Financial management is the activity of raising money and managing the company’s finances to achieve the highest possible rate of return. It sits alongside operations management, marketing, HR, and engineering as a core business function.
Four financial objectives
Every financially-healthy company aims for:
- Profitability — ability to make a profit on the revenue it generates.
- Liquidity — ability to meet short-term financial obligations (suppliers paid, payroll met, near-term debts serviced).
- Efficiency — ability to use assets and equity productively to generate revenues and profits.
- Stability — overall financial health, mainly the capital structure (mix of debt and equity).
These four interact. A company can be very profitable on paper but illiquid (can’t pay this week’s bills because the cash is tied up in receivables), efficient but unstable (too much debt), or stable but unprofitable. You need all four to read the picture.
Financial management process
The standard cycle has four steps:
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Preparation of historic financial statements: Income statement, Balance sheet, Statement of cash flows.
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Preparation of forecasts: projected income, expenses, capital expenditures.
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Preparation of pro forma financial statements: financial statements for future periods, built from forecasts.
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Ongoing analysis of financial results: comparing actual results to plans, comparing the company’s ratios to industry norms.
The process is cyclical, not linear. Each cycle’s actual results feed into the next cycle’s forecasts and plans.
Historical vs pro forma statements
Historical statements report past performance. Typically prepared quarterly and annually. Publicly traded companies are legally required to prepare them for shareholders and to make them public (SEDAR/EDGAR filings).
Pro forma statements project future periods, usually annual, 2-3 years out. Planning tools, not legally required, not binding. Used for internal planning, investor pitches, loan applications.
The two complement each other: historical statements describe what happened, pro forma statements describe what’s expected. You need both for credible planning.
The diagnostic tools that operate on these statements are in Financial ratio analysis. For new ventures specifically, see Business plan and Feasibility analysis.