What is Managerial Finance?
“Managerial finance” is another word for financial planning and decision-making in organizations. Fintalent’s managerial finance consultants note that it’s the management activity that shapes an organization’s financing strategies, such as what sources of money the company should use for investments or whether debt should be raised, and how money should be deployed to generate cash flow.
The underlying goals of managerial finance are twofold: maximize shareholder wealth in the long run, meanwhile making decisions without damaging organizational profits in the short run. Another goal is to help a company produce goods and services that satisfy customer needs at an acceptable cost.
A final goal of managerial finance is to achieve transparency and predictability in the financial planning process. That way, everyone in the organization can see what impact their financial decisions have on the organization as a whole. In fact, meeting the first three goals may depend on achieving this last one. By generating a detailed budget, for example, you will know how much money is needed to operate your business each month and how that amount compares with your actual sales revenue. This information will allow you to foresee problems before they happen and take steps to correct them before they bite into profits or cause cash flow difficulties in the long run. You’ll also be able to measure and adjust the overall financial strategy of your organization.
Along the way, you’ll find that a careful planning capability will yield other benefits. Managers who can think ahead and make good decisions in advance will enjoy greater job security, because they’ll be able to meet short-term objectives that are essential for keeping their organizational jobs. That’s because they’ll know how each decision affects the company as a whole, while not damaging it in the short run. It also means that they don’t have to wander around desperately looking for ways to survive on short notice when problems arise — a situation that only worsens when financial troubles involve an entire division instead of just one unit or department.
Managing financial resources properly is a task that depends on a broad range of skills. You’ll need to master the fundamental principles of finance, such as what it means to have an asset or an expense and how to find out about balance sheets, income statements, and cash flow statements. You’ll also need to understand the components of investment strategies, such as market timing and diversification, and you’ll have to acquire experience using spreadsheets so you can calculate net present value (NPV) by hand or with a computer spreadsheet.
When preparing a financial plan for your organization, you’ll probably use software such as Microsoft Excel 2003. Excel has two basic views: a spreadsheet view for entering data and a graphical view for visualizing results. In the spreadsheet view of Excel, rows represent lists of numbers from desired values to actual values and columns represent different types of data. For example, in the graphically oriented view of Excel, rows are used to plot lines representing different financial variables and columns are used to plot points representing different financial items.
In the graphical view of Excel, a graph of financial statements is displayed with rows representing different accounts. Each column represents a different time period related to the financial statements. In the spreadsheet view, each column represents a different item and each cell contains numbers. In this way, users can easily “slice” and “dice” results in various ways. For example, global financial results may be calculated by multiplying the net income in a single column by the number of months for which the data applies. This way, you don’t have to go back and change every line of data — instead, a single multiplication will update the annual income numbers for each month in your spreadsheet.
It’s important to keep in mind that Excel is a powerful software tool, but it should never be used as an excuse for neglecting fundamental managerial finance concepts. In particular, you need to understand how to use debt, equity, and other financial sources to raise the money needed for financing investments. You also need to understand how budgeting works and how different financial statements are calculated using accounting rules. The latter skill will help you track various indicators that reflect the financial condition of your organization as well as keep an accurate record of performance on a short-run basis.