7 Types of Financial Management You Need to Know
Financial management is the process of planning, organizing, directing and controlling the financial activities of an organization. It involves making decisions about how to allocate and use financial resources to achieve the organization’s goals and objectives. Financial management is essential for the success and sustainability of any business, whether it is a small start-up or a large corporation.
There are different types of financial management that can be applied to different situations and contexts. In this article, we will discuss seven types of financial management that you need to know:
1. Strategic Financial Management
Strategic financial management is the type of financial management that focuses on the long-term vision and goals of the organization. It involves setting the financial objectives, policies and strategies that align with the organization’s mission and vision. Strategic financial management also involves evaluating the external and internal factors that affect the organization’s financial performance, such as market trends, competitors, regulations, opportunities and risks.
Strategic financial management helps the organization to create a competitive advantage, optimize its resource allocation, and maximize its value creation for its stakeholders.
2. Corporate Financial Management
Corporate financial management is the type of financial management that deals with the financial decisions and actions of a corporation. It involves managing the capital structure, dividend policy, capital budgeting, working capital management, mergers and acquisitions, and corporate governance of the corporation.
Corporate financial management helps the corporation to raise and invest funds efficiently, distribute profits to shareholders, create value for shareholders and other stakeholders, and comply with legal and ethical standards.
3. Personal Financial Management
Personal financial management is the type of financial management that relates to the financial planning and management of an individual or a household. It involves setting personal financial goals, creating a budget, saving and investing money, managing debt, insurance, taxes, retirement and estate planning.
Personal financial management helps individuals to achieve their financial goals, improve their financial literacy and well-being, and prepare for unexpected events and emergencies.
4. Public Financial Management
Public financial management is the type of financial management that applies to the public sector, such as governments, public agencies, non-governmental organizations (NGOs), and international organizations. It involves managing the public revenues, expenditures, debt, assets, liabilities, and accountability of the public sector.
Public financial management helps the public sector to deliver public goods and services effectively and efficiently, ensure fiscal sustainability and transparency, promote economic growth and development, and enhance social welfare and equity.
5. Project Financial Management
Project financial management is the type of financial management that pertains to a specific project or program. It involves planning, monitoring, controlling, and reporting the financial aspects of a project or program. Project financial management covers the project life cycle from initiation to closure.
Project financial management helps to ensure that the project or program is completed within the budget, time, scope, quality, and risk parameters. It also helps to measure the project or program performance and outcomes against the expected benefits and objectives.
6. International Financial Management
International financial management is the type of financial management that deals with the financial issues and challenges that arise from operating in a global environment. It involves managing the foreign exchange risk, currency exposure, political risk, tax issues, legal issues, cultural differences, and ethical issues that affect international business activities.
International financial management helps to optimize the global operations and transactions of an organization. It also helps to exploit the opportunities and mitigate the risks that come from globalization and internationalization.
7. Behavioral Financial Management
Behavioral financial management is the type of financial management that incorporates insights from psychology, sociology, neuroscience, and other behavioral sciences into financial decision making. It recognizes that human behavior is not always rational or consistent with traditional economic assumptions. It explores how cognitive biases, emotions, social influences, heuristics, framing effects, and other behavioral factors affect financial choices and outcomes.
Behavioral financial management helps to understand and improve human behavior in relation to money. It also helps to design better financial products, services, policies, and interventions that suit human behavior.
Financial management is a broad and diverse field that encompasses various types of financial management. Each type of financial management has its own purpose, scope, methods, tools,
and applications. By knowing these types of financial management,
you can enhance your knowledge and skills in managing your own or your organization’s finances.
Types of Financial Management and Global Demand
Financial management is the strategic planning and managing of an individual or organization’s finances to better align their financial status to their goals and objectives. Depending on the size of a company, finance management seeks to optimize shareholder value, generate profit, mitigate risk, and safeguard the company’s financial health in the short and long term. Financial management professionals handle three main types of financial management for companies: financing decision, investment decision, and dividend decision.
Financing Decision
Financing decision involves acquiring funds, managing debt, and assessing risk when borrowing money for purchases or to build the company. Financing is also required when raising capital. Companies can make better, more strategic financing decisions to raise capital or obtain funds when they have information on cash flow, market trends, and other financial stats on the health of a company. The financing decision also affects the capital structure of a company, which refers to the mix of debt and equity financing that a company uses to fund its operations and growth.
Investment Decision
Investment decision involves choosing where to invest, what to invest in, and how to invest. The investment decision also affects the capital budgeting of a company, which involves allocating a company’s resources to different projects. The investment decision is based on the analysis of the assets for risk and return ratios. Financial managers will consider a company’s profits, rate of return, cash flow, and other criteria to assist companies in making investment decisions.
Dividend Decision
Dividend decision involves distributing a company’s earnings to its shareholders. The dividend decision affects the cash flow and the value of a company. Financial managers will consider factors such as the current earnings, future earnings potential, liquidity needs, tax implications, and shareholder preferences when deciding how much dividend to pay. The dividend decision also influences the retention ratio of a company, which is the proportion of earnings that are reinvested in the business rather than paid out as dividends.
Global Demand for Financial Management
The global demand for financial management is expected to increase in the coming years due to various factors such as the growth of the global economy, the complexity of the financial markets, the need for risk management, the emergence of new technologies, and the regulatory changes. According to a report by Grand View Research, the global financial services market size was valued at USD 22.5 trillion in 2020 and is expected to grow at a compound annual growth rate (CAGR) of 9.9% from 2021 to 2028. The report also identifies some of the key drivers for the market growth, such as:
– The increasing adoption of digital platforms and solutions by financial institutions to enhance customer experience, reduce operational costs, and improve efficiency.
– The rising demand for alternative financing options such as peer-to-peer lending, crowdfunding, and microfinance by small and medium enterprises (SMEs) and individuals.
– The growing need for financial inclusion and financial literacy among the underserved segments of the population in developing countries.
– The expanding role of financial services in supporting sustainable development goals (SDGs) such as poverty alleviation, climate action, and social justice.
The report also highlights some of the challenges and opportunities for the market players, such as:
– The increasing cyber threats and data breaches that pose risks to the security and privacy of financial data and transactions.
– The changing customer expectations and preferences that require constant innovation and differentiation by financial service providers.
– The evolving regulatory landscape that creates both compliance burdens and competitive advantages for different market segments.
– The emergence of new technologies such as artificial intelligence (AI), blockchain, cloud computing, big data analytics, and biometrics that offer new possibilities and challenges for financial service delivery.
The report also segments the market by type of service (banking, insurance, asset management, etc.), by end-use (individuals, businesses, governments, etc.), by region (North America, Europe, Asia Pacific, etc.), and by key players (JP Morgan Chase & Co., Bank of America Corporation, Citigroup Inc., etc.).
References:
http://upscalingfinance.weebly.com/business-finance-and-financial-management.html
https://kfknowledgebank.kaplan.co.uk/financial-management
https://www.bls.gov/OOH/management/financial-managers.htm#tab-2
https://www.bls.gov/ooh/business-and-financial/budget-analysts.htm#tab-2
https://www.coursera.org/articles/finance-management
https://www.netsuite.com/portal/resource/articles/financial-management/financial-management.shtml
https://www.grandviewresearch.com/industry-analysis/financial-services-market
https://www.investopedia.com/terms/f/financialmanagement.asp
https://www.accountingverse.com/managerial-accounting/financial-management.html
https://www.thebalance.com/types-of-financial-planning-models-357375
