What is Financial Management?
An essential component of general management is financial management. It is focused on the responsibilities of the business firm’s financial managers. Effective money management in the firm is the major focus of financial management. Financial management as it is used by commercial organisations is also known as company finance or corporation finance.
The use of finance and the best possible procurement are both concerns of financial management. In order to make the best purchasing decisions, the various financing options are discovered and examined in terms of the prices and risks involved.
Financial management attempts to keep risk under control, lower the cost of money acquired, and achieve effective use of those funds.
Objectives of Financial Management
Profit Maximization: Profit is the primary goal of all economic activities. A company firm also operates primarily in order to make money. Profit is a metric used to gauge a company’s operational effectiveness. Another common and limited strategy is profit maximisation, which tries to increase a company’s profit as much as possible.
Wealth Maximization: One of the contemporary strategies that incorporates the newest advancements and enhancements in the sphere of commercial concern is wealth maximisation. The term “wealth” refers to shareholder money or the personal wealth of those involved in the firm.
Value or net present worth maximisation are other names for maximising wealth.
Functions of Finance Manager
- Forecasting Financial Requirements: Estimating the financial needs of the business concern is his responsibility. He should calculate the amount of money needed to buy fixed assets and forecast how much money will be necessary in the future to cover working capital needs.
- Acquiring Necessary Capital: The finance manager should focus on how the finance is mobilised and where it will be available after determining the financial requirement. Additionally, it has a very critical outlook.
- Investment Decision: The financial manager must carefully choose the best investment options and take into account the investment’s reasonable and reliable return. To assess the efficient use of investment, he must be well-versed in capital budgeting methodologies. When making capital investments, the financial manager must pay close attention to the criteria of safety, liquidity, and profitability.
- Management of Cash: In the field of finance nowadays, cash management is extremely important since good cash management not only ensures efficient use of cash but also enhances a company’s short-term liquidity position.
- Interrelationships with Other Departments: The finance manager works with a variety of functional divisions, including marketing, production, personnel, HR, research, and development, among others. Finance managers should be well-versed in a variety of subjects in addition to those directly associated with money. He needs to keep cordial contact with each of the corporate organization’s functional departments.
Importance of Financial Management
- Financial Planning: Financial management enables business concern financial planning and aids in determining the financial requirements of the business concern. A crucial aspect of company concern that aids in the promotion of an enterprise is financial planning.
- Acquisition of Funds: The process of financial management includes securing the necessary capital for the company. Obtaining necessary finances is a key component of financial management, which involves finding the best sources of funding at the lowest possible cost.
- Appropriate use of money: The operational effectiveness of the business concern is enhanced by the wise use and distribution of financial resources. The cost of capital can be decreased and the firm’s worth can rise when the finance manager manages the money effectively.
- Financial Decision: Making wise financial decisions in a corporate concern is facilitated by financial management. A financial decision will have an impact on the concern’s entire company activity. because there is a direct connection to numerous departmental tasks like marketing and production workers, among others.
- Increasing profitability: The business concern’s effectiveness and correct management of finances is the only factor that influences whether or not the company is profitable. Strong financial control tools including budgetary control, ratio analysis, and cost volume profit analysis are used by financial management to support the organization’s profitability position.
- Increase the firm’s value: When it comes to boosting investor and business concern wealth, financial management is crucial. The ultimate goal of any business enterprise is to maximise profit, and greater profitability drives up investor and national wealth.
- Increasing Savings: Savings are only feasible when a company produces greater profitability and maximises wealth. Individual and corporate savings are encouraged and mobilised with the aid of effective financial management.
Above all, maintaining the optimum cash balance, granting credit, mergers and acquisitions, raising money and choosing the instruments to use for obtaining money, etc. are all examples of financial management decisions.
To maximise the returns to the owners, financial management entails getting the cash needed by an organisation in the most economical manner.
Financial management, put simply, is every choice a company makes that has an impact on its finances.