Financial Responsibility: Definition & Importance for Businesses & Individuals

The Securities and Exchange Commission has regulatory expectations for companies' financial responsibility.

The general use of the term "financial responsibility" simply means wise use of monetary resources by individuals and businesses. For most people, this means considering your income (or business profits) and determining how much of that income is appropriate to allocate to expenses and discretionary items. Other, more technical applications of financial responsibility exist in areas of business ethics, business finance and insurance.

General Application

Most people live in a financial reality that is often described as "paycheck to paycheck." This means that you look at your weekly, bi-weekly, or monthly paycheck and determine how much expendable income you receive periodically. You then consider your standard expenses, like mortgages, auto loans, insurance, utilities, groceries, as well as discretionary expenditures. Financial responsibility is generally accepted to mean spending no more than you earn and even allocating a certain amount of your paycheck toward savings. Parents are often charged with training children and teens how to manage money responsibly.

Corporate Social Responsibility

The Institute for Supply Management discusses financial responsibility as a component of the prominent 21st century business ethics ideology known as corporate social responsibility. ISM defines financial responsibility as "understanding and applying financial concepts to supply management decisions to address allocation of funds, accurate reporting and management of risk." This extends the general idea of companies making sound financial decisions to include consideration of those decisions' effects on key stakeholders, including investors, partners, employees and the community.

Insurance

The CompuQuotes insurance website offers a definition of financial responsibility regarding car insurance. This refers to laws common to most states that require drivers to have proof of liability insurance should they get involved in an auto accident. This requirement is sometimes referred to as the "financial responsibility law."

Financial Regulations

A final technical aspect of financial responsibility comes from the US Legal website, which discusses financial responsibility in relation to Securities and Exchange Commission regulations for publicly traded companies. US Legal explains that the commission's use of the term financial responsibility relates to a company's compliance with SEC regulations, which companies must legally and ethically abide by. These regulations are in place to require companies to make financially responsible decisions and to follow requirements in communicating financial performance to the public.