Financial Management is about preparing, directing and managing the money activities of a company such as buying, selling and using money to its best results to maximise wealth or produce best value for money. It is basically applying general management concepts to the cash of the company. Financial Management can also be defined as – The management of the finances of a business / organisation in order to achieve financial objectives
“Financial management is concerned with raising financial resources and their effective utilisation towards achieving the organisational goals
“Financial management is the process of putting the available funds to the best advantage from the long term point of view of business objectives”
It is crucial for both public and private sector organisations.
Taking a commercial business as the most common organisational structure, the key objectives of financial management would be to:
• Create wealth for the business
• Generate cash,
• Provide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested
There are three key elements to the process of financial management:
Management need to ensure that enough funding is available at the right time to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit.
In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions. This links in with the financial decision making process and forecasting
Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as:
• Are assets being used efficiently? • Are the businesses assets secure?
• Do management act in the best interest of shareholders and in accordance with business rules?
however there are always financing alternatives that can be considered. For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers. This is connected with the capital budget and forecasting when dealing with fixed assets and projects.
this is connected to the raising of finance from various sources like banks or financial investors, which will depend on the options of the type of source, period of financing, cost of financing and the net present returns generated.
A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.
Financial management facilitates better decision making. It collects and provides all financial information regarding the organization. Easy availability and accessibility of all information helps managers in taking decisions efficiently on the bases of facts and figures.
Financial management leads to transparency of all information in business. It records all information systematically and made it available to all business users. Better transparency helps in developing proper understanding within and outside the organization and avoids any confusion or errors.
Controlling the finance of an organization is one of better advantage offered by financial management. It supervises and manages all activities of business to exercise financial control. Finance managers ensure that all activities of business go in accordance with the estimated cost and should not go above the pre-set budgets.
Financial management is responsible for maintaining proper financial discipline in an organization. It ensures that all financial resources are efficiently utilized and there is no wastage. Financial managers supervise the activities of all employees and work at deriving better results out of them.
Financial management aims at raising the profit of organization and wealth of shareholders. It aims at earning high profits by reducing the cost of operation and efficiently utilizing all resources. Higher the profit the company earns, higher would be the dividend declared by the company for its shareholders. This way it will increase their wealth.
Estimation of an adequate amount of capital that a business requires to start and continue its activities is an important task. Financial management estimates the right amount of funds required by business so that it can be acquired timely.
Financial management helps in avoiding and taking any unnecessary debt by the company. It aims at the proper and efficient application of all funds and aims at reducing the overall cost. This leads to avoiding any need for additional funds requirements by business.
Practicing of Financial management is costly activity for business organization. For controlling and measuring the cost, financial management implies various financial control tools. These tools are costly to use and are time-consuming.
Financial management leads to rigidity by setting certain standards for measuring performance. All the standards are set in accordance with certain parameters. However, conditions may differ while performing the actual task from those conditions which were considered while framing standards. Therefore due to standards rigidity, actual and standard performance cannot be properly evaluated.
Financial management requires determination of standards for measuring actual performance which is a very difficult task. There is no proper setup criteria for setting up standards and there may be chances to set improper standards.
: Applying various financial control measures faces several difficulties. These financial controls can be easily applied at the starting off the process but its implication becomes difficult during operation of the process.
Identification of real reasons for deviation in an actual performance is not always possible. Financial management can work toward managing or avoiding deviations if and only real reasons for such deviations are found out, otherwise, it is ineffective.
The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be-
Key scope of financial management are divided in four categories. Lets learn and understand about the nature and scope of financial management through the below details notes.
Evaluating the risk involved, measuring the cost of fund and estimating expected benefits from a project comes under investment decision. It is one of the important scope of financial management. The two major components of investment decision are – Capital budgeting and liquidity.
Capital budgeting is commonly known as the investment appraisal. It deals with the allocation of capital and funds in such a manner that they will yield earnings in future. Capital budgeting determines the long term investment which includes replacement and renovation of old assets. It is all about maintaining an appropriate balance between fixed and current assets in order to maximize profitability and to maintain desired liquidity in the firm for its smooth functioning.
Decisions related to working capital is another crucial scope of financial management. Decisions involving around working capital and short term financing are known as working capital decision. It also manages the relationship between short term assets and its liabilities.
Short term assets include cash in hand, receivables, inventory, short-term securities, etc. Creditors, bills payable, outstanding expenses, bank overdraft, etc are a firm’s short term liabilities. Short term assets can be exchanged with cash within one calendar year. Similarly, the liabilities are to be settled within an accounting year.
The Dividend Decision plays a crucial role in today’s corporate era. It determines the amount of taxation that stockholders pay. A good dividend policy helps to achieve the objective of wealth maximization. Distributing the entire profit in the form of dividends or distributing only a certain percentage of it is decided by dividend policy. It is known as deciding the optimum dividend payout ratio i.e. proportion of net profits to be paid out to shareholders.
Stability of cash dividends and stock sets the parameter which determines the number of investment opportunities. Expansion of an economic activity depends on effectiveness of dividend decisions and scope of financial management.
Financing Decisions focuses on the accountabilities and stockholders’ equity side of the firm’s balance sheet, for example decision to issue bonds is a kind of financing decision. The main aim of financing decision is to cover expenses and investments. The decision involves generating capitals by various methods, from different sources, in relative proportion and considering opportunity costs, with respect to time of flotation of securities, etc.
Scope of financial management is to meet the expenses of the firm, a suitable capital structure for the enterprise should be developed by the finance manager. Only an optimum finance mix can maximize the market price of the company’s shares in the long run. To decrease the risk, a stable equilibrium is required between debt and equity.
Finance management is a long term decision making process which involves lot of planning, allocation of funds, discipline and much more. Let us understand the nature of financial management with reference of this discipline.
A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.
Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.
: For additional funds to be procured, a company has many choices like-
Choice of factor will depend on relative merits and demerits of each source and period of financing.
The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.
The net profits decision have to be made by the finance manager. This can be done in two ways:
Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc.
The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.
Financial Management means applying management principles to manage the financial resources of an organization. It simply involves planning, organizing, directing and controlling financial operations to manage the finance of an organization efficiently. Financial Management is a methodology that business implements to monitor and govern its revenue, expenses and assets in order to maximize profitability and ensure sustainability.
Management of finance is a vital part of every business. Finance is termed as a backbone of every business and is required for carrying out its each and every activity. Financial management is concerned with efficiently planning the procurement of funds and utilization of these funds in the business.
The finance manager is required to decide the proper capital structure of an organization deciding optimum mix of debt and equity for raising required funds. Financial management concept ensures that an adequate amount of fund is always available in business from different sources and also it earns the best return on its investments.