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Financial management

Meaning, definition

Meaning and Definition Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. In other words it is concerned with acquiring, financing and managing assets to accomplish the overall goal of a business enterprise (mainly to maximize the shareholder’s wealth). "Financial management is the process of putting the available funds to the best advantage from the long term point of view of business objectives."

Objectives of Financial Management

Financial Management as the name suggests is management of finance. It deals with planning and mobilization of funds required by the firm. Managing of finance is nothing but managing of money. Every activity of an organization is reflected in its financial statements. Efficient financial management requires the existence of some objectives. It includes

Create wealth for the business

Generate cash

to provide an adequate return on investment

to achieving a higher growth rate.

to attain a large market share.

to promote employee welfare

to increase customer satisfaction.

to improve community life.

The Key elements of financial management

There are three key elements to the process of financial management:

Financial Planning

Management need to ensure that enough funding is available at the right time to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees etc. In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions.

Financial Control

Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as:

• Are assets being used efficiently?

• Are the businesses assets secure?

• Does management act in the best interest of shareholders and in accordance with business rules?

Financial Decision-making

The key aspects of financial decision-making relate to investment, financing and dividends:

• Investments must be financed in some way – such as selling new shares, borrowing from banks or taking credit from suppliers etc.

• A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.

Functions of financial management

The modern approach to the financial management is concerned with the solution of major problems like investment financing and dividend decisions of the financial operations of a business enterprise. Thus, the functions of financial management can be broadly classified into three major decisions, namely:

Investment decisions,

Financing decisions,

Dividend decisions.

1. Investment decisions: These decisions relate to the selection of assets in which funds will be invested by a firm .Funds procured from different sources have to be invested in various kinds of assets. Long term funds are used in a project for various fixed assets and also for current assets. The investment of funds in a project has to be made after careful assessment of the various projects through capital budgeting .

2. Financing decision: These decisions relate to acquiring the optimum finance to meet financial objectives and seeing that fixed and working capital are effectively managed. It includes sources of available funds and their respective cost, capital structure, i.e. a proper balance between equity and debt capital.

3. Dividend decision- These decisions relate to the determination as to how much and how frequently cash can be paid out of the profits of an organization as income for its owners/shareholders, and the amount to be retained to support the growth of the organization.