What is the Finance Management?
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 a 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 the backbone of every business and is required for carrying out each and every activity. Financial management is concerned with efficiently planning the procurement of funds and the utilization of these funds in the business.
Definition of Financial Management by Authors
According to Guthman and Dougal
The activity concerned with the planning, raising, controlling and administering of funds used in the business.
According to Dr. S. N. Maheshwari,
“Financial management is concerned with raising financial resources and their effective utilization towards achieving the organizational goals.
Advantages of Financial Management
Better decision making
Financial management facilitates better decision making. It collects and provides all financial information regarding the organization. Easy availability and accessibility of all information help managers in taking decisions efficiently on the bases of facts and figures.
Transparency of Information
Financial management leads to the 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 the better advantages offered by financial management. It supervises and manages all activities of the 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.
Enhances Managerial Efficiency
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.
Profit Maximization and Wealth Maximization
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, the higher would be the dividend declared by the company for its shareholders. This way it will increase their wealth.
Determines Adequate Capital
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 the 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 the business.
Disadvantages of Financial Management
Practicing Financial management is a costly activity for business organizations. 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.
Determination of Standards
Financial management requires determination of standards for measuring actual performance which is a very difficult task. There are no proper setup criteria for setting up standards and there may be chances to set improper standards.
Difficulty in applying control measures
Applying various financial control measures faces several difficulties. These financial controls can be easily applied at the starting of the process but its implication becomes difficult during operation of the process.
Problems in recognizing deviation
The 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.