Financial Management

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Definition of Financial Management

Financial Management refers to the planning, organizing, directing and coordinating of different financial activities like procurement of funds, utilization of funds etc.

In other words, applying general management principles to financial resources is termed as financial management. Financial management is the efficient way in which a business  manages its funds so that it could accomplish its goals.


Objectives of Financial Management

For any commercial organization, the key objective of financial management would be:

  • To create wealth for the business.
  • To generate cash for the business.
  • To ensure optimum fund utilization. Once a company has procured funds, they should be utilized in the best and the most affordable possible manner.
  • To ensure safety of money, i.e. funds should be invested in a safe venture or projects that offer an adequate return on investment.
  • To plan a sound capital structure for a company.  There should be a proper balance between debt and equity.


Functions of Financial Management

Following are the functions of Financial Management:


1. Estimation of Capital Structure

The foremost function of a financial manager is to estimate the capital structure of a business.  The capital requirements of a business depend upon expected costs, profits, and future plans and policies. The estimations must be made after careful analysis and they must increase the earning capacity of a business.

2. Determining Capital Composition

Once the estimations are made, the capital structure should be determined. This involves short term and long term financial analysis. This analysis depends upon the proportion of equity and debt in a business. 

3. Making Choice for Sources of funds

A Company has many choices for raising funds. These include:

a) Issuing common stocks and preferred shares

b) Issuing debentures and bonds

c) Taking loan from financial institutions

A choice is made on the basis of the merits and demerits of each source.

4. Investment of Funds

The finance manager is responsible for investing funds into profitable ventures so that regular returns are received.

5. Surplus Distribution

The decision to allocate surplus is made by the finance manager. The net income can be treated in two ways:

a) Dividend can be declared

b) Profits could be retained.


6. Cash Management

The finance manager is required to make decisions regarding the management of cash. Cash is required for meeting daily business expenses like payment of wages, payment to suppliers, payment of electricity bills etc.

7. Financial Controls

The financial manager has to control the financial activities as well. He needs to evaluate the financial statements of a business, which can be done by using different techniques like ratio analysis, comparative financial analysis, cost volume profit analysis, financial forecasting etc.

What decisions should be considered in financial management?

There are three decisions, which are considered in financial management:

  • Investment Decision

It includes decisions concerning capital investment and current investment like purchase of fixed assets etc.

  • Financial Decision

The decision related to raising capital from various sources is termed as financial decision. This decision depends upon source type, financing cost etc.

  • Dividend Decision

The decision concerning the distribution of profits is termed as dividend decision. Net profit is generally divided in two ways, one is dividend distribution and the other is retained earnings.


What is the importance of financial management in a business?

 Financial management is required for the management of money. It includes both personal financial management and organizational financial management.

Personal Financial management helps in managing the finance at home, which includes budgeting, saving, investing and it covers the other important aspects of personal money.

Meanwhile, organizational finance helps in creating wealth for a business. It comes in hnady in generating cash and gaining maximum profits from the investments made by a business.

Lack of Financial management leads to losses and closure of business in some cases. It helps in avoiding improper utilization of funds. Without proper financial planning, debts will not be repaid on time and they may make a business insolvent. Financial management keeps an eye on the balance sheet of a company and it analyzes the sensitive facts that can endanger the existence of a company.

It leads to more financial stability, which in turn leads to profitability and  the ultimate results include development, expansion and greater  efficiency.

It leads to economic growth and development as a result of investments in different projects.


Our experts have answered various questions relating to financial management:

“To avoid the problem of shortage of funds”, what should be done by a financial manager?

“Every manager has to make three decisions in financial management” Could you explain all of them?

What is the importance of financial management in a business?

I am planning to invest money for my retirement; I am 34 and would like to retire at the age of 60. I want to retire with a monthly regular income of $13,000. The average age of an American according to me is somewhere near about 75. This is related to finance; can any financial expert tell me about the money that I shoulddeposit every month till retirement if I am to achieve my target. 

Hi! I wanted to know about the stocks in the stock market that are most risky and those that are the safest from the point of view of investment. I need some finance expert to answer this question.

People often say that one should not invest all of one' funds in one place. But I don't understand what makes them say this. If a person can get good returns by investing in one stock, doesn't it make sense to  make all of one's investments in one stock?


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