What is Managerial Finance?
Managerial finance is concerned more with the assessment of financial techniques versus the financial techniques themselves. It differs from the technical approach, which essentially only concerns itself with measurement and whether money’s been assigned to the correct categories.
The managerial approach aims to determine the significance of data, figures, and numbers. Managerial finance considers how financial techniques can be improved – where changes can be made in order to help prevent losses and improve the bottom line.
Managerial finance is somewhat a combination of both corporate finance and managerial accounting. It is an interdisciplinary approach. It assists in putting business strategies into place and monitoring their effectiveness in relation to accomplishing the objectives of a company. When finances are properly managed, value is created and a company’s scarce resources are properly allocated.
- Managerial finance is concerned with assessing how financial techniques are being used at different levels of a company versus the financial techniques themselves.
- Proponents of the managerial finance approach look at a variety of key elements and departments of a company to determine how well the company is doing.
- Managerial finance and corporate finance are two different approaches; however, they work together as two of the most important elements in managerial accounting.
What Managerial Finance Looks Like
In order to better understand what managerial finance really means, let’s look at some examples of what it might look like in practice. An individual using the managerial approach might:
- Examine a company’s working capital (which is a comparison of a business’ current assets – accounts receivable, raw materials, finished goods, and cash – and current liabilities – accounts payable, interest due, etc. Working capital is the net sum – positive or negative – of the two, which one is larger). It is examined to help anticipate potential problems with cash flow in the future.
- Draw a comparison between the returns of a company and that of its peers, asking whether the focal company is doing relatively better or worse. If the focal company is doing worse, the managerial approach will seek to find out the reason for the poor performance, examine profit margins and expenses, and try to determine if the focal company is spending more on essentially identical operating expenses, as compared to other companies in the industry.
- Look closely at substantial changes to asset balances and any red flags that arise that indicate the focal company is holding bad debt or failing to properly collect on outstanding bills.
Managerial Finance vs Corporate Finance
Both managerial finance and corporate finance are combined under the umbrella of managerial accounting; however, the two serve different functions.
Managerial finance carefully analyzes companies by department and products, versus looking at the company as a whole. Top-level managers need to measure performance. Managerial finance helps them do so by looking at specific departments, determining their efficiency and effectiveness in helping a company boost returns. It helps the senior-level managers make decisions about how a company is organized and if its organization is working to maximally benefit the company.
Corporate finance, on the other hand, examines all the tools being utilized to develop a company’s financial statements, analyzing the data in order to determine if the company – as a whole – is successful or failing. Those who employ the corporate finance approach also look at capital raising, risk management, and the valuation of a company’s assets.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below: