Financial management - Importance, Scope, Goals and Tasks
What is the Meaning of financial management?
Financial management means planning, organizing, directing and controlling financial activities such as the purchase and use of company funds. It means applying general management principles to the company's financial resources.
Scope/elements:
- Investment decisions involve investments in tangible assets (referred to as capital budget). Investing in working capital is also part of an investment decision called a working capital decision.
- Financial decisions - deals with financing of debt from various sources, depending upon the type of source, length of loan, cost of loan and determination of income.
- Dividend Decisions – Financial managers must make decisions regarding the distribution of net income.
Net income is usually divided into two:
- Dividends to shareholders – You need to determine the rate associated with the dividend.
- Retained earnings: The amount of retained earnings should be determined based on the company's expansion and diversification plans.
What are the Objectives of financial management?
- Financial management generally involves obtaining, allocating, and managing a company's financial resources. The goal is:
- To ensure regular and adequate funding for issues.
- In order to secure real profits for shareholders, it depends on profitability, market value of stocks and expectations of shareholders.
- Ensuring optimal use of funds. Once the money is collected, you should make the most of it, at least for free.
- To ensure the safety of your investment, that is, to get a reasonable return, you should invest your money in a safe company.
- Plan for a solid capital structure - A solid and fair capital structure is required to maintain a balance between debt and equity.
Financial management tasks:
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Estimating Capital Needs:
A finance manager must make estimates of the company's capital needs. It depends on the expected costs and profits as well as future plans and policies of a group. The valuation should be made in a suitable manner in order to increase the earning power of the company.
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Determination of capital composition:
The capital structure should be determined after estimation. This includes short- and long-term stock analysis. It depends on the percentage of capital the company has and the additional funds it will raise externally.
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Choose a funding source:
- To raise additional funds, companies have several options: • Issuance of shares and bonds • Loans from banks and financial institutions • Public deposits withdrawn in the form of bonds.
4. Investment of funds:
The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.
5. Disposal of the surplus:
The CFO must make the decision on the net profit. This can be done in two ways. • Dividend Declaration: Includes identifying other benefits such as dividend rates and bonuses. • Retained earnings - the amount should be determined based on the company's expansion, innovation and diversification plans.
6. Cash Management:
The finance manager has to decide about cash management. Cash is needed for many purposes, e.g. B. Paying wages and salaries, paying electricity and water bills, paying accounts payable, paying current accounts payable, maintaining sufficient inventory, purchasing raw materials, etc.
The financial manager must not only plan, purchase and use funds, but also control financial matters. This can be done through various techniques like ratio analysis, financial forecasting, cost and profit control etc.