What is Financial Management
Financial Management refers to the efficient and effective management of money or funds in such a manner as to accomplish the objectives of the organization.
It is the specialized function directly associated with the top management. The significance of this function is not seen in the ‘Line’ but also in the capacity of the ‘Staff’ in overall of a company. It has been defined differently by different experts in the field.
The term typically applies to an organization or company’s financial strategy, while personal finance or financial life management refers to an individual’s management strategy. It includes how to raise the capital and how to allocate capital, i.e. capital budgeting. Not only for long term budgeting, but also how to allocate the short term resources like current liabilities. It also deals with the dividend policies of the shareholders.
Definitions of Financial Management
Planning is an inextricable dimension of financial management. The term financial management can notes that funds flows are directed according to some plan.
Financial management is that activity of management which is concerned with the planning, procuring and controlling of the firm’s financial resources.
Financial Management is the Operational Activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.
Business finance deals primarily with rising administering and disbursing funds by privately owned business units operating in non-financial fields of industry.
Financial Management is an area of financial decision making, harmonizing individual motives and enterprise goals.
Financial management is the area of business management devoted to a judicious use of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals.
Financial management may be defined as that area or set of administrative function in an organization which relate with arrangement of cash and credit so that organization may have the means to carry out its objective as satisfactorily as possible.
Business finance can be broadly defined as the activity concerned with planning, raising, controlling and administering of funds and in the business.
Financial management is a body of business concerned with the efficient and effective use of either equity capital, borrowed cash or any other business funds as well as taking the right decision for profit maximization and value addition of an entity.
Financial management refers to the proper and efficient use of money and it plays a significant role in analyzing to invest in profitable business enterprise. Return on Investment must be greater than the invested amount.
Objectives of Financial Management
Profit maximization happens when marginal cost is equal to marginal revenue. This is the main objective of Financial Management.
To ensure regular and adequate supply of funds to the concern.
To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
Wealth maximization means maximization of shareholders’ wealth. It is an advanced goal compared to profit maximization.[2]
Survival of company is an important consideration when the financial manager makes any financial decisions. One incorrect decision may lead company to be bankrupt.
Maintaining proper cash flow is a short run objective of financial management. It is necessary for operations to pay the day-to-day expenses e.g. raw material, electricity bills, wages, rent etc. A good cash flow ensures the survival of company.
To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.
Minimization on capital cost in financial management can help operations gain more profit.
Scope of Financial Management
Estimating the Requirement of Funds:
Businesses make forecast on funds needed in both short run and long run, hence, they can improve the efficiency of funding. The estimation is based on the budget e.g. sales budget, production budget.
Determining the Capital structure:
Capital structure is how a firm finances its overall operations and growth by using different sources of funds. Once the requirement of funds has estimated, the financial manager should decide the mix of debt and equity and also types of debt.
Investment fund:
A good investment plan can bring businesses huge returns.
To ascertain maximum profit as well as maintain the core value of the organization
Financial Management for Start Up
For new enterprises, it is important to make a good estimation on costs, sales. Consideration on appropriate length sources of finances can help businesses avoid the cash flow problems even the failure of setting up. There are fixed and current sides of assets balance sheet. Fixed Assets refers to assets that cannot be converted into cash easily, like plant, property, equipment etc. A current asset is an item on an entity’s balance sheet that is either cash, a cash equivalent, or which can be converted into cash within one year. It is not easy for startups to forecast the current asset, because there are changes in receivables and payables.
Functions of Financial Management
Estimation of capital requirements: 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.
Determination of capital composition: 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.
Choice of sources of funds: For additional funds to be procured, a company has many choices like-
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- Issue of shares and debentures
- Loans to be taken from banks and financial institutions
- Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and period of financing.
Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.
Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways:
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- Dividend declaration – It includes identifying the rate of dividends and other benefits like bonus.
- Retained profits – The volume has to be decided which will depend upon expansion, innovation, diversification plans of the company.
Management of cash: 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, maintenance of enough stock, purchase of raw materials, etc.
Financial controls: 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.
