Finance teams have been using financial management systems for a long time. But these systems have evolved so much over the years (and diversified to such an extent) that it’s more difficult than ever to know what falls into this category.
In this article, we’ll define what a financial management system is today, including a breakdown of the separate functions they consist of. We’ll also discuss their importance, the specific benefits they bring about, and which traits to prioritise when selecting a financial management system for your business.
Understanding financial management systems and their importance
A financial management system (FMS) is any method, process, or tool used by businesses to manage their finance-related activity. This can involve any activity that seeks to monitor financial performance and store financial data.
An FMS can be used to track all income and expenditure, so that the finance team can understand what they owe and what is owed by others. They can then grasp the bigger picture, in order to assist with the company’s ongoing profitability.
The evolution of financial management systems over the years has taken teams through the following methods:
- Pen and paper bookkeeping
- Spreadsheets
- Dedicated accounting software
- Integrated Cloud accounting technology
Accounting techniques have become more sophisticated as technology has progressed. Many processes would have previously been completed manually. But calculations can now be made far more accurately and quickly, in a more secure environment too.
What are the functions of a financial management system?
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Accounts payable/receivable
Financial management systems often strive to incorporate functionality for each responsibility a finance professional may have to contend with on a daily basis. With accounts payable/receivable capabilities, they allow employees to track all payments, both incoming and outgoing. This ensures they can hit deadlines for liabilities. And credit management provides clarity around cash they are expecting to receive. The sales invoicing aspect of an FMS makes invoice generation much quicker and debt collection much smoother.
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General ledger
Maintaining a general ledger digitally improves the accuracy of bookkeeping and makes the process more streamlined. With full visibility of all incomings and outgoings in a single location, finance teams can easily grasp the company’s health/performance. Widespread use of this technology eradicates multiple versions of the truth, so that the latest balance is accurate. And with bank reconciliation capabilities, transactions don’t have to be matched manually.
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Reporting
The reporting element of financial management software allows employees to quickly compile data related to key metrics, so that this can be presented back to senior figures in a useful/insightful manner. Previously they would have had to build reports from scratch (which is extremely time-consuming) but now they can just use existing templates.
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Cash flow management
Healthy cash flow is a crucial attribute for any business aspiring to be successful. An FMS provides visibility around how much fluid cash is available, credit that is expected soon, and value that is locked up in fixed assets. With a clear view of payment deadlines too, finance teams can see if they’re on course to meet obligations and take remedial action if they’re not.
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Payroll
Payroll is one of the most important tasks for finance teams to get right, as employees are likely to become dissatisfied if they’re not paid correctly. Software helps to minimise payroll-related mistakes with automated salary calculations, considering bonuses, overtime, tax, and other deductions.
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Expense management
Traditionally, physical receipts will have been kept by employees so that expense management could be completed manually. With digital systems it’s much easier to log an expense claim instantly (and for approval/rejection to take place automatically). This helps to keep everyone aligned with a single unified policy, while also reducing costly mistakes and fraudulent behaviour.
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Asset management
It can be difficult for companies to keep track of every single asset they own, as well as how much each is worth. Asset management functionality changes this, as accounting software often includes a built-in asset depreciation calculator, so that the value of assets can be accurately monitored over a prolonged period of time.
Not only does the data in an FMS make it easier to track current financial performance, but it makes it possible to project future outcomes too. With forecasting capabilities, finance teams can gain an idea of how cautious or bold the company should be in relation to aspects like investments and growth. They can also use this to budget more dynamically, to avoid spending beyond their means.
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Risk management
Software ultimately provides greater awareness around risks, such as liabilities that may have gone unnoticed. It also offers better protection for sensitive information, reducing the likelihood of data loss and data breaches. Rather than keeping up with the latest legislation manually, technology helps finance teams to automatically remain compliant.
Benefits of using a financial management system
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Increased efficiency
Through automation, unnecessary steps are removed from financial processes, ensuring activity is as streamlined as possible. With instant calculations and interconnected functions, work is completed at a much faster rate.
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Fewer mistakes
Whenever manual tasks are removed, there’s inevitably reduced mistakes (such as data duplication), as computers simply make fewer errors than people. When processes are streamlined, there are fewer opportunities for something to go wrong.
