Introduction to Financial Management

Introduction to Financial Management

Finance is the key element that helps in running any business. But finance is a limited resource. However, the wants will always remain unlimited. Hence, it is necessary that we manage the finances effectively so that our wants are fulfilled as well as we do not run out of finance. A business should utilize and invest the finances in such a manner that the ROI is higher as compared to the amount invested. Basically, we can say financial management is the process that involves the judicious utility of capital as well as a vigilant selection of the capital source that helps in the accomplishment of business goals.

Nature and Importance of Financial Management:

  1. Financial management is an organic business function. It is obvious that a business enterprise will require finances in order to procure physical resources, carry on operational activities as well as business operations, make payments for compensation to suppliers and other stakeholders, etc.
  2. According to some experts, you need to understand that finance is largely about cash. Business transactions involve cash either directly or indirectly.
  3. Also, financial management is about offering necessary funds as per the favorable terms and the business goals. One should keep in mind that the fund procurement involves institutions, instruments, and practices of fundraising. Also, it helps in maintaining the accounting and legal relationships between the business enterprise and the fund sources.
  4. Also, financial management involves obtaining of funds and effective utilization of the funds. For instance, a manufacturing company will have to ensure that the procured funds should be used effectively for the installation of machinery and plants. Also, the profits should be able to compensate for the costs and risks of the business.

Scope of financial management:

In order to understand the intricacies of financial management, you should also be able to get a grasp of the scope of financial management.

  • Financing decision: These decisions involve raising funds from different resources. Such decisions are affected by various factors like period of financing, type of source, cost of financing, returns, and so on. Basically, the managers make such decisions. Financing decisions can be of two types:
  1. Capital structure decisions: It involves the identification of the fund sources. Also, they involve a wide variety of other decisions like issuance of bonds, shares, borrowing from banks, internal sources, etc.
  2. Financing planning decisions: These involve estimation of the sources and application of the funds. In other words, such decisions help in making assessments beforehand regarding the financial requirements of the organization.
  • Dividend decision: These decisions involve planning how to distribute the profits in the form of dividends. The idea is to create a balance between the demand of the stakeholders and retaining profits for future business needs.
  • Investment decision: There are two types of investment decisions – long term and short term. Long-term investment decisions involve the commitment of funds on fixed assets for a longer duration. Short-term investment decisions involve the commitment of funds on current assets for a short period of time, for instance, cash, bank deposits, inventory, etc.

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Objectives of Financial Management:

  • Profit maximization: The most significant aim of any economic activity is to make a profit. Basically, the major purpose of any business enterprise is to earn a profit. Profit hints towards the business efficiency level of the enterprise. The role of the finance manager is to make maximum profits in the long term as well as short term basis. He needs to make apt financial decisions and use the fiancé of the company in a well-balanced manner.
  • Proper estimation of total financial requirements: One of the most significant objectives of financial management is the proper estimation of the overall financial requirements. It is the duty of the financial manager to determine the total financial requirements of the company.
  • Wealth maximization: Wealth maximization means the maximization of shareholder’s value. The financial manager will have to offer maximum wealth in the form of dividends to the shareholders.
  • Proper mobilization: Again, finance mobilization is another significant objective of financial management. The financial manager needs to be vigilant enough not to waste the finance and make its optimum utilization.

So, these are the scopes and objectives of financial management.