What is financial management theory

Finance and business have a close relationship to each other, the reason is because a business has to make financial decisions all the time, such as investment decisions, requirements for labour or manpower, raw material purchases and stocks, advertisements & marketing expenses, other transactions like buying assets, profit and loss calculations, dividends etc, and therefore organisations need to have a very strong financial management department in place.

The way you make your decisions will result in either the success or failure of any organisation. A very common tool that is usually used, for making strong and effective financial decisions regarding a business, is what we call financial management theory.

When people use the theory and apply it in their organisations it is then known as the practice of financial management theory.

There are a number of theories in practice relating to financial management that have been devoloped by some of the top and most experienced entrepreneurs over time.

There are lots of finance managers and finance directors who are still new to the term financial management theory. Basically, financial management theory deals with the usage of money in a business, including all acquisitions, sales and expenditure. Its effectively taking financial management theory and applying it to practice applicable to your organisation. Sometimes we just call it finance management.

Financial management theory will assist you and provide tools, when put into practice will help you achieve the financial goals of the organisation. In fact financial management theory is not always so easy to follow, because financial management is based on a number of different aspects :

• like acquisition and allocation of resources,

• outsourcing,

• streamlining production codes,

• risk management,

• investment ideas,

• rate of interest

• and return on investment.

There are lots of techniques to deal with in a single financial issue for any business, and sometimes such techniques become very difficult to follow especially when you implement one that requires change within your business system and structure. And no one likes change.

There have been lots of amendments that have been made to traditional financial management theory over the last few years, and experts have made it more practical and diverse for the benefit of business owners. The biggest benefit of using financial management theory is that it has a more diverse plan of action and tools, with which a business owner can use to increase its profit, through following aggressive strategies in investment & cost control.

The theory will allow you to gain profit from some unexpected sources which is the biggest benefit of using it. Along with these great management benefits of financial management theory, there are some drawbacks to be found in its practice.

According to experts and some executives, the theory is not good enough for dealing with risk management, and it seems that the theory is no longer in practice or on solid ground. This had lead to the area of finacial risk management being developed.

Sometimes, with financial management theory, it becomes hard for executives to trace profit in the real world. In short, financial management theory is complex and sometimes needs so much understanding for management to follow to make effective use of the company’s financial resources.

There are good courses available for financial management and how to put the theories into practice.

A very good book is “Financial Management Theory and Practice” by Eugene F Brigham available on Amazon