Key indicators for healthy financial management

Introduction

Given the rapid changes in the business landscape, managers are compelled to make decisions swiftly and effectively. In this context, Key indicators for financial management efficient emerge as indispensable tools for assessing economic performance and making informed strategic decisions.

According to Nava (2009), organizations face significant financial challenges such as high financial costs, risk, profitability, operational control, dividend distribution, among others.

Consequently, utilizing indicators such as financial profitability, operational efficiency, and operating expenses, among others, offers a comprehensive view of a company’s financial status and its ability to create value.

In this article, we will explore how these indicators not only provide an accurate snapshot of an organization’s financial health but also serve as a guide for formulating long-term successful business strategies. We will delve into the importance of understanding and effectively utilizing these key indicators for financial management in a robust and efficient manner.”

Financial management

According to a conventional perspective, the primary purpose of an organization is focused on profit attainment and maximization, although this approach may contribute to generating economic disparities among involved parties. In contrast, the contemporary approach does not simply seek to maximize wealth but prioritizes value maximization, considering the latter as essential for all stakeholders related to the company (Duque, et al., 2020).

Financial management is responsible for acquiring and effectively utilizing monetary resources, carrying out activities related to the procurement, investment, and administration of these resources. Consequently, it is argued that finance establishes procedures, techniques, and criteria that optimize the way these financial resources are acquired and utilized. In the organizational context, financial management refers to the set of actions and strategies aimed at efficiently managing the financial resources of an organization to achieve its objectives and maximize its value.

This discipline involves planning, analysis, and control of financial activities, as well as decision-making aimed at ensuring and maintaining the economic strength and sustainable growth of the company.

From assessing financial profitability and liquidity to proper debt management and optimization of financial processes, financial management encompasses a wide range of aspects that directly influence the financial health and overall performance of the organization.

Essentially, financial management is a dynamic and continuous process that requires a deep and comprehensive understanding of the economic environment. It also requires a strategic approach to addressing challenges and seizing opportunities that arise in the course of maintaining operations with the aim of achieving business success.

According to Fajardo and Soto (2017), financial management decisions encompass aspects related to investment in assets necessary for operations, financial decisions related to the benefits of borrowing, and administrative decisions regarding assets.

Keys to Healthy Financial Management

In this section, we will explore the fundamental keys that contribute to healthy financial management in organizations. Effective and healthy financial management is essential to ensure the stability and sustainable growth of a company in an increasingly competitive and dynamic business environment.

Some key strategies for financial management include:

• Strategic Financial Planning: It is the starting point for healthy financial management. It involves setting short, medium, and long-term financial goals, as well as developing strategies to achieve them. This includes budgeting, projected cash flows, and identifying suitable sources of financing to support the company’s operations and growth.
• Cost and Expense Control: This entails closely monitoring operating costs, identifying areas of inefficiency, and taking corrective actions to optimize the use of financial resources. Additionally, it is important to establish clear expense policies and promote financial guidelines within the corporate culture.
• Financial Risk Management: It involves identifying, evaluating, and mitigating the financial risks facing the company, such as market volatility, inflation, changes in interest rates, or changes in exchange rates. This is achieved through the implementation of appropriate hedging strategies and diversification of investments.
• Financial Indicator Analysis: Regular analysis of financial indicators provides valuable insights into the company’s financial performance and helps identify areas for improvement. Continuous monitoring of financial indicators contributes to providing a comprehensive view of the company’s financial health and guiding strategic decision-making.

Therefore, healthy financial management requires a combination of strategic planning, cost control, risk management, and financial indicator analysis. By implementing these key elements, organizations can strengthen their financial position and enhance their ability to confidently face market challenges.

Main key indicators for financial management

Below are the main indicators that guide the financial management of an organization, focusing on:

1. Liquidity: It refers to a company’s ability to meet its short-term financial obligations by converting assets into cash. Essentially, it indicates the availability of cash and easily convertible assets to cover current liabilities.
2. Solvency: It refers to a company’s long-term ability to meet all its financial obligations, including long-term debts and future obligations. It indicates whether the company has enough assets to support its liabilities.
3. Operational efficiency: Related to a company’s ability to use its resources optimally to generate revenue. It includes efficient management of assets, optimization of production processes, and minimization of operating costs.
4. Debt Capacity: It refers to a company’s ability to assume and effectively manage debt. It indicates the proportion of debt in relation to the company’s equity.
5. Performance: It means a company’s ability to generate profits from its assets and investments. It includes indicators such as return on investment (ROI) and return on capital employed (ROCE).
6. Financial profitability: Refers to a company’s ability to generate profits in relation to its investment and capital. It includes indicators such as net profit margin and return on equity (ROE).
7. Control of operating expenses: It consists of a company’s ability to manage and reduce costs related to its daily operations. It includes costs such as production, distribution, marketing, and administration.

