Financial Management : Meaning, Scope, Functions & Objectives
What is Financial Management?
This Article Includes
- What is Financial Management?
- Scope / Elements of Financial Management :
- Functions of Financial Mangement / Manager:
- Objectives of Financial Management:
- Understand the concept of Financial Management in just 10 minutes ( Must Watch )
Financial Management means planning, organizing, directing and controlling the financial activities such as procurement of funds in the most economic manner and employment of those funds in the most optimum way.
It means applying general management principles to financial resources of the enterprise.
Scope / Elements of Financial Management :
1. Financial Decisions
2. Investment Decisions
3. Dividend Decisions
Financial Decisions ( What will be the source of funds? )
Financial Decisions relate to the raising of funds from various resources. It depends on the type of source ( debt or equity ), the period of financing, cost of financing and the returns thereby.
Investment Decisions ( Where the funds will be invested? )
Investment Decisions includes investment in fixed assets ( known as capital budgeting ). Investment in current assets ( working capital ) is also a part of investment decision.
Dividend Decisions ( What will happen to those earnings? )
The Finance Manager has to take a decision with regards to the net profit distribution. Net profits are generally divided into two parts:
- The dividend for Shareholders: Dividend and the rate of the dividend need to be decided.
- Retained Earnings: Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.
Functions of Financial Mangement / Manager:
1. Estimation of Capital Requirement: Estimation depends upon expected costs, profits, future programs and policies of a firm. Estimation must be adequate, as it can increase the earning capacity of the firm.
2. Determination of Capital Composition: It is based on long term-short term debt equity analysis. This will depend upon the proportion of equity capital a company is processing and additional funds which have to be raised from outside parties.
3.Choice of sources of funds: Choice of funds depend upon the relative merits and demerits of each resource. Various sources of funds are:
- Issue of shares and debentures
- Loans to be taken from banks and financial institutions
- Public deposits to be drawn, like in the form of bonds
4. Investment of Funds: Financial Manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns are possible.
5. Disposal of surplus: It refers to the decisions on the net profits made about the dividend declaration and retained earnings.
6. Management of cash: The Financial manager has to make decisions with regards to cash management. It is required for many purposes like payment of wages and salaries, bills, creditors, maintenance of stock, raw materials, etc.
7. Financial Control: Financial Manager not only has to plan, procure and utilize funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.
Cost Of Capital Complete Notes : You may Like
Objectives of Financial Management:
1. Wealth Maximization : The one of the most important objective of financial managers is to maximize the value of shares of their shareholders.
2. Profit Maximization
3. Focus on stakeholders: Stakeholders are those entities who have invested in shares and the interest of those people that a firm can’t ignore.
4. Estimation of capital requirement
5. Arranging of required funds
6. Optimum utilization of funds
7. Management of cash position or balance
8. Coordination with other functions or department
You May Need : Leverage in Financial Management
Understand the concept of Financial Management in just 10 minutes ( Must Watch )
That’s all for the Introduction to Financial Management. Still left with any doubts regarding the topic ?? Just contact us by commenting down or through our facebook page, and we will reply to you 🙂