Financial management relates to internal company issues, such as the basic financial structure of the business and departmental performance. Financial management techniques are the basic actions that financial managers accomplish, at a general level, during the course of their duties, which encompass a broad range of actions and must take many variables into consideration in building their models.
The basic technique of financial management is to plan for the future. Therefore, the manager is to use models and statistical data to predict how the current financial structure of the organization will endure over time. The real issue in using planning software is the sheer number of variables that must be inserted for any real model to provide useful information. The manager must take into account all relevant variables without using variables that overlap. For example, if, in a statistical model, a financial manager uses the variables of “government policy” and “regulation” as two variables, then the model will be harmed, since these are, in reality, one variable. The basic work here is clear thinking, economy of resources and lean variable definition. While highly technical, it does get to the heart of the discipline.
One of the main areas where the basic software packages are programmed to perform is in the identification of risk. Financial planning is about forecasting risks and planning methods of dealing with them. For example, if a firm is considering buying oilfields in Nigeria, then the financial manager will collect data on the Nigerian oil industry. The risks that may show are the lack of coordination in government policy, shoddy equipment, substantial competition and the corruption in the industry. Political insatiability and ethnic violence will be other risk factors. The manager then performs a sophisticated cost and benefit analysis to see whether the projected profits could ever outweigh the risks in investing in that climate. The technique here is to take these risk variables and attach a real price tag to them.
Financial managers and managerial accountants may worry about the value of assets, costs and risks over time. Financial managers must be regularly involved in forecasting any possible increase or decrease in cost. For example, if a financial manager is working for a firm that makes aluminum products, a government in Jamaica may be elected that wants to take steps to nationalize that island's substantial bauxite reserves. Bauxite is the main ingredient in making aluminum. The manager then writes out a series of scenarios and their projected costs. If the government does nationalize, it needs to be determined if the cost of bauxite will go up, if the government is the contact in these matters and what the island's record in government industries is. These are the main issues that will have to be addressed for an intelligent report to the board.