For new MBA graduates, understanding how financial management works in organizations is immensely important. Managers and executives need to understand how budgets work and how financial management integrates with all business functions, emerging business trends, regulatory shifts and even economic and political changes.
Within their spheres of expertise, corporate finance professionals are involved in planning, raising and investing capital. They are actively involved in defining financial objectives and tracking performance in order to build company value. No longer are the CFO and subordinates of the past who focused primarily on compliance and financial operations. Today's most successful financial managers and executives think beyond day-to-day financial management functions; they enable their organizations to find new revenue streams, excite customers and shareholders, innovate and grow.
Here are some of the best practices in modern financial management, applicable to professionals in companies of all sizes and sectors.
Balance Strategic With Tactical Financial Management
As you ascend the leadership ladder and become more involved in executive financial planning, you will likely have opportunities to become more strategic in your long-term thinking. Rather than focus on day-to-day capital budgeting and liquidity, you may focus on long-term financial health and solvency.
This shift may entail purchasing assets or investments with an appreciation or profit potential, strategically financing debt, developing products with longer product life cycles and determining how to use assets more efficiently. As a result, strong financial managers maximize the profit generated from each dollar invested. They track earnings per share (EPS) to show how strategic management ultimately results in earnings growth and market capitalization (or private business value).
Add Value by Developing New Revenue Streams
Whether you are a chief financial officer or a financial manager, developing new revenue streams is likely your responsibility or your path to greater authority. Successful organizations are continually developing new product lines to replace products that are losing market share, turning products and services into subscription or contract models and thinking of new ways to leverage company assets to package as products. The subscription model is especially hot right now: many businesses currently offer their products through an ongoing commitment model such as shaving blades, prepared meals and even software (SaaS).
Monitor Financial Statements
Managing expenses through financial statements at every level of financial management — from a managerial budget to shareholder reporting — provides a clear view of assets, income and expenditures. Financial managers who demonstrate mastery of these tools often work their way up into the executive levels of leadership.
Financial statements include the following:
- Cash flow statement: Includes inflows from ongoing operations and investments, as well as outflows that pay for business expenditures and investments
- Income statement: Tracks the revenue over a specified period, focusing on revenue, expenses, gains and losses
- Balance sheet: Reports on shareholders' equity, as well as company assets and liabilities at a specific point in time
- Statement of shareholders' equity: Indicates funds coming in through investor purchases of preference and equity shares
Track Financial Ratios
Financial ratios simplify understanding financial performance and enable financial managers to communicate concisely and effectively with peers and financial executives about their performance and expected impact of proposed initiatives.
Key financial ratios include the following:
- Liquidity ratios: meaningful measures of a company's ability to repay both short- and long-term financial liabilities
- Leverage ratios: evaluate company debt levels and solvency
- Efficiency ratios: measures how efficiently a company utilizes resources and assets
Get Scientific and Predictive With Metrics and Data
In every business sector, key performance indicators (KPIs) or metrics and ratios determine success. For example, in manufacturing, return on assets (ROA) measures the money made on investments by dividing net income by the average number of total assets across time. In marketing, customer acquisition cost (CAC) looks at the total investment required to capture a new customer. For every important metric, tracking data over time is essential to scoring your effectiveness and making continual improvements. In this way, you become a more effective financial manager, and with every success, your company becomes financially stronger.
Graduates of the Northern Kentucky University (NKU) Master of Business Administration (MBA) online program bring high-demand, financial management best practices to the job market, with 17% projected job growth between 2020 and 2030, according to the U.S. Bureau of Labor Statistics.
Learn more about NKU's online MBA program.
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