These indicators provide a detailed insight into the economic performance of the company and are necessary for assessing overall financial health. Therefore, financial indicators such as profitability, efficiency, and control of operating expenses are crucial for evaluating the financial health of a company and guiding strategic decision-making.

By closely monitoring these indicators and taking corrective actions when necessary, organizations can optimize their financial performance and ensure long-term success. If you wish to learn more about financial analysis, I invite you to review the article “Financial Indicators Analysis.”

Indicators in Practice

The financial and economic analysis based on indicators, as stated by Ochoa et al. (2018), Cáceres (2019), and Rivera (2019), is a complex and dynamic process that cannot be governed by fixed rules due to the diversity of factors influencing its performance.

The authors point out that it is crucial to understand that this analysis cannot be uniformly applied to all companies, especially in the case of Small and Medium Enterprises (SMEs), as each one has its own peculiarities and specific circumstances.

Firstly, the nature of the financial and economic analysis of an SME depends on the aspects to be studied and the availability of relevant information. Not all companies have the same financial structure or objectives, so the analysis must be tailored to the specific needs of each company.

Additionally, the sector in which the company operates and its particular situation also influence the financial and economic analysis. For example, companies in highly regulated sectors may face different financial challenges than those in less regulated sectors. Similarly, a growing company may have different financial needs than an established one.

Finally, the timing of the analysis is also a determining factor. The financial situation of a company can change over time due to a variety of factors, such as market changes, economic fluctuations, or strategic decisions by the company. Therefore, it is important to conduct periodic analyses and update information to make informed financial decisions.

In financial matters, transparency and trust are important. Financial statements, reflecting the health status of an organization, promote accountability and good corporate governance while enhancing the credibility and reputation of the company in the market. This was evidenced in 2023 when Microsoft released its financial results.

Conclusions

Efficient financial management is crucial for the success and sustainability of organizations in a dynamic and competitive business environment. As managers face the need to make quick and effective decisions, key indicators for financial management become essential tools for evaluating economic performance and guiding strategic decisions.

Financial and economic analysis, based on financial indicators such as financial profitability, operational efficiency, and control of operating expenses, provides a comprehensive view of the financial status of an organization and its capacity to create value. These indicators not only offer a precise snapshot of the financial health of the organization but also serve as a guide for formulating strategies that drive long-term business success.

References

1. Cáceres, C. (2019). Financial management indicators and their impact on decision-making in the credit area of the Indigenous Savings and Credit Cooperative SAC Ltda., in the city of Ambato. Escuela Superior Politécnica de Chimborazo. Retrieved from: http://dspace.espoch.edu.ec/bitstream/123456789/11267/1/20T01226.pdf
2. Duque, G; Córdova, F; González, K: Aguirre, J. (2020). Evaluation of financial management and managerial qualities in Ecuadorian companies. INNOVA Research Journal, ISSN 2477-9024 (September-December 2020). Vol. 5, No.3.1 pp. 115-184 DOI: https://doi.org/10.33890/innova.v5.n3.1.2020.1562
3. Fajardo, M. and Soto, C. (2018). Business Financial Management. UTMACH Editions. Ecuador.
4. Nava Rosillón, M. A., (2009). Financial analysis: a key tool for efficient financial management. Venezuelan Journal of Management, 14(48), 606-628. https://ve.scielo.org/scielo.php?script=sci_arttext&pid=S1315-99842009000400009&lng=es&nrm=iso&tlng=es
5. Ochoa González, C., Sánchez Villacres, A., Andocilla Cabrera, J., Hidalgo Hidalgo, H., & Medina Hinojosa, D. (2018). Financial analysis as a key tool for efficient financial management in medium-sized commercial enterprises in Canton Milagro. Journal of the Latin American Economy Observatory, 19. https://www.eumed.net/rev/oel/2018/04/analisis-financiero-ecuador.zip
6. Rivera Mena, L. A. (2019). Financial indicators for the food and beverage sector of small and medium-sized enterprises in the metropolitan district of Quito (Bachelor’s thesis, Quito, 2019.). Retrieved from: https://bibdigital.epn.edu.ec/bitstream/15000/20474/1/CD%209961.pdf.