The Importance of Financial Management

Paper Type:  Essay
Pages:  3
Wordcount:  586 Words
Date:  2021-03-13

Businesses have an obligation to compete and succeed in the marketplace with helpful strategies such as Unique Selling Point (USP). The procedures allow companies to stand from the competition and give customers a compelling reason to purchase products or services from the business. However, for a business to succeed and grow USP, and other strategies adopted have to match with firm financial management plans. A well-organized bookkeeping system is vital and determines the methods for financial administration and control covering a broad range of tasks and tasks. It gives an excellent analysis of money flow in the business. Also, no business enterprise can utilize its full potential for growth and expansion without proper administration and efficient utilization of finances. The concerns of financial management are acquisition, financing, and management of assets, which are vital in any business.

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The decision-making process is one of the critical activities relying on information recorded in financial records. The records provide scientific analysis of all data through financial tools such as variance analysis, ratio analysis, and budgets (Reid, 2003). The analysis process helps in evaluating the profitability of enterprises plans and enables adoption of proper actions to minimize risks. Some of the main decisions are an investment, financial, and dividend decisions. Investment decision determines the total amount of assets needed to be held by the organization. Financial decisions focus on raising money for various instruments. Dividend decisions help to determine the amount of profit to retain when the return on investment is advanced than the opportunity cost of retained profits and vice versa. However, these decisions are inter-related but are independent.

Taxes are part of financial management duties. Tax planning involves making sure you have cash to pay estimated tax. For example, if you know your current tax year will not require a massive tax payment but next year will it is worth to postpone buying some significant assets until next year. Failure to plan for taxes and maximize deduction can cause your business to spend more than it has to on taxes. Also, the amount of tax to pay depends on the amount of income from business activities. Therefore, tax authorities require financial statements to levy taxes on companies.

Corporation organizations have a duty to disclose fully the matters on their operations to aid investors in making investment decisions (Khan & Jain, 2007). Vast and small organizations in addition to satisfying the legal requirements they tend to retain existing and attract potential investors by disposing their financial statements to them for assessment. Investors draw information from these declarations to gauge the security of their investment. Financial statements are scorecards for millions of individual investors worldwide. It is evident that they seek companies with strong balance sheets, solid earnings, and positive cash flows. Therefore, they expect returns such as dividends and increase in the value of their capital. Profitability of the enterprise influences most of these decisions and the business must prove they are better as compared to other competitors.

Finances are the lifeblood of business. It is also the indicator of how well a business is running and affects decisions meant to rectify the weakness of any organization on finances bases. Its primary objective is profit maximization when marginal cost and revenues are equal. For one to have a successful business, financial records are of great importance since they influence both interior and exterior affairs of the firm.


Khan, M. Y., & Jain, P. K. (2007). Financial management. New Delhi: Tata McGraw-Hill.

Reid, J. (2003). Seven fundamentals for effective financial management. Lansdowne: Juta Academic.

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