FINANCIAL MANAGEMENT

Financial Management may be defined as the part of management, which is concerned with

1.      Raising funds in the most economic and suitable manner.

2.      Using these funds as profitably (for a given risk level) as possible.

3.      Planning future operations and controlling current performance and future developments through financial accounting, cost accounting, budgeting, statistics and other means.

4.      (a) It guides investments where opportunity is the greatest, producing relatively uniform yardstick.

(b) judging most of a firms operation and projects and is

(c) continuously concerned with achieving an adequate rate of return on investments, as this is necessary for survival and the attracting of new capital.

 

Prof. Ezra Solomon- “FM is concerned with the efficient use of an important economic resource namely Capital Funds”

 

        Phillipalos ‘ FM is concerned with the management decision that results in the acquisition and financing of long term and short term assets for the firms. As such, it deals with the situation that requires the selection of specific assets (or combination of assets) as well as the problem of size and growth of an enterprise. The analysis of these decisions is based on the expected inflows and outflows of funds and their effects upon management objectives.’

        N.G. Wright divides FM into 3 main areas

1. Decision on the capital structure. 2. Allocation of available funds to specific uses. 3. Analysis and appraisal of problems

 

In other words FM is that part of managerial activity, which is mainly concerned with the planning and control of the financial resources of a firm. i.e. its acquisition and proper use of funds by a business firm.

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Importance

 

        Financial Management is an excellent tool by means of which resources can be allocated to various projects, depending upon their importance and pay off capacities.

 

It provides the best guide for future resource allocation by a firm.

 

It provides relatively uniform yardsticks for judging most of the enterprises operations and projects. It helps firms in planning the output from a given input of funds.

FM implies the designing and implementation of a certain plan. Plains aim at an effective utilization of funds. It helps a firm in monitoring the effective employment of funds in Fixed Assets (fixed capital) as well as current assets (working capital).

 

FM connotes responsibility for obtaining and effectively utilising the funds necessary for the efficient operation of an enterprise. It makes it possible for the finance manager to obtain funds at the best time in relation to their cost and their effective use in the business firm.

 

FM is the dynamic evolving on making of day to day financial decision in a business of any size.

 

FM is important because it has an impact on all the activities of a firm. Its primary responsibility is to discharge the finance function successfully. It touches on all the other business function. It may be described as making decision on financial matter and facilitating and reviewing their execution. FM helps in prompt planning, capital budgeting, controlling inventories, accounts receivable etc.

 

FM implies a more comprehensive concepts than the simple objectives of profit making or efficiency. Its broader mission is to maximise the value of the firm so that the interest of the different sections of the community remains protected.

 

FM applies to any organisation irrespective of its size, nature of ownership and control and whether it is a manufacturing or service organisation. It applies to any activity of an organisation, which has financial implications. FM is important even for non-profit organisations. It helps them to control the costs and to use the funds at their disposal in the most useful manner.

 

FM does not handle merely routine day-to-day matters. Often it deals with more complex problems such as mergers, re-oranisation of the like.

 

It plays 2 distinct roles.

Firstly, it safeguards the interests of the corporations

which is a separate legal entity.

Secondly, this separates legal entity has no meaning

unless the interests of the owner and other sections

of the community, which are concerned directly with

the corporations, are properly protected.

 

FM responsibility is to insure that finance contributes to efficient day-to-day operations as well as the long-range objectives of the owners. FM is thus an integrated and composite subject. It brings together much of the material that is found in accounting, economic, mathematics, system analysis and behavioral sciences and uses other disciplines as it tools.

Thus it is clear that the FM is very necessary for the progress of the enterprise. Its importance has increased in modern times because of the financial commitment of the management to different parties concerned.

 

 

 

Goals of Financial Management

 

The financial decisions are unavoidable and continuous. In order to make them rationally, the firm must have objectives. It is generally agreed that the financial objectives of the firm should be the maximisation of owner’s economic welfare. However, there is disagreement as to how the economic welfare of the owner can be maximized.

The objectives of Financial Management can be broadly classified into 2 categories.

1.      Basic objectives 2. Other objectives.

 

Basic objectives:

Maintenance of adequate liquid assets in the firm is one of the basic objectives of financial management. It implies that financial management should ensure that there are adequate cash in the hands of the firm at all times to meet is obligation.

 

1.      Maximisation of profit -- a business firm is a profit-seeking organisation. This objective implies that financial management should ensure that the profit of the firm is maximized.

2.      Maximisation of wealth -- is the most important objective of financial management.

 

Other Objectives:

1.      Ensure maximum operational efficiency through planning, directing and controlling the utilization of funds. i.e. through the effective employment of funds.

2.      Enforcing financial discipline in the organisation in the use of financial resources through the co-ordination of the operation of the various divisions in the organisation.

3.      Building up of adequate resource for financing growth and expansion.

4.      Ensuring a fair return to the shareholder on their investment.