Why Is Financial Management Important To All Managers?


In simple terms, a manager is a person in charge of something. It could be a business, a family, a sports team, an event, or your own life. Technically, we are all managers. And as managers, one of the most critical areas we should be good at is financial management.

Financial management provides economic stability and profitability. Organizations with managers who practice sound money management will thrive. On the contrary, companies that do not manage their finances will put themselves at risk. Money is always a factor when making critical decisions.

To my fellow parents, we know this is especially true with managing our families. We count the cost all the time. We always consider the financial implications before we make our moves. This post is about helping you become a better financial manager. What you will learn here applies to your personal and professional life. Continue reading below if you want to know the crucial decisions we should make as financial managers and what money issues we have to watch out for.

Disclaimer: The content is based on the author’s opinion. This post does not intend to give any professional advice.

A man managing his farm.
A man managing his farm.

How Important Are The Decisions Of A Financial Manager In Running A Company?

The primary job of a financial manager is to ensure the company has enough money to run smoothly. His decisions will always lean towards cost-effectivity and efficiency. He constantly seeks the best ways to utilize the company’s resources. If I have to rate the importance of a financial manager’s decision, I’d say 7 out of 10.

In 2016 I moved my business to our house and focused all my efforts online – full story here. This transition allowed my company to cut costs and pay off its debts. It’s among the toughest calls I have to make as a manager, but I know it was a necessary move for our business and family.

Money is great, but it is not everything. This is why I only rated its importance 7 out of 10. Three things supersede a financial decision:

1. Higher Authority

The decision of the owner is more important than the financial manager’s. I worked in my dad’s company many years ago. I remember telling him to halt an order from a supplier to maintain liquidity. This decision would give us enough cash to pay our workers that month. Despite my advice, he told me to push with the transaction; and so I did. As managers, we may not agree with our bosses’ calls. But submitting to the higher authority is part of our job.

2. Morality

Do not trade your morals for financial gain or efficiency. Our veterinarian told me my dog, OJ, needs to undergo emergency surgery to remove a stone blocking his urinary tract. It would cost $1,200. OJ was ten. He is almost at the end of his life. Is it a wise decision to spend that amount on an old dog? The other option is much cheaper. For only $50, I can go for euthanasia and end his suffering. I walked back and forth as I called my wife and family members to seek their advice. In the end, we chose life over money. Because it is the right thing to do.

3. Relationship

Relationship over money. Many people questioned us when they learned Lalaine and I were moving out of my parent’s house. They said we would waste money on rent and incur additional monthly expenses. I agree. I actually wrote about my struggle to leave and cleave. The decision did not make sense from a financial point of view. But relationship-wise, it was necessary.

  • My wife and I enjoyed our marriage more.
  • Our husband and wife teamwork has leveled up.
  • Our relationship with my parents and siblings has never been better. We now miss each other and look forward to every family gathering.
  • We have better influence and authority over our kids.

Money and relationships usually do not go well together. If you must choose between them, always go with better relationships.

What Are Some Of The Most Important Financial Management Decisions?

Building wealth is less about earning and more about spending. This is one of the most profound financial concepts I learned from Robert Kiyosaki. Think about it, no matter how much money you make, you will never become wealthy if you spend them on things that do not have value. Thus, the most important financial management decisions rest on how you spend your money.

Where should we spend the money?

This might be a bad example, but this is the illustration I last used in my conversation with Lalaine. I asked her: which watch is more expensive, a $1,800 Tag Heuer or a $6,500 Rolex? She said the Rolex, of course. She’s technically correct. But what if I tell you that Tag Heuer depreciates while Rolex appreciates? If I buy Tag and think of reselling it after a year, I definitely have to sell it below the published price. In the case of Rolex, I can sell it at the amount I bought it or even profit from it. In a sense, Tag is more expensive because you will lose money in the long run.

To my wife: this is not an alibi to purchase a Rolex.

Again, I apologize for the terrible illustration, but I hope you get the point. As financial managers, we must consider where we should spend our money. What are the expenses that will give us better returns long term?

How much can we spend?

Financial managers are not magicians. We cannot create anything out of thin air. All we do is use the resources we already have on hand. The challenge for us is to strike the proper balance between assets and liquidity. Assets are the things we acquire that have potential returns. Liquidity is the amount of cash we have to fund our daily needs. Spending too much on assets may hamper our day-to-day operations. Being too liquid will deprive us of future earnings.

It is why having a budget is so crucial to financial management. It helps us determine how much to spend on acquiring assets and how much we should save to maintain liquidity. The safe ratio is 50/50. But to me personally, I like to give more room for my investments. I allot 70% to assets and 30% to cash.

Where should we cut back?

Again, we are not magicians. There is a trade-off in everything we do. To allocate 70% of our funds to assets requires cutting back on some of our expenses. I downsized our manpower, unsubscribed to numerous services, and let go of several types of equipment with high upkeep. I admit they are not easy decisions to make, especially when you grow an attachment to them. But as managers, we have to think logically. Deciding what we should cut is part of our job description. Pruning promotes growth. It will enable us to focus our resources on what matters more.

What Are The Most Important Financial Management Issues Today?

Before I close this post, allow me to share some critical financial management issues plaguing our society today. Becoming aware of them helps us managers make better decisions for the organizations we are heading.

Using Debts

There are different takes on debts. Some, like Dave Ramsey, are completely against it. While there are people such as Robert Kiyosaki who think there are good and bad debts. You have to clarify your personal position (and conviction) about this matter because it will affect your overall game plan as a financial manager. If you decide against debts, you will be more careful about your spending and become extra diligent in saving. If you intend to use other people’s money as leverage, then your tendency is to focus on spending to increase your credit score.

Mixing Business And Personal Finances

If you are a work-at-home dad like me, you’ll understand one struggle we face is separating our business and personal accounts. It is crucial to draw a clear line between them. I have a friend who travels regularly. Thrice a year, he goes out of the country with his wife spending $4,000 to $7,000 a trip. Later we found out his business shut down. Apparently, he was using the company’s resources to fund his personal travels.

Comparing

One bad habit we must remove from our lives as financial managers is comparison. Comparing ourselves to others only clouds our judgment and leads us to act based on emotions. Comparing ourselves to individuals ahead of us may foster envy, jealousy, or a competitive spirit. Comparison to people behind us may result in pride, ego, and superiority. Comparing does not make sense because we all have different starting points. But it’s a disease we all have today since the emergence of social media.

Waste

If there is one common enemy we managers should despise, it’s this: the wastage of resources. It is painful to learn in our country alone, 1,717 metric tons of food are wasted every 24 hours. $460,000 worth of rice is wasted daily – enough to feed 4.3 million individuals. Imagine that. What a waste of resources! But leftovers are not the only problem. Overconsumption of resources is also a form of wastage. It doesn’t matter if it’s money, food, fuel, time, power, water, attention, etc. Any kind of wastage is a failure in management.

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Sources

Jed Chan

Jed is trained by The World Needs A Father movement, and has been a full-time, work-at-home husband and dad since 2017. He is an internet entrepreneur, a blogger, an investor, a small group leader, an avid reader, and a former financial consultant. He currently lives somewhere in the mountains of Cavite, Philippines, enjoying his time as a father.

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