Financial Management - Meaning, Objectives and Functions

Meaning of Financial Management

Financial Management

Financial Management refers to organizing, planning, managing, and controlling financial activities like procurement and use of company funds.
 

It involves applying general management principles to the financial resources of an enterprise.

Scope/Elements


  1. Investment decisions involve investing on Fixed assets (called by the term capital budgeting). Current assets investment is an integral part of investment decisions referred to "working capital" decisions.

  2. Financial decisions are akin to the sourcing of money from various sources that will be contingent on the what kind of source, the duration of financing, the cost of financing, and the benefits resulting.

  3. Dividend distribution The finance manager is required to make a decision in relation to the distribution of net profits. Net profits are typically divided into two parts:

    a) Dividends for shareholders- Dividend, and the amount of it must be determined.
    b) Retained profits- The amount of retained profits must be determined, which will depend on expansion plans and diversification plans of the company.

Objectives of Financial Management


The finance management is usually involved in the procurement as well as the control and allocation of financial resources within the concern. 

The goals can include:

  1. To ensure that there is a consistent and regular flow of funds for the business concern.

  2. In order to ensure that the shareholders receive adequate compensation. shareholders, which will be contingent on the capacity to earn as well as the market price of the share, and expectations of shareholders.

  3. To ensure optimum funds utilization. After the funds have been sourced it is essential to use them to the maximum extent possible with the least amount of expense.

  4. In order to ensure that investment is safe, i.e, funds should be put into safe ventures to ensure that a sufficient rates of return are realized.

  5. To design an efficient capital structure. There must be a fair and balanced structure of capital to ensure that there is a balanced balance between equity capital and debt capital.

Functions of Financial Management


  1. Estimation of capital requirements A finance manager must determine the financial requirements of the company. 

    It will be based on expected profits and costs as well as future policies and programs of concern. Estimates need to be made in a manner that improves the earning capacity of an business.

  2. The determination of the composition of capital: Once an estimation has been completed The capital structure needs to be figured out. This involves short-term and long-term analysis. It will be based on the percentage of equity capital that a business has and the amount of additional capital required to be raised from outside sources.

  3. Sources of funds to choose from: In order to raise additional funds obtained, companies have several options like

    1. Shares and debentures are issued.
    2. The loans are to be repaid from bank and other financial institutions
    3. Public deposits that can be drawn as in the shape of bonds.

    The selection of a factor will be contingent on the relative merits and disadvantages of each source and the duration of financing.

  4. The investment of funds: The finance manager must determine how to allocate funds to profitable ventures, so that they are safe from the investment and that regular returns are possible.

  5. The disposal of surplus The net profit decision has to be taken by the manager of finance. The process can be accomplished by two methods:

    1. Dividend declaration: It is the process of the amount of dividends and also other benefits, such as bonuses.
    2. Retained profits - The amount must be determined which is contingent on expansion strategies, innovations, diversification and diversification plans of the company.

  6. Cash management: The Finance Manager has to take decisions regarding the management of cash. Cash is needed for a variety of reasons like the paying salaries and wages as well as the payment of water and electricity bills, payments to creditors, paying current obligations maintaining a sufficient stock, buying raw materials, etc.

  7. Controls of finances: A finance director must not only plan, procure , and manage the funds, but he must also manage the finances. This can be accomplished by numerous methods, including ratio analysis financial forecasting, financial forecasting controlling profit and cost, etc.

Importance of Financial Management

Financial management that is sound provides the foundation for the three fundamental pillars of fiscally sound governance:

Strategy or determining what must take place financially for the company to meet its long- and short-term objectives. Leaders need insight into their how the company is performing to help plan for future scenarios for instance.

Decision-making as well as helping leaders in business determine the most effective way to carry out plans by providing the most current financial reports as well as data on pertinent KPIs.

Controlling or ensuring that each department is contributing to the overall vision and is operating within budget and in line with the strategy.

Through effective financial management All employees know where the company is heading and can look into the direction of progress.

Managing and assessing risk

Line-of-business executives depend on their financial managers to evaluate and implement compensating controls to mitigate a variety of risk such as:

  • Risk to the market affects business investing and public companies' reports and stock performance. It can also be a reflection of financial risk specific to the sector, like a pandemic that affects restaurants, or the transition of retail to an Direct-to-Consumer (DTC) model.

  • The risk of financial credit is the result of, for instance customers not paying their bills on time, and consequently, the company not having enough funds to pay its obligations. This could negatively impact creditworthiness and valuation, which affects the capacity to take loans at attractive rates..

  • Risks to liquidity Finance teams must monitor their the flow of cash in their current accounts, calculate the future needs for cash and be ready to release working capital when required.

  • Risks to operations: The Operational risk is an umbrella category and is a new one to certain finance teams. It could be for instance, the threat of a cyber-attack and whether or not to buy cybersecurity insurance as well as what disaster recovery and continuity strategies are in place and the emergency management procedures are activated in the event that a senior executive is found guilty of misconduct or fraud.

Procedures

The financial manager creates guidelines concerning how the finance team will manage and distribute financial information, such as invoices, payment and reports, in a manner that is secure and precision. These procedures are also a guideline for who is accountable for making financial decisions within the company, and who is responsible for approving these decisions.

There is no need for companies to begin from scratch. There are templates for policy and procedure that are available for various different types of organizations, including this one for non-profits.

What are the Three Types of Financial Management?

The above functions can be classified into three broad categories of financial management


Budgeting for capital
 refers to determining what must happen in order for the business to meet its short- as well as long-term goals.
 What is the best place to have capital funds spent to boost growth?

Capital structure and determining the best way to pay for operating costs and/or growth. When interest rates are at a low level, then taking on debt may be the best option. A business could look for financing from private equity firms or consider selling assets such as real estate, or, if appropriate selling equity.

Management of working capital as mentioned above is ensuring there's enough cash in the bank to fund day-to day operations, like hiring workers and purchasing raw materials to make products.

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Happy Reading!!

Nadeem Khan
M.Com, MBA
Mail - ndmk1338@gmail.com

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