledgers. The finance team must follow up on, and correct, any mismatches between bank statements and ledgers—a process known as account reconciliation.
- Closing the books: On a particular date, the company will tally transactions from a given period so it can reconcile its accounts and report on its financial position. The close, as this process is known, typically happens at the end of a month, quarter, or year.
- Reporting: Companies must report regularly on their financial performance, whether it’s to the CEO, a board of directors, investors, shareholders, or government regulators. The finance team is responsible for ensuring that these reports are clear and accurate.
- Scenario modeling, planning, and budgeting: Scenario modeling starts with making certain assumptions about an upcoming period of time, such as, “Next quarter, we expect to bring in $10 to 15 million in revenue.” The finance team will run multiple “what-if” scenarios for the best and worst cases to estimate how much money the company will have if those conditions come to pass. Based on these models, the finance team will assess how best to respond and develop appropriate plans, forecasts, and budgets. Often, the finance team will work with other departments—such as sales, HR, project management, or procurement teams—to build models that include data from sales forecasts, workforce expenses, and inventory costs. This is known as connected planning.
- Payroll and expenses: Individual paychecks to employees are typically the responsibility of the HR department. However, overall workforce costs roll up to the finance team so they can factor it into their budgets and plans. Finance is also responsible for reimbursing employee expenses, such as work-related travel and meals.