What Are the Different Financial Management Concepts?

Helen Akers

Financial management concepts encompass financial reporting, the way a company finances its operations, assets and liabilities, and market risk. On a personal level, financial management is usually related to budgeting and credit management. Businesses also analyze the way monetary resources are spent in proportion to revenues. Some countries require corporations to adhere to Generally Accepted Accounting Principles (GAAP) and other government regulations when compiling official financial statements, which is a part of the analysis side of financial management.

Financial management includes financial reporting, assets and liabilities, and market risk.
Financial management includes financial reporting, assets and liabilities, and market risk.

Businesses use financial management concepts when determining how to raise capital for their operations. Companies often have to decide whether to issue public equity, public debt, or seek out private investors. Business leaders also have to strategically manage how much of a company's financing comes from each source. A crucial part of effective financial management is creating the proper mix of investment sources, which should be mutually cost efficient and beneficial to the company and its investors.

Financial management specialists strive to help businesses make better financial decisions.
Financial management specialists strive to help businesses make better financial decisions.

The efficient use of assets and liabilities is another one of the major financial management concepts. In ideal situations, companies should have enough current liquidity from their assets to cover their immediate liabilities. This ensures that they avoid financial hardships, bankruptcies, and retain market confidence. Related to this concept is the idea of choosing the right mix of liabilities, since having too many long-term debts on assets that can't be easily liquidated might be harmful.

Financial reporting is one of the important financial management concepts. In the United States, publicly traded corporations must produce annual reports that include the firm's balance sheet, statement of cash flows, and income statement. Besides providing official, certified financial documents that reveal the firm's monetary standing, the annual report gives investors insight into management's strategic goals and analysis. These reports give the investment market a chance to determine whether the company is worth buying stock or bonds from.

Market risk can refer to a firm's willingness to expand and take on new capital projects, such as a new product line or geographic market. The concept can also refer to the company's performance in the exchange market and whether investors see an adequate return in the short or long-term. Market risk can be important to a company since it often signals the firm's ability to grow, yet manage its resources wisely.

Personal or consumer financial management concepts often have to do with a person's ability to spend less than he makes. Budgeting is a practice that can help document expenditures versus income and reveal areas where spending can be reduced. Saving money for large purchases and choosing credit wisely is also related to personal financial management. Time value of money concepts, such as how much of a deposit is needed for savings to grow and how much credit actually costs in the long-run, are heavily used in personal finance techniques.

The annual report gives investors insight into management's strategic goals and analysis.
The annual report gives investors insight into management's strategic goals and analysis.

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