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.
Financial management is concerned with efficiently planning the procurement of funds and the utilization of these funds in the business. The finance manager is required to decide the proper capital structure of an organization deciding the optimum mix of debt and equity for raising required funds. Financial management concept 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.
- Investment decision- Financial management is involved in managing all investment decisions of an organization. Investment decisions involve risk evaluation, measuring the cost of capital, and estimating benefits expected out of a particular project. Managers are responsible for deciding how available funds should be invested in fixed or current assets to earn optimum returns.
- Working Capital decision– Taking working capital decisions properly is another important scope of financial management. These decisions are concerned with investment in current assets or current liabilities. Working capital decisions revolve around working capital and short-term financing. Current assets include cash, inventories, receivables, short-term securities, etc. whereas current liabilities include creditors, bank overdraft, bills payable.
- Financing decision- Financing decisions involves deciding how the required funds should be raised from available long term or short term sources. A financial manager is required to form a proper finance mix or optimum capital structure of the company to raise its value. They are required to maintain a proper balance between equity and debt to provide maximum return to shareholders.
- Dividend decision- Financial management involves taking all dividend decisions of the company. These decisions involve developing a proper dividend policy regarding the distribution or retaining of company profits. The finance manager should decide an optimum dividend payout ratio out of available profit. He should consider all expansion and growth opportunities available to the organization and should avail them by retaining a proper amount of profit.
- Ensures liquidity– Maintaining proper liquidity in an organization is another important role played by financial management. The finance manager ensures that there is a regular supply of funds in an organization. He monitors all cash-inflows and cash-outflows and avoids any underflow or overflow like situations. Ensuring the optimum level of liquidity in an organization is one of the important scopes of financial management.
- Profit management– Financial management aims at increasing the profit of the company. It works towards reducing the cost of various activities through proper monitoring and setting up proper price policy. The finance manager measures the cost of capital and chooses cheap sources of capital by properly analyzing different sources available.
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.