Definition and Scope
Financial management encompasses coordinating, planning, supervising, and controlling financial activities, including acquiring and utilizing an organization’s funds. It applies fundamental management principles to the financial resources of a company.
Elements of Financial Management
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- Investment Decisions involve allocating resources to fixed assets (capital budgeting) and current assets, known as working capital decisions.
- Financial Decisions: These pertain to raising funds from various sources, considering source type, duration, cost, and expected benefits.
- Dividend Distribution: Decisions regarding the distribution of net profits, dividing them into dividends for shareholders and retained profits for expansion or diversification.
Objectives of Financial Management
The key objectives include:
- Ensuring a consistent cash flow.
- Providing satisfactory returns to shareholders.
- Optimizing fund utilization.
- Safeguarding investments.
- Establishing an efficient capital structure.
Functions of Financial Management
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- Estimation of Capital Requirements: Determining the organization’s financial needs based on anticipated profits, costs, and future strategies.
- Capital Composition Determination: Defining the equity and external capital mix required for operations.
- Selection of Funding Sources: Deciding whether to issue shares, debentures, loans, or public deposits based on merits and financing duration.
- Investment of Funds: Allocating funds to profitable ventures that ensure returns and safety.
- Surplus Management: Decisions on dividend declarations and retained profits based on expansion and diversification plans.
- Cash Management: Oversight of cash for various business needs.
- Financial Controls: Use ratios analysis and forecasting tools to manage finances effectively.
Importance of Financial Management
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- Strategic Guidance: Financial management aids in long-term and short-term planning, allowing businesses to adapt to different scenarios.
- Decision Support: Providing current financial data and KPIs to help leaders make informed decisions.
- Control: Ensuring each department aligns with the company’s vision and operates within budget and strategy.
- Risk Management: Evaluating and mitigating market, financial credit, liquidity, and operational risks.
Procedures
Financial managers establish secure and precise procedures for managing and distributing financial information, including invoices, payments, and reports. These procedures also designate responsibility for making and approving financial decisions.
Three Types of Financial Management
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- Capital Budgeting: Determining how to allocate capital funds to achieve business goals.
- Capital Structure: Deciding how to finance operational costs or expansion, considering factors like interest rates, equity, and debt.
For further reading you can go through this article The Engine of Prosperity: Understanding the Financial System.