What is Managerial Finance?
Managerial finance is a mixture of managerial skills with corporate finance understanding. This branch of finance deals with financial techniques likes understanding and analyzing financial statements by using methods like trend analysis and comparative analysis. The primary focus is on maximizing profits and improving the company’s performance.
Key concepts of Managerial Finance
Essentially, Managerial Finance depends on four key concepts listed below –
- Cash Management –
Cash management means ensuring that the firm has enough cash to meet its financial obligations. Any kind of cash crunch or cash deficit can affect the performance of the business and impact the image of the organization in the market.
Cash Management is a common problem in most of the businesses. Let us look at a few examples below:
- Company X started its business five months ago and offers a period of 30 days or 60 days for the payment to its customers. Even though the company is growing quickly they are finding it difficult to manage cash and are not able to wait for such a long period for the payments leading to financial problems. They consult their financial manager and ask for a solution.
The financial manager suggests that there are two ways in which this problem can be solved. First is by offering the customers a discount of 1.5% for making payment in the first fifteen days, this will motivate them to pay the money faster. The second solution is to use invoice factoring or to finance slow-paying invoices.
- Company X agrees to the first solution. A few months later the Company observes that a Customer has been defaulting on its payment which is affecting its profitability. They consult their financial manager for a solution.
In order to reduce the bad debt, the financial manager advice the company to assess the commercial credit lines of each client and offer this facility to the clients on the basis of good credit and stable payment records.
2. Financial Reporting
This concept has two aspects to it, The first is to present the report in the format that is easy to understand to the management and the stakeholders and the second is analysis using these reports. Decision making largely depends on accurate and detailed reports.
- Going back to our previous example, Company X has grown considerably and completed a year of conducting business. The CEO of the company wants to present its business to its investors and creditors to gain additional capital. It requests the financial analyst to prepare these statements and provide insights by conducting analysis using ratios, horizontal and vertical analysis.
3. Planning and Predicting
This is one of the most critical jobs in Managerial Finance and requires experienced professionals. Planning and predicting strategies are implemented to forecast revenues, profits and future expenses. In case the company does not perform well these strategies can be changed and will help the company to run according to the plan.
- After being six years in existence, Company X now wants to add a new segment in its business. Further to plan its revenue stream they want to forecast the income statement, balance sheet, cash flow statements, and capital expenditures and ensure that the prediction matches the funding so that there are no inconsistencies. The financial manager plans to do this by using the qualitative methods like market research, Delphi method and quantitative methods like the time series model, indicator approach and econometric model.
- Read more: FINANCIAL MODELS TYPES – BRIEF INSIGHTS YOU SHOULD KNOW!
4. Capital allocation
The financial manager also has the responsibility of determining capital needs. Based on the current structure and cost they have to determine if debt or equity is suitable.
- To add the new segment Company X requires additional capital. Currently, they do not have any debt on their balance sheets. The financial manager calculates the cost of debt and compares it to the cost of equity and concludes that adding debt would be a good mix in the capital structure of the company. It will also help them to get additional tax benefits.
Why should you study managerial finance?
Managerial Finance is a vital part of all business organizations especially in the area of business management. This role contributes to decision making related to corporate finance, cash flows and in turn the overall productivity of the organization.
In recent times these roles have become increasingly important in all the business organizations and have lead to a surge in opportunities for Managerial Finance students and professionals. Below I have listed down three reasons why you should pursue a career in managerial finance.
- Narrow and niche focus yet a diverse option
Managerial Finance is a necessity of each and every organization and has dense job opportunities. By studying this niche course chances of your selection increase and gives you an edge over peers.
- Personality and Professional growth
The scope of the job is huge and starts from making decisions to driving revenues. This means you will be involved in every stage of decision making which will help you in understanding the business better and in gaining knowledge of every segment.
According to payscale.com the average salary of a financial manager is INR 9.7 Lakh per year with the top 10% earning as much as INR 2 million per year. (source: Payscale)
Careers in managerial finance
Before selecting any study or course it is important to understand how it will affect your professional growth and complement your skillset. There are various areas you can take on if you have a financial degree; some of them are listed below –
- Brokerage houses
- Investment, commercial and private banks
- Financial planning services
- Insurance companies
- Finance management
So, by now you must have got all the relevant details regarding Managerial Finance; the skills required for this role, the scope, and opportunities available in this sector. It can be concluded that pursuing a career in managerial finance will open doors to a wide range of opportunities that revolves around decision making and planning. Hope this article helps you in deciding the right career path.