How Important Is Managing Your Finances
We all know finances are important aspects of our life. But we undervalue its importance from time to time. So, how can we know if we are undervaluing, and what kind of management is required for the same? Financial management plays an important role in the business as well as an individual’s life. This helps in making your business successful and your life convenient.
Financial management is a holistic approach to managing cash outflow and inflow. But it is not limited to that only. It also includes strategic long-term and short-term planning, organizing, and controlling the sources of income, debt management, and profits. It also helps in directing the principles to manage an individual’s financial assets or a company as a whole. This is known as financial control.
Financial Management in Business
The finances of a business entity are quite different from that of an individual. Therefore, a separate finance department is present to take care of financial activities. A group of financial managers manage the funds and allocate them into their budget and control the expenses.
The finance department in any organization has the following functions and responsibilities:
- Calculation of capital requirement
- Capital structure formation
- Capital investment
- Budget allocation
- Profit round-off
- Cash flow
- Financial control
- Debt management
Now, why is this important for the organization? If there is no control over the money, the firm may lose its stability over the years to do business or even pay its employees, leading to bankruptcy. Financial management helps in making critical decisions and provide economic stability. This ensures that the cash flow is in control and other aspects of money management are done properly.
Financial management for individual
Unlike business, there is no finance team to control one individual’s salary. However, some people hire chartered accountants to keep an eye on their books. But the requirement for financial control is still important. The absence of financial control can lead to problems in managing funds for the future.
Thus, it is very important to make proper financial planning on how to disperse the income and manage the debts and expenses. Individuals can also be bankrupt if they don’t manage their finances well. Apart from that, proper funds management can help fulfill your wish list on buying new gadgets, or have a fancy dinner at an expensive restaurant, or even go on a vacation without worrying about the money.
Benefits of proper financial management
There are numerous financial management benefits. Firstly, it helps you create a budget for the year and aids in future wealth generation. A proper budget helps you in maintaining a disciplined expense. Without proper financial management, your emergency funds will drain and soon, you will be left with nothing more than regret.
With proper financial planning, you can avoid debts. For instance, if you plan to buy a car five years down the line, you can start saving from now. This way you will have enough funds to purchase a car on your own. Financial management also helps in your strategic debt payment. If you have taken a loan from the bank for education, you can create your budget based on the expected salary level and start paying off the debt likewise.
Financial management also helps in creating future wealth. Wealth creation is very important for any individual or business. Wealth generation is directly proportional to the value of an entity. However, financial planning is based on the future goals that you wish to achieve. This can be either short-term or long-term goals.
Proper management of funds ensures that you increase your profit or savings level to a substantial amount. Do remember that a good financial plan can prevent you from extravagant spending and maintain financial freedom, wealth creation, and achieve economic stability at microeconomic and macroeconomic levels.