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What Is Sound Financial Management?

Article Details
  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 12 December 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Sound financial management refers to the various methods and strategies that individuals, organizations or government may employ in order to facilitate stated goals or to achieve desired financial objectives. That is to say that sound financial management includes all the applicable practices that will help in the realization of good financial results. The methods for achieving sound financial management depend on whether the party in question is an individual, a company or organization, or a government entity.

Most individuals make financial decisions in their lives on a daily basis. These types of decisions are not only restricted to adults, because even little children make small financial decisions that may be deemed as good or bad. For instance, a child who receives a stated amount of pocket money every week must make decisions concerning what to do with the money. Some of the options may include saving a large percentage of the money, spending all of the money, and investing some of the money so that it will yield dividends over time. All of these decisions have their own results, which may include having enough money saved for rainy days, being constantly broke by the middle of the week, and having extra income from the dividends accruing from the investment.

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In the same way, businesses must make sound financial management one of the chief cornerstones of their business practice in order to properly manage whatever resources they have in conjunction with the realization of their corporate objectives. For instance, a company must have a clearly stated operational budget that will serve as a guide for the entire fiscal year. Such a company must keep careful records of the inflow and outflow of cash in order to put a tight rein on any avenues for leakages that could push the corporate expenditure over the desired budget. Companies may need to borrow money from banks and other financial institutions at some point in order to execute large or financial-intensive projects. Good financial management practices demand that such companies must also have a clear plan for the use of the money as well as for the repayment of any loans to avoid any defaults.

Governments also exhibit the principles of good financial management through the planning of annual budgets and the earmarking of funds for different sectors and projects. They must also have financial plans in place to allow for proper accounting for incoming revenue from various means, including taxes, fines, duties and other government income sources. Such sound financial management practices often mean the difference between a healthy economy and one that is in not moving forward.

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