Role and Importance of Financial Management

Meaning of Financial Management in Modern Business

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.

Importance of Financial Management in Modern Business

  • Importance of Financial Management
  • Meaning of Financial Management
  • Importance of Financial Management
  • Characteristics of Financial Management
  • Features of Financial Management
  • Role of Financial Management
  • Advantages of Financial Management
  • Disadvantages of Financial Management

Forecasts cash flows

Financial management forecasts the fund required for carrying out the activities by business. Estimation of fund requirement is the foremost and primary function played by financial management.

Raises the funds

Once the fund required by business are estimated, financial managers are responsible for acquisition of such funds. Financial managers choose among different sources available of raising fund like shares, debentures, loan etc. They choose the one which provides funds at low cost and have less conditions attached with them.

Determines capital structure

Financial management decides the optimum capital structure of organization. It decides the proportion of equity and debt to be included in the capital. Proper balance between debt and equity should be attained which minimizes the cost of capital.

Proper use of funds

Financial management ensures that all financial resources are properly utilized in organization. Financial managers supervises the use of all funds and checks whether they are invested in better assets. Before allocating any funds in any investment avenue they properly evaluate risk and return associated with it. 

Facilitates cost control

Financial managers focus on controlling all cost associated with the business. They prepare budget for all activities of business and ensure that all expenses goes in accordance with pre-determined budget. Financial managers take all remedial measures if cost is found to be more than pre allotted budget.

Better disposal of surplus

Decisions regarding using the surplus or profit earned by business are taken by financial managers. They decide whether it should be distributed as dividend to shareholders or should be retained for ploughing it back into business. Finance manager decide an optimum dividend pay-out ratio out of available profit by considering all expansion and growth opportunities available to organization.

Manages cash movements

Financial management monitors and manages all cash movements in business organizations. All cash inflows and outflows in an organization are properly recorded by financial managers. They ensure that there is no deficiency or surplus of cash.

Role Financial Management in Modern Business

Capital Management

Financial management has an effective role in managing the capital of the business. It is the responsibility of financial managers to determine the amount of capital required by the business. After estimation of the amount of funds requirements, they decide the capital structure and choose the sources of funds for acquiring them.

Financial planning

Financial management frames policies regarding financial activities and resources in business. They collect data regarding organizations from different sources and analyses it to understand the needs of the organization. All this helps in making budgets and plans for better performance.

Financial decisions and control

Financial managers take all financial decisions and imply various financial control techniques. It is their duty to ensure that all activities of business goes in accordance with the estimated cost and should not go above the pre-set budgets.  For controlling the finances of organization they use various financial tools like profit and loss analysis, ratio analysis and financing forecasting.

Efficient utilization of funds

Proper utilization of all funds is a must for earning the estimated profits and attaining growth. Financial managers ensure that all funds of organization are allocated in profitable investment avenues.

Proper cash flow management

Management of cash is a must for every organization for carrying out its activities and long term survival. It is the duty of finance managers to supervise all cash movements through proper accounting of all cash inflows and outflows. They try to avoid any situation like deficiency or surplus of cash in an organization.

Risk management

Risk management of organizations is another important role played by financial management. Financial management helps the organization in forecasting future risks and takes all necessary steps to avoid or manages such risks. It also sets up certain reserves for facing any unforeseen and emergency situations in business.