Meaning of Financial 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.
Financial management ensures that an adequate amount of funds is always available in business from different sources and also it earns the best return on its investments. It aims at the achievement of two main objectives for an organization that is profit maximization and wealth maximization. All the decisions in financial management are taken by focusing on the achievement of these two important objectives.
What is Financial Management Process?
Financial management means planning, organizing, directing, and controlling the financial activities of the organization, this whole process of managing funds is called financial management process. Financial management helps the organization to manage the flow of funds and make sure returns on investment.
Definition of Financial Management by Authors
According to Ezra Solomon
- “Financial management is properly viewed as an integral part of overall management rather than as a staff especially concerned with funds raising operations.”
According to Dr. S. N. Maheshwari,
- “Financial management is concerned with raising financial resources and their effective utilization towards achieving the organizational goals.”
According to Solomon,
- “Financial management is concerned with the efficient use of an important economic resource, namely, capital funds.”
Objectives of Financial Management
Profit maximization is the main objective of financial management. Because every company invests a huge amount, so the company wants to return on investment. A financial manager should take proper decisions in order to maximize profit in the short and long term.
Wealth maximization of shareholders shares is also the main objective of financial management. Because shareholders provide their money to the company. So, it is the responsibility of financial managers to maximize the value of their shares.
Mobilization of finance is an important objective of financial management. The finance manager should decide the best sources of finance which would be the cheaper and high volume of funds. The finance manager collects funds from various sources i.e, shares, debentures, bank loans, etc.
Effective utilisation of funds
After getting funds, the finance manager of the company should utilize effectively. finance manager must not invest funds in unrealistic and unprofitable projects.
Financial manager should give more profits to the company and shareholders. if the finance manager will able to do goodwill of the company will also increase. that will help the company to collect funds in the future.
Functions of Financial Management
Estimates Capital Requirement
Financial management is concerned with the estimation of an adequate amount of funds required for an organization. The finance manager takes into account organization goals, objectives, and costs associated with them for determining the fund requirements. Future growth policies and programs of an organization are also considered by the finance manager. Proper estimation helps in procuring and utilizing required funds efficiently thereby improving the revenue of the business.
Determines Capital Structure
Deciding the proper capital structure is a key decision to be taken by the finance manager. Once capital requirements are estimated now the proper capital mix is selected. The finance manager decides the optimum proportion of different long term and short term equity debt securities. The determination of capital structure tells the amount of fund that the company is possessing and the additional amount that it needs to raise from outside. The finance manager selects such sources where cost of procuring funds can be minimized.
Select Source Of Fund
The finance manager chooses from among different sources of funds available for raising the additional fund requirements. After deciding on an optimum capital structure, the finance manager selects suitable sources of funds. The different sources available are the issue of shares and debentures, commercial banks, financial institutions, public deposits, etc. Share and debentures are considered favorable for meeting long term capital requirements. Whereas for meeting short term capital requirements banks, financial institutions, public deposits, etc. is suitable.
Select Investment Pattern
The selection of proper patterns of investment is a must for attaining desired goals and profitability. The finance manager should invest the funds of an organization into a proper class of assets or avenues. Proper analysis of risk and return factors of different avenues should be done before allocating funds in them. It will help in ensuring safety on investment so that higher regular return is attained.
Financial management manages all cash requirements of the business. It aims at maintaining an adequate amount of cash required for successful operations of business activities. It records all cash expenses and incomes fairly into accounts for avoiding any error. For meeting different expenses like salaries and wages payment, payment to creditors, electricity, and water bills payment, purchase of raw materials, and maintenance of adequate stock proper amount of cash are required. Management of cash helps in meeting these expenses timely and wisely.
Adequate Use Of Surplus
Financial management focuses on the efficient utilization of surplus earned by the business. The efficient use of surplus earned affects the growth and expansion plan of business and also the shareholder interests. The finance manager has two options available for utilizing the surplus i.e. Declaration of dividend to shareholders and retaining surplus for plowing back of profits into the business. A proper balance between the two should be done considering the expansion, diversification, and innovation plans of business and also the interests of shareholders.
Implement Financial Controls
Financial management monitors and controls the finances of business for maintaining a balance between risk and return. It exercises to minimize the risk and expenses associated with undergoing the required operations. Not only its plans, procures, and utilizes the funds efficiently but also monitors the overall finance of the business. It uses different techniques like budgetary control, returns on investment, cost control, ratio analysis, cost, and internal audit, break analysis as a device for controlling finances.