Financial management involves planning, controlling, monitoring and management of financial resources for achieving future goals. The management is not restricted to large business organizations alone; individuals can also make use of it. Thus, financial management is one of the most important aspects of a business owner’s job.
Objectives of Financial Management
Financial management is generally associated with procurement, allocation, and control of the financial resources of a concern.
- To ensure a regular and adequate supply of funds to the concern.
- To ensure adequate returns to the shareholders which will depend upon the concern’s earning capacity, the market price of its shares, and the expectations of the shareholders.
- To ensure optimum funds utilization. Once the funds are procured, they should be utilized in the maximum possible way at the least cost.
- To ensure safety on investment, i.e, funds should be invested in safe ventures so that an adequate rate of return can be achieved.
- To plan a sound capital structure. There should be a sound and fair composition of capital so that a balance is maintained between debt and equity capital.
Functions of Financial Management
1. Estimation of Working Capital
Working Capital is the lifeblood and controlling nerve center of a business. No business can be successfully run without an adequate amount of working capital. To avoid the shortage of working capital at once, an estimate of working capital requirements should be made in advance so that arrangements can be made to procure the adequate amount. But estimation of working capital requirements is not an easy task and a large number of factors have to be considered before starting this exercise.
2. Determining Capital Structure
Once the requirement of capital funds has been determined, a decision regarding the kind and proportion of various sources of funds has to be taken. For this, the financial manager has to determine the proper mix of equity and debt and short-term and long-term debt ratio. This is done to minimize the cost of capital and maximize the shareholders’ wealth.
3. Procurement of Funds
The function of procurement of funds starts by estimating the requirement of funds. It involves a lot of forecasting exercises to identify each and every future requirement of the project and find out the sum required for investment in fixed assets and working capital. Not only is the quantum of requirement important, but the finance manager has also to decide the timing of that requirement.
4. Utilization of Funds
The funds procured by the financial manager are to be prudently invested in various assets so as to maximize the return on investment: While taking investment decisions, the management should be guided by three important principles, viz., safety, profitability, and liquidity.
5. Disposal of Profits or Surplus
The financial manager has to decide how much to retain for ploughing back and how much to distribute as dividend to shareholders out of the profits of the company. The factors which influence these decisions include the trend of the earnings of the company, the trend of the market price of its shares, the requirement of funds for self-financing the future programmes and so on.
6. Financial Control
Financial control may be construed as the analysis of a company’s actual result approached from different perspectives at different times, compared to its short, medium and long-term objectives and business plans.
Hence financial management is the most crucial aspect for the smooth operation of any organization. The safety, monitoring, and control of all the significant financial resources completely depend on it. However, the management completely depends on the work performance of the financial manager.
Content: Kaif Ahmed
Graphics: Shubham Saurav
Editor: Prachi Prafull