What is financial management?

Financial management encompasses everything that impacts the financial health and sustainability of the organization. It includes day-to-day cash flow monitoring, guiding financial reporting decisions and everything in between.

Most large organizations will dedicate an entire finance team, led by a chief financial officer (CFO), head of finance or someone with a similar title, to manage all financial responsibilities.

Modern organizations are turning to new and emerging technology like artificial intelligence (AI) in financial planning and analysis (FP&A) and finance automation to get real-time insights into financial performance. These organizations are also using accounting software and enterprise resource planning (ERP) platforms to streamline financial functions into one financial management system.

According to recent IBM Institute for Business Value research, 53% of executives already employ automation in financial analysis and management reporting.

Through more advanced technologies like agentic AI, AI agents specializing in financial modeling can digest historical data to build predictive models, enabling more accurate forecasting of outcomes. These advancements not only enhance forecast precision but also free up finance professionals and CFOs to focus on mitigating financial risks and prediction uncertainties.

Financial management directly impacts nearly every aspect of an organization’s performance and overall budgeting strategy. It doesn’t just maintain the books and balance sheets. The objective of financial management is to help organizations achieve their objectives. These objectives can include tracking liquidity and cash flow, maximizing profits and developing financial scenarios.

A financial manager likely has a background as a financial analyst and is typically part of a team of finance professionals. While smaller organizations might rely on a more limited team, there is usually at least a dedicated financial manager to lead capital strategy and to manage financial relationships.

Sometimes, an organization might use a business performance management (BPM) approach to manage and monitor business performance alongside financial performance.

Here are the four core responsibilities of a financial management team:

• Planning: Financial management teams project the financial resources that the organization needs to maintain positive cash flow. It allows them to allocate funds to grow and manage unexpected events.

• Budgeting: Financial managers assign available funds to meet organizational costs, such as rent, salaries and raw materials. The financial management team is in charge of making financial decisions that are in the best interest of the organization’s short-term and long-term goals.

• Manage and assess risk: Leaders outside of the finance department look to CFOs and finance teams to manage and assess a range of risks. Those risks can include market risk, credit risk, liquidity risk and operational risk. Monitoring each one requires effective financial management processes and a cohesive finance team.

• Set procedures: Financial management teams are also in charge of establishing how to distribute financial data in the form of payments, reports or invoices. These procedures will also outline who in the organization is responsible for making the final financial decisions and which stakeholders must sign off.

Financial management influences every aspect of an organization. Every department gains from a targeted approach supported by specialized expertise.

While many areas of financial management overlap, it’s important to understand each one’s individual focus. Key areas of financial management include:

• Investment: Financial management teams are responsible for evaluating capital opportunities and realistic returns on investment against potential risk. The investments can include things like technology upgrades, market expansion and acquisition targets.

• Procurement: Finance managers work alongside procurement teams to optimize purchasing decisions and establish spending controls. The teams work together to negotiate payment and set financial controls for the organization as a whole.

• Reporting: Timely, accurate financial reporting gives stakeholders clear insights and streamlines the period-end close. Using accounting software, financial managers rapidly produce internal management reports, external financial statements and specialized documents for lenders or investors. All while maintaining the right balance between transparency and confidentiality.

• Tax strategies: Finance managers go beyond meeting compliance requirements. They craft tax strategies that legally reduce liabilities without disrupting operations. They also structure transactions, manage tax provisions, work with external advisors and track changing regulations.

• Risk management: There are numerous threats that an organization faces and it’s up to finance managers to identify and quantify them and make informed decisions on how to handle risk management. They must develop mitigation strategies that strike a balance between risk and financial growth potential.

• Project management: By working closely with department leaders, financial managers evaluate the financial soundness of each initiative. Throughout the project lifecycle, they analyze return on investment (ROI) and recommend adjustments to financial activities when costs exceed expectations.

• Cash flow: With money flowing in and out of an organization, it’s vital for finance teams to have a unified view of cash flow, expenditures and accounts payable. This approach requires financial managers to forecast cash needs and to handle cash management while also maintaining financial stability.

• Budgeting: Financial managers drive the budgeting process by setting financial targets and scheduling resources in line with the organization’s strategic goals. They collaborate with department leaders to create practical budgets, track performance against those plans and adjust allocations as business conditions shift.