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Greater visibility
Not only does accounting software provide a single view of data for everyone in the team, but it also ensures there is a clear audit trail, so there is no ambiguity around who completed which task (and when the task was completed).
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Better data
The quality of financial data improves when mistakes/duplication are eradicated. And when updates can be made instantly, the data is current too, which has a profoundly positive impact (as this information will be used to guide key decisions).
Boosted efficiency leads to lower costs. When resources are being utilised optimally, less energy is used and less waste is produced, meaning lower bills/maintenance costs. There’s greater cost-effectiveness in terms of employee salaries too, as they are using their time more effectively.
As we’ve touched upon, financial management software will usually incorporate compliance-related changes when it is updated by the provider. This reduces stress for the finance team and ensures they can avoid non-compliance fines.
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Higher productivity
With the time saved through automation, it simply means more can be done on any given day. The business can produce more, and the finance team can complete a higher number of tasks, while also having increased time to focus on high-level work.
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Better decisions
If the data being used to guide decisions is of a higher quality, then these decisions will be better informed. Reports can unearth hidden gems, allowing the CFO to come to board meetings with impactful strategic suggestions.
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Improved cohesion
There are many roles and responsibilities within a finance team. If a different software solution is used for each function, and these systems cannot integrate, it can create tension between colleagues (if they have conflicting data). Whereas a unified financial management system keeps everyone aligned and makes collaboration easier.
What to look for in a financial management system
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Adequate automation
An FMS is likely to facilitate some form of automation, but it’s important to assess the extent of these capabilities. Significant functionality in this regard could unlock the potential of your finance team and create transformational results. It can help you to keep up with competitors, as well as enabling an expansion of operations.
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Powerful reporting
It’s important to determine the scope of reporting functionality. Data is rightly regarded as one of the most powerful commodities in the business world. A system’s reporting prowess, as well as your team’s ability to analyse data, will determine whether you can mine the optimum value from this powerful resource.
It's possible that your needs will change as and when the business grows. By selecting a software solution that is scalable, you can enjoy growth in a way that is comfortable and sustainable. If a system is inflexible and is unable to scale up its processes when your demand increases, it will need to be replaced before long, leading to lost time and money.
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Integrates easily
Flexibility doesn’t just apply to a financial management system’s ability to scale up its processes, it’s also linked to its ability to integrate with other systems (and to add new modules when users’ needs change). It’s worth checking how often new functionality is added as this could influence your ability to keep up with industry trends.
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Includes support and updates
If the provider of the FMS is quick to address issues, this can make a big difference for businesses looking to avoid unwanted downtime. You should check that software support (and possibly a dedicated account manager) is included as part of your Software-as-a-Service subscription. It’s also crucial that system updates are included, as the technology needs to evolve and remain relevant.
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Seamless user experience
You should research how seamless the implementation process is when adopting the technology. It can be useful to request a demo, as this gives a good indication of how simple the system is to use, and whether it’s likely to achieve the desired results.
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Cloud-based
The final and perhaps most important trait to assess is whether the FMS is Cloud-based. More than ever, it’s important for finance employees to be given the option to work from home, which Cloud technology facilitates through remote access. Cloud-based software is also more secure from a cybersecurity perspective, which is important when dealing with sensitive financial information.
Cloud-based financial management software
Cloud-based financial management software ensures that financial updates can be made from anywhere, at any time, so that data is as accurate as possible. This data then fuels built-in reports and dashboards, which provide finance managers with a snapshot of financial health, while additionally giving insights that drive change.
Accounting software also provides functionality for accounts payable/receivable, budgeting, forecasting, cash flow management, expense management, general ledger, and much more. As a result, the finance team becomes a single interconnected function. Automation of repetitive tasks allows processes to become far more streamlined, saving the business both time and money.
At Advanced, we provide a financial management system called Advanced Financials. This software was created for finance people by finance people, with a user experience that is intentionally simple. The software is scalable, ensuring it grows in line with your ambitions. And updates are applied regularly, keeping your team up to date with the latest innovations.
If you’re looking to gain the business benefits that come with a Cloud-based financial management system, be sure to get in touch to learn more about Advanced Financials.