Financial management is the activity of raising money and managing the company’s finances to achieve the highest possible rate of return. It sits alongside operations management, marketing, HR, and engineering as a core business function.
Four financial objectives
Every financially-healthy company aims for:
- Profitability — ability to make a profit on the revenue it generates.
- Liquidity — ability to meet short-term financial obligations (suppliers paid, payroll met, near-term debts serviced).
- Efficiency — ability to use assets and equity productively to generate revenues and profits.
- Stability — the company’s overall financial health, especially its capital structure (mix of debt and equity).
These four interact. A company can be very profitable on paper but illiquid (unable to pay this week’s bills because the cash is tied up in receivables); efficient but unstable (using too much debt); stable but unprofitable. The full picture requires looking at all four.
Financial management process
The standard cycle has four steps:
-
Preparation of historic financial statements: Income statement, Balance sheet, Statement of cash flows.
-
Preparation of forecasts: projected income, expenses, capital expenditures.
-
Preparation of pro forma financial statements: financial statements for future periods, built from forecasts.
-
Ongoing analysis of financial results: comparing actual results to plans, comparing the company’s ratios to industry norms.
The process is cyclical, not linear — each cycle’s actual results feed into the next cycle’s forecasts and plans.
Historical vs pro forma statements
Historical statements report past performance. Typically prepared quarterly and annually. Publicly traded companies are legally required to prepare them for shareholders and to make them public (SEDAR/EDGAR filings).
Pro forma statements are projections of future periods — usually annual, 2-3 years out. They’re planning tools, not legally required, not binding. They serve internal planning, investor pitches, loan applications.
The two complement each other: historical statements describe what happened; pro forma statements describe what’s expected to happen. Both are needed for credible planning.
For the three core statements see Income statement, Balance sheet, Statement of cash flows. For the diagnostic tools that operate on them see Financial ratio analysis. For the specific use case of new ventures see Business plan and Feasibility analysis.