What Is Financial Management?
Financial management refers to applying management concepts to budgeting, forecasting, managing, and controlling a company’s financial resources to achieve its objective. It aims to maximize investors profit by optimizing the firm’s money usage. It deals with all the areas connected to profitability, expenses, cash, and credit.
Management of finances is the foundation of all enterprises. They need to earn a higher rate of return on investment of market-sourced money than the related expenses. Financial management frequently balances the legal and accounting sides of a company. It consists of three essential components: reducing the cost of finance, ensuring sufficient funds, and utilizing funds appropriately.
Table of contents
- Financial management is the application of management principles to the management of a business’s finances.
- It comprises three essential components, namely investment decisions, financing decisions, and dividends. It helps the firm maximize profit, liquidity, and earnings per share.
- The role of financial management is diverse, including capital needs assessment, capital composition evaluation, capital source selection, fund investment determination, liquidity management, and financial control.
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Financial Management Explained
Financial management is the application of general management concepts to a company’s financial resources. It helps the firm achieve its objectives by budgeting, managing, and applying financial instruments.
In all markets, obtaining credit from banks and associated financial institutions is simple for investing or financing an expansion. However, the primary problem lies in employing it effectively and allocating the cash to appropriate ventures and activities to generate returns that exceed the cost of borrowing capital. Therefore, it is a rescuer for organizations in terms of effective financial management and planning.
Financial management comprises three essential components: deciding on investment, financing, and dividend.
Financial managers determine the amount of short-term and long-term investments made with the available cash. Short-term investment decisions are related to working capital management, affecting liquidity and investing. On the other hand, long-term investment decisions involve capital planning, such as purchasing property or machinery.
It involves decisions that ensure the availability of money as and when required. Furthermore, it assists in making capital structure decisions to select funding sources from external parties, share issuance, bond issuance, bank borrowing, and retained earnings.
There are several objectives of financial management in a company’s operations, the primary being expanding the business to increase shareholder wealth. It’s goals are as follows:
- Secure adequate and sustainable funding sources.
- Assure lucrative returns to investors and shareholders.
- Ensure effective utilization of available or borrowed funds.
- Choose secure and profitable investment opportunities.
- Finally, plan the structure of a business’s financial resources to balance the equity capital and debt of the organization.
Let us look at the principal functions of financial management that are crucial to the success of any firm:
- Evaluating capital requirements – The finance manager evaluates capital requirements to optimize a company’s revenue. The such evaluation considers needs-based finances, determined by anticipated expenses plus earnings and the company’s plan.
- Evaluating capital constitution – The capital constitution can be determined after gauging capital requirements. It includes long-term and short-term debt-equity analyses based on the company’s equity capital ratio and any funds to be sourced from outside.
- Determining the source of capital – There are multiple sources of acquiring funds. Sourcing funds is the most significant risk in financial management, so the finance manager considers each source’s relative merits and demerits. Major sources are as follows:
- Taking investment decisions – Financial managers will decide on relevant projects and investment opportunities for the company to provide safe and lucrative returns.
- Managing surplus money – In the event of a company’s net gains, a financial manager manages excess funds by:
- Declaring dividends to investors after establishing the dividend and bonus rate
- The company’s goals for diversification, innovation, or market expansion
- Managing liquidity – Cash is essential for a company’s day-to-day operations, such as paying employees, purchasing raw materials, acquiring inventory, paying creditors, adjusting current liabilities, maintaining inventory, and making monthly or annual payments such as the electricity – water bills, salaries, rent, and marketing costs. A finance manager balances liquidity and replowing funds in the business.
- Financial control – Monitoring and controlling financing activities is vital to financial management. It is possible to accomplish financial control using cost and profit control, ratio analysis, and financial forecasting methods.
Importance of Financial Management
A company may go awry and incur losses without sound financial management. The following points highlight its importance:
- It helps a business to organize its finances and acquire the necessary capital.
- It is crucial for efficient and effective use of borrowed money.
- Businesses need financial management to make financial decisions.
- It is essential for executing plans in light of up-to-date financial reports and data on relevant Key Performance Indicators (KPIs).
- It ensures that the company is adhering to all the legal requirements on financial aspects.
- It ensures that each department operates within budget and in alignment with strategy.
Frequently Asked Questions (FAQs)
The main goal of financial management is to increase shareholders’ wealth as much as possible. Therefore, it implies the stock price for public companies and the market value of the owner’s equity for private companies. To do this, finance managers try to maximize the return and minimize the risk.
A finance strategy brings together strategic financial planning. The result is a functional plan that looks at the company’s resources, costs, and budget and ensures they fit with its mission and goals.
Financial management has become one of the best and most lucrative professions. Financial managers are among the highest-paid professionals around the world. It’s scope includes working in the capital markets, the insurance industry, and non-banking financial companies. Most financial managers work for brokerage firms, banks, insurance companies, or High net worth individuals wanting to keep track of their own money.
The essential abilities include strong quantitative skills, problem-solving skills, using logic well, being persuasive, making quick decisions, credible personal financial management, and communicating well.
This has been a guide to What is Financial Management. Here, we explain its objectives, importance, and functions. You can learn more about the form the following articles –