Financial Management is compiling and controlling financial activities by applying general management principles to financial resources in the organisation. In the long run, Financial Management will contribute to the universal goal for all companies: making profit and returning maximum value to stakeholders. There are two separate areas to Financial Management; the Legal and the Operational area. They are strongly connected to one another, and yet they serve different external and internal stakeholders.
The Legal side of Financial Management includes all the financial exercises associated with legal requirements from financial institutions and governments. This could be requirements, restrictions and guidelines to maintain the overall integrity of the financial system. The legal area is focused on the owner’s perspective, investors, shareholders and other external stakeholders, with the purpose of letting them all gain insight.
We need Legal Financial Management to determine unacceptable behaviour and to provide certainty and stability to the organisation’s finances. A common division at companies is that the Financial Controller manages the legal financial requirements, whereas the Business Controller manages the operational side of financial management.
The Operational side of Financial Management entails the on-going business profit and is dedicated to the Board of Directors and other internal stakeholders. Operational finance can also be directed at owners, similarly to the Legal Finances, but is primarily a foundation for the day-to-day business and how it should be managed. The managers and leaders of the company need to know how the company is doing and how they should keep operating it.
Balance sheets, income statements, current assets and liabilities become tools for short-term decision making and top-level management. This insight is used to make sure maximum value is returned to the organisation. In short, the Operational Financial Management is very similar to the legal part with the exception of being directed towards internal leaders to a greater extent.
Financial Management is a broad concept, with some ambiguity depending on the industry or company. Within the concept you find two divisions, the Legal and the Operational, both focusing on the day-to-day business and historical numbers with the purpose of letting internal and external shareholders gain insight. When general management principles are applied to the resources in the organisation, stakeholders can gain valuable insights and take informed decisions.