Financial Management
Meaning of Financial Management
Financial
Management means planning, organizing, directing, and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It
means applying general management principles to financial resources of the
enterprise.
Scope / Elements
1.
Investment
decisions includes investment in fixed assets (called as capital budgeting).
Investment in current assets is also a part of investment decisions called as
working capital decisions.
2.
Financial
decisions - They relate to the raising of finance from various resources which
will depend upon decision on type of source, period of financing, cost of
financing and the returns thereby.
3.
Dividend
decision - The finance manager has to take decision with regards to the net
profit distribution. Net profits are generally divided into two:
a.
Dividend
for shareholders- Dividend and the rate of it has to be decided.
b.
Retained
profits- Amount of retained profits has to be finalized which will depend upon
expansion and diversification plans of the enterprise.
Objectives of Financial Management
The
financial management is generally concerned with procurement, allocation and
control of financial resources of a concern.
The
objectives can be-
1.
To ensure
regular and adequate supply of funds to the concern.
2.
To ensure
adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3.
To ensure
optimum funds utilization. Once the funds are procured, they should be utilized
in maximum possible way at least cost.
4.
To ensure
safety on investment, i.e., funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5.
To plan a sound
capital structure-There should be sound and fair composition of capital so that
a balance is maintained between debt and equity capital.
Functions of Financial Management
1.
Estimation
of capital requirements: A
finance manager has to make estimation with regards to capital requirements of
the company. This will depend upon expected costs and profits and future
programmes and policies of a concern. Estimations have to be made in an
adequate manner which increases earning capacity of enterprise.
2.
Determination
of capital composition: Once
the estimation has been made, the capital structure must be decided. This
involves short- term and long- term debt equity analysis. This will depend upon
the proportion of equity capital a company is possessing and additional funds
which must be raised from outside parties.
3.
Choice
of sources of funds: For
additional funds to be procured, a company has many choices like-
a.
Issue of
shares and debentures
b.
Loans to
be taken from banks and financial institutions.
c.
Public
deposits to be drawn like in form of bonds.
Choice
of factor will depend on relative merits and demerits of each source and period
of financing.
4.
Investment
of funds: The finance
manager must decide to allocate funds into profitable ventures so that there is
safety on investment and regular returns is possible.
5.
Disposal
of surplus: The
net profits decision must be made by the finance manager. This can be done in
two ways:
a.
Dividend
declaration - It includes identifying the rate of dividends and other benefits
like bonus.
b.
Retained
profits - The volume must be decided which will depend upon expansional, innovation,
diversification plans of the company.
6.
Management
of cash: Finance manager must
make decisions with regards to cash management. Cash is required for many
purposes like payment of wages and salaries, payment of electricity and water
bills, payment to creditors, meeting current liabilities, maintenance of enough
stock, purchase of raw materials, etc.
7.
Financial
controls: The finance
manager has not only to plan, procure and utilize the funds but he also must
exercise control over finances. This can be done through many techniques like
ratio analysis, financial forecasting, cost and profit control, etc.
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