Fundamentals of Financial Management notes

Meaning of Financial Management

Financial Management means applying management principles to manage financial resources of an organisation. It simply involves planning, organising, directing and controlling financial operations to manage finance of an organisation efficiently. Financial Management is a methodology that business implements to monitor and govern its revenue, expenses and assets in order to maximize profitability and ensure sustainability. Management of finance is vital part of every business.

Finance is termed as a backbone of every business and is required for carrying out its each and every activity. Financial management is concerned with efficiently planning the procurement of funds and utilisation of these funds in business. Finance manager is required to decide proper capital structure of an organisation deciding optimum mix of debt and equity for raising required funds. He is also required to invest these funds into profitable assets having low risk.

Financial management ensures that adequate amount of fund is always available in business from different sources and also it earns best return on its investments. It aims at achievement of two main objectives for an organisation that is profit maximisation and wealth maximisation. All the decisions in financial management are taken by focusing on achievement of these two important objectives. Various fundamentals of financial management are discussed in detail as given below:

Fundamentals of Financial Management notes

Fundamentals of Financial Management
Fundamentals of Financial Management

Profit Maximisation and Wealth Maximisation

Financial management aims at the achievement of profit maximisation and wealth maximisation for an organisation. These are two main objectives on which financial management focuses through better application of funds. Profit maximisation is meant to be achieved in short-run whereas wealth maximisation is meant to be achieved to be achieved in long run. Financial management ensures safety of funds by investing them in proper avenues earning high incomes. It aims at increasing net worth of shareholders by raising their per-unit profit through proper management of their funds.

Proper Utilisation of Resources

Efficient utilisation of resources is another important role played by financial management. It aims at maintaining a balance between risk and return by properly monitoring and controlling business operations. Financial management works on reducing the expenses and risk involved in undergoing business activities.

Various financial control tools like budgetary control, return on investment, cost control, ratio analysis, cost and internal audit are implemented by it for deriving better results. It cuts down unnecessary cost and avoids wastage of resources in useless assets. Proper handling and avoidance of any misuse of funds by financial management helps in efficient utilisation of resources.

Maintaining Adequate Cash Flow

Maintaining a sufficient amount of funds is necessary for every business organisation. It ensures flexibility in their operations and avoids any interruption. Proper amount of cash is always required for meeting various day to day expenses such as payment of raw materials, payment of electricity bills, rent and employee’s wages or salaries. Finance manager take various decisions for proper management of cash for maintaining healthy cash flow every time within organisation. 

Long Term Survival of Business

Financial management works toward long term survival of the business. It properly manages all financial affairs of business to retain its profitability for long term. Today market is very competitive which makes it difficult for every business to survive in market. Finance manager takes all decisions in accordance with situations of market to avoid any unfavourable conditions. They also maintain certain reserves out of business profit for meeting contingencies thereby ensuring the long term continuation of business.

Estimating Financial Requirements

It is one of crucial role played by financial management. Finance manager estimates the adequate amount of fund required by business for its functioning. He finds out both working capital as well as fixed capital required by business for attaining its goals. Proper estimation of fund requirements helps in avoiding any shortage or surplus like situations.

Finance manager considers various factors for estimation like scale of operations, type of technology used, number of employees, organisational goals, legal requirements etc. Right estimation helps in efficient procurement and utilisation of required funds. 

Reducing Cost of Capital

Every business requires additional funds from time to time. Financial management aims at reducing the cost of capital for business. It acquired funds required by the business at economical cost. Finance manager properly analyse different source of fund available to them such as shares, debentures, loans, public deposits etc. They select the one which are available at cheap rates requiring lower interest payments. Financial management designs such capital structure which will lower the cost of capital.

Preparing Capital Structure

Financial management prepares the optimum capital structure for the business. It decides proper proportion between owned and borrowed funds. Designing the capital mix that is ratio of debt and equity in the capital of firm is one of the key decision of financial management. Issue of more equity will result in more sharing of profit thereby reducing the business share. Whereas issue of more debt will increase the burden of business as it is required to pay more amount of fixed interest. Right capital structure is essential for liquidity, flexibility, stability and economy.