Financial Management

Financial Management: Meaning, Objectives and Functions

MEANING OF FINANCIAL MANAGEMENT

Financial Management involves a range of activities. The activities include planning, organizing, directing, and controlling the financial activities. In financial organizations, executive tasks, such as procurement and utilization of funds of the enterprise are part of financial management. 

Business executives apply general management principles to financial resources of their enterprise.

FINANCIAL MANAGEMENT DEFINITION

Financial Management is tasked with a vital activity for any organization. It involves controlling planning, organizing, and monitoring financial resources. These activities are performed with a view to achieving organizational goals and objectives. 

For controlling the financial activities of an organization, it is a perfect practice. The practices involve activities, such as utilization of funds, payments, procurement of funds, accounting, risk assessment, and every other thing related to money.

In other terms, Financial Management is the application of financial possessions of an enterprise. The management involves general principles of management. It includes the financial possessions of an enterprise. 

To ensure efficient functioning of an enterprise, proper management of an organization’s finance is a requirement. It provides quality fuel and regular service. Finances have to properly dealt with an organization. If it doesn’t happen, organizations will face barriers that may have severe consequences on its growth and development.

SCOPE/ELEMENTS

1. Investment in fixed assets (called as capital budgeting) are influenced by investment decisions. Investment in current assets contributes to the part of investment decisions. The collective decisions are called as working capital decisions.

2. Financial decisions – They are part of the raising of finance. And, it is done from various resources, which will depend upon decision on the type of source. Moreover, the decision is influenced by the period of financing, cost of financing, and the returns by this mean.

3. Dividend decision – The finance manager takes decision concerning the net profit distribution. Net profits are generally discussed in two parts:

  • Dividend for shareholders- Dividend and the dividend rate has to be discussed.
  • Retained profits- Amount of retained profits has to be decided. The rate will be contingent on expansion and diversification plans of the enterprise.

OBJECTIVES OF FINANCIAL MANAGEMENT 

The financial management is generally relevant with allocation, procurement, and control of financial resources of a concern. The objectives of financial management are discussed below:

  1. To make sure regular and sufficient supply of funds to the concern.
  2. To make sure sufficient returns to the shareholders, this will depend upon the earning capacity, the market price of the share, expectations of the shareholders.
  3. To ensure utilization of funds to an optimum degree. Once the funds are obtained, they should be utilized in a maximum way, spending the least amount of cost.
  4. Investment needs to be ensured with safety on, i.e., funds should be invested with safe ventures, so that an adequate rate of return can be ensured.
  5. To prepare a sound capital structure, sound and fair distribution of capital have to be ensured. Sound capital will make sure that a balance is maintained between debt and equity capital.

FUNCTIONS OF FINANCIAL MANAGEMENT

Estimation of capital requirements: A finance manager has to make projections. The projections have to agree with the capital requirements of the company. This is contingent upon expected costs, profits, 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: The capital structure has to agree with estimation. Once it is determined, estimation has to be decided. This process relies on short-term and long-term debt equity scrutiny. 

The analysis is dependent upon the proportion of equity capital a company is possessing and additional funds, which have to be collected from outside parties.

Option for sources of funds: For additional funds to be collected, a company has many options to consider like-

  1. Factors influencing shares and debentures
  2. Loans to be withdrawn from banks and financial institutions
  3. Public deposits to be made like in the form of bonds.

Choice of factors will depend on qualified merits and demerits of each source and period it will take for financing.

Investment of funds: Allocating funds into profitable ventures is to be determined by the finance manager. The finance manager has to decide so that there is safety on investment and thereby ensuring regular returns.

Disposal of surplus: the finance manager makes the net profits decision. This can be realized in two ways:

  • Dividend declaration – It takes account of the rate of profits and other benefits like a bonus.
  • Retained profits – The volume has to be determined, which will depend upon expansion, innovational, diversification plans of the company.

Management of cash: Finance manager has to make decisions on how cash is best managed. Cash is invested on many purposes like payment of wages and salaries, purchase of raw materials, payment to creditors, meeting current liabilities, payment of electricity and water bills, maintenance of enough stock, etc.

Financial controls: The finance manager not only plans, raises, and utilizes the funds, but also exercises control over finances. This can be done through many techniques like financial forecasting, ratio analysis, cost and profit control, etc.

SUMMARY 

There are several options that one organization can use for managing their finances. Managing an organization either requires managing it on your own, hire a full time employee. Hire a part time accountant or a third party for financial management or all finance related activities for you, for example a Chartered Accountant.

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