Finance is the lifeline of any business. However, finances, like most other resources, are always limited. On the other hand, wants are always unlimited. Therefore, it is important for a business to manage its finances efficiently. As an introduction to financial management, in this article, we will look at the nature, scope, and significance of financial management, along with financial decisions andplanning.
Financial Management means
planning, organizing, directing and controlling the financial activities such
as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
- Some
experts believe that financial management is all about providing funds
needed by a business on terms that are most favorable, keeping its
objectives in mind. Therefore, this approach concerns primarily with the
procurement of funds which may include instruments, institutions, and
practices to raise funds. It also takes care of the legal and accounting relationship
between an enterprise and its source of funds.
- Another
set of experts believe that finance is all about cash. Since all business
transactions involve cash, directly or indirectly, finance is concerned
with everything done by the business.
- The
third and more widely accepted point of view is that financial management
includes the procurement of funds and their effective utilization. For
example, in the case of a manufacturing company, financial management
must ensure that funds are available for installing the production plant
and machinery. Further, it must also ensure that the profits adequately
compensate the costs and risks borne by the business.
- Investment
decisions includes investment in fixed assets (called as capital
budgeting). Investment in current assets are also a part of investment
decisions called as working capital decisions.
- Financial
decisions - They relate to the raising of finance from various resources
which will depend upon decision on type of source, period of financing,
cost of financing and the returns thereby.
- Dividend
decision - The finance manager has to take decision with regards to the
net profit distribution. Net profits are generally divided into two:
- Dividend for shareholders-
Dividend and the rate of it has to be decided.
- Retained profits- Amount of
retained profits has to be finalized which will depend upon expansion and
diversification plans of the enterprise.
Objectives of Financial Management
The financial management is
generally concerned with procurement, allocation and control of financial
resources of a concern. The objectives can be-
- To
ensure regular and adequate supply of funds to the concern.
- To
ensure adequate returns to the shareholders which will depend upon the
earning capacity, market price of the share, expectations of the
shareholders.
- To
ensure optimum funds utilization. Once the funds are procured, they should
be utilized in maximum possible way at least cost.
- To
ensure safety on investment, i.e., funds should be invested in safe
ventures so that adequate rate of return can be achieved.
- To
plan a sound capital structure-There should be sound and fair composition
of capital so that a balance is maintained between debt and equity
capital.
- 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 programs 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-
- Issue of shares and debentures
- Loans to be taken from banks and
financial institutions
- Public deposits to be drawn like
in form of bonds.
- 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:
- 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 expansional, innovational,
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.
References
https://www.managementstudyguide.com/financial-management.htm
https://www.toppr.com/guides/business-environment/business-functions/financial-management/
https://www.youtube.com/watch?v=WxXCPmKkfUI
https://www.youtube.com/watch?v=qrs3taWpuD8&list=RDQMj-qDWTv5qzw&start_radio=1
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