Financial management is the act of applying general management principles, such as planning, organizing, controlling, and directing, to personal and business finances to achieve various goals and objectives. It is the process of and steps required for making one’s finances more effective and efficient. As such, it is an essential function of every successful business and key to good personal finances.
Today, we’ll look at a brief history of how financial management came to be.
A brief history of financial management
Money has been a part of human history for almost 3,000 years, beginning with simple bartering systems and evolving into today’s modern, global banking system and even bitcoin. Changing markets, globalization, the emergence and updates of technology, and upgrades to business practices and scale all played key roles in changing the history of money over the ages.
The same can be said of financial management.
Up until 1890, financial management was merely a branch of economics, but the turn of the century, its importance could no longer be ignored. From 1900 onward, financial management underwent several key changes.
Financial management in the 1900 – 1940s
For the first several decades of the 1900s, financial management was in its most traditional phase. That is, it emerged to help solve and improve business challenges that came with industrialization, such as enterprise formation, expansion, mergers, liquidation, and reorganizations. This phase formed the building blocks of basic financial management.
Financial management in the ’40s and ’50s
Where the traditional phase of financial management in the early 1900s formed the core building blocks, this next phase aimed to solve new challenges that finance managers, lenders, and banks faced with the early modernization of banking. For example, in 1946, John Biggins invented the “Charg-It” banking system, which became the first-ever credit card. This is known as the transitional phase of financial management. During this time, finance management aimed to solve daily challenges such as monetary analysis, control, and planning.
Financial management in the mid-’50s onward
Together with changes taking place in emerging markets, technologies, businesses, and new institutional ideas around economics, financial management quickly transitioned into a modern phase. The scope of financial management broadened drastically to include new ways to analyze finances, establish institutional theories and explanations, and use these theories and ideas during major business and economic decisions.
During this phase, the following topics emerged, among many others, in the history of financial management:
Likewise, theories such as efficient market theory for investments, capital structure theory, agency, and arbitrage pricing theories emerged to become institutionally recognized and followed in the past and today.
Read the first few blogs in our financial literacy series, including Financial Literacy Series: Financial Literacy and Wellness 101 and Financial Literacy Series: 21 Signs That You Need Help With Your Finances.