What Is the Financial Management Process?

The financial management process is one that supports objectives and organizes resources into appropriate categories. When performed successfully, it can lead to growth and the attainment of identifiable goals. The financial management process can be applied to personal circumstances or to an organization's economic position. Effective procedures may include recording a desired end result, evaluating risk, and estimating future conditions.

Creating a budget, either for personal or business use, is a step in the financial management process. To be especially efficient, an individual or organization might formulate a plan for several different possible scenarios. Establishing more than one plan could reduce the time or resources needed to adjust if circumstances do not unfold as expected over a period of time. For instance, if financial conditions deteriorate or, on the other extreme, if unexpected income is generated, an early consideration about a proper response could save time.

A long-term budget could outline the anticipated income and expenses over the forthcoming 12-month period. This approach is a reasonable way for a business to operate. For an individual, it might be prudent to create near-term plans on a monthly basis in order to remain ahead in the financial management process. Despite the duration of the plan, a budget should address the financial goals that a person or organization expects to reach over time. It may be a realistic assumption of accomplishments that can be attained based on the current size of income and debts.

Another part of the financial management process is to assess whether or not risks were considered properly and if expectations are reasonable. It is one thing to record the way that money should be distributed or saved, but something else entirely to follow the direction of a plan. Evaluating whether or not goals are on track or if milestones may be missed can eliminate unnecessary surprises. It might also lead a person or business to reassess and implement a different budget if necessary based on realistic performance.

Once it is clear whether or not expectations are attainable, the financial management process could involve predicting future conditions. This might include creating estimates for several years ahead. The success of projections could depend on sticking to a budget but may also be influenced by the state of external circumstances. Outside conditions may include the state of a regional economy or political changes. Consequently, even with a great deal of planning, assessing, and guessing, the financial management process will likely require some degree of flexibility.