With the end of the financial year looming, many business owners will reviewing their financial system and procedures in preparation for the coming year. Some may be considering a financial management system to help them better manage income and expenses.
However, financial management systems come in all shapes and sizes and it’s important to fully understand the purpose of them and which systems will work best in your business.
What is a financial management system?
A financial management system is the methodology and software that an organisation uses to oversee and govern its income, expenses, and assets with the objectives of maximising profits and ensuring sustainability.
An effective financial management system:
- Improves short- and long-term business performance by streamlining invoicing and bill collection
- Eliminates accounting errors
- Minimises record-keeping redundancy
- Ensures compliance with tax and accounting regulations
- Helps personnel to quantify budget planning
- Offers flexibility and expandability to accommodate change and growth.
What are the different financial management systems?
There are three main types of financial management systems. These are:
- Financial accounting
- Managerial accounting
- Corporate finance
Financial accounting is a part of financial information systems that provide income statements, balance sheets, and statement of cash flows to creditors, investors, and taxing authorities. These reports are monthly outputs that create the ability for decision makers to determine financial trends relating to the business.
Managerial accounting is a system that provides information internally to individuals and businesses. These are generally not released to the public and are only for internal use only. Decision makers can simply request data they wish to see and ask for a specific format, if necessary.
Corporate finance is a part of financial management systems that resides outside of the normal accounting information systems. These include budgeting, financial analysis, forecasting, and performance metrics, among others. The activities in this system take accounting information to create necessary reports. The main purpose of corporate finance, is to provide a road map or plans for a company’s future activities.
Not all financial management systems include the same activities. A small business will not have the same needs as a much larger organisation in terms of financial management. Creating a specific system tailored for the company’s needs is what sets these systems apart from others.