• Financial planning and analysis (FP&A): The financial planning and analysis process consists of taking raw financial data and turning it into practical insights through financial forecasting and scenario modeling. FP&A teams spot emerging trends, explain variances and supply the information executives rely on to shape decisions about pricing and metrics.

Financial management is critical because it keeps an organization honest about how its financial goals align with the money coming in and going out of the business. Financial management teams address the most critical issues that an organization might face (sometimes outside of their control) and create a contingency plan to handle those scenarios.

Financial management and financial management software can also help organizations create systems for managing money and drive long-term growth. The new era of financial management even uses the power of generative AI (gen AI) through cloud financial management.

Gen AI models can analyze market trends and economic indicators in real-time and go beyond automation to provide immediate data-driven insights. CFOs are fueled with knowledge and data to understand which bets are most likely to turn into results.

By using gen AI, CFOs and their teams understand which bets are most likely to turn into results. But the success is reliant upon how quickly finance can turn data into actionable insights.

According to IBM Institute for Business Value research, most of the business value derived from using FinOps or financial management for cloud-based investments in cloud transformation, comes from innovation and improved resiliency. The report also shows that organizations that use AI-powered FinOps models report cost savings exceeding 20%.

Effective financial management is evolving and requires strategic planning to move an organization into a proactive, profitable position.

Financial management is typically divided into different decision categories, depending on where organizations are looking to invest resources and how to fund the operation. The categories are interconnected but represent how individual financial choices impact a broader financial position.

Working capital management can ensure organizations have enough short-term assets to meet short-term obligations by managing cash, inventory, accounts receivable and payables. Finance managers are responsible for adjusting policies and procedures to improve efficiency and reduce financial strain.

Example: A midsize manufacturing company is looking to review its working capital to improve liquidity and reduce financing costs. The first thing that the finance team does is analyze the cash conversion cycle (CCC). They find that inventory days are too high. To address this issue, finance managers implement a new inventory approach to deliver faster and reduce excess stock.

Capital budgeting is a financial management process used for analyzing and prioritizing large-scale projects. These initiatives are the ones that require significant funding and must be evaluated before going forward. The purpose of the process is to provide a framework and data-backed evaluation on the best way to use the organization’s capital within the confines of the proposed project.

Example: A retail company is evaluating whether to invest in a new warehouse. The finance team estimates how much the project will cost and calculates financial metrics, such as the net present value (NPV) and internal rate of return (IRR). After completing those analyses, the company approves the warehouse investment or it chooses to pass depending on the projected costs.

This type of financial management refers to the use of both debt and equity to finance an organization’s assets and operations. For instance, if interest rates are low, sometimes taking on debt is the best approach. Separately, an organization might consider funds from private equity, selling assets or sometimes selling equity.

Example: A technology firm is looking to expand its operations and must decide how to finance the growth. Financial management analyzes its capital structure and considers to use a mix of debt and equity.

The company might consider issuing capital in the form of long-term bonds to take advantage of low-interest rates, providing tax-deductible interest benefits. The firm might also raise money by issuing new shares. This balanced approach keeps the firm’s debt-to-equity ratio at a manageable level.

Omnichannel retailer Landmark Retail is a real-world example of how a financial management solution can revolutionize an organization’s budgeting process.

As one of the largest retailers across the Middle East and Northern Africa (MENA), India and Southeast Asia (SEA), the company evolved into a powerhouse of 2,200 stores across 21 countries.

Due to its growth, Landmark Retail’s financial planning and analysis team was facing challenges as they tried to manage multiple financial processes. The company turned to IBM® Planning Analytics to streamline the budgeting process

“With this tool, Landmark Retail was able to enhance its business analytics and gain insightful perspectives that are often overlooked when using traditional spreadsheet-based budgeting methods. The tool effortlessly facilitated budgeting on a zero-based approach, saving significant time and effort as it possessed all the necessary historical data,” according to Gopal Chandak, FP&A Leader at Landmark.

The company saw an exceptional transformation, resulting in a 75% reduction in time spent by employees, Chandak added. They also improved governance and transparency spanning across different brands and countries, freeing up employees for more strategic business analysis.

Landmark Retail is just a single example of the importance of financial management solutions and processes and the impact that they can have on how an organization manages its finances.