DEFINITION OF FINANCIAL MANAGEMENT
Financial management is an integral part of overall management. It is concerned with the
duties of the financial managers in the business firm.
The term financial management has been defined by
Solomon, “It is concerned with
the efficient use of an important economic resource namely, capital funds”.
The most popular and acceptable definition of financial management as given by
S.C.
Kuchal
is that “Financial Management deals with procurement of funds and their effective
utilization in the business”.
Howard and Upton
: Financial management “as an application of general managerial
principles to the area of financial decision-making.
Weston and Brigham
: Financial management “is an area of financial decision-making,
harmonizing individual motives and enterprise goals”.
Joshep and Massie
: Financial management “is the operational activity of a business
that is responsible for obtaining and effectively utilizing the funds necessary for efficient
operations.
Thus, Financial Management is mainly concerned with the effective funds
management in the business. In simple words, Financial Management as practiced by
business firms can be called as Corporation Finance or Business Finance.
SCOPE OF FINANCIAL MANAGEMENT
Financial management is one of the important parts of overall management, which is directly
related with various functional departments like personnel, marketing and production.
Financial management covers wide area with multidimensional approaches. The following
are the important scope of financial management.
1. Financial Management and Economics
Economic concepts like micro and macroeconomics are directly applied with the
financial management approaches. Investment decisions, micro and macro
environmental factors are closely associated with the functions of financial manager.
Financial management also uses the economic equations like money value discount
factor, economic order quantity etc. Financial economics is one of the emerging
area, which provides immense opportunities to finance, and economical areas.
2. Financial Management and Accounting
Accounting records includes the financial information of the business concern.
Hence, we can easily understand the relationship between the financial management
and accounting. In the olden periods, both financial management and accounting
are treated as a same discipline and then it has been merged as Management
Accounting because this part is very much helpful to finance manager to take
decisions. But nowaday’s financial management and accounting discipline are
separate and interrelated.
3. Financial Management or Mathematics
Modern approaches of the financial management applied large number of
mathematical and statistical tools and techniques. They are also called as
econometrics. Economic order quantity, discount factor, time value of money,
present value of money, cost of capital, capital structure theories, dividend theories,
ratio analysis and working capital analysis are used as mathematical and statistical
tools and techniques in the field of financial management.
4. Financial Management and Production Management
Production management is the operational part of the business concern, which
helps to multiple the money into profit. Profit of the concern depends upon the
production performance. Production performance needs finance, because
production department requires raw material, machinery, wages, operating expenses
etc. These expenditures are decided and estimated by the financial department
and the finance manager allocates the appropriate finance to production department.
The financial manager must be aware of the operational process and finance
required for each process of production activities.
5. Financial Management and Marketing
Produced goods are sold in the market with innovative and modern approaches.
For this, the marketing department needs finance to meet their requirements.
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The financial manager or finance department is responsible to allocate the adequate
finance to the marketing department. Hence, marketing and financial management
are interrelated and depends on each other.
6. Financial Management and Human Resource
Financial management is also related with human resource department, which
provides manpower to all the functional areas of the management. Financial
manager should carefully evaluate the requirement of manpower to each
department and allocate the finance to the human resource department as wages,
salary, remuneration, commission, bonus, pension and other monetary benefits
to the human resource department. Hence, financial management is directly
related with human resource management.
IMPORTANCE OF FINANCIAL MANAGEMENT
Finance is the lifeblood of business organization. It needs to meet the requirement of the
business concern. Each and every business concern must maintain adequate amount of
finance for their smooth running of the business concern and also maintain the business
carefully to achieve the goal of the business concern. The business goal can be achieved
only with the help of effective management of finance. We can’t neglect the importance of
finance at any time at and at any situation. Some of the importance of the financial
management is as follows:
Financial Planning
Financial management helps to determine the financial requirement of the business concern
and leads to take financial planning of the concern. Financial planning is an important part
of the business concern, which helps to promotion of an enterprise.
Acquisition of Funds
Financial management involves the acquisition of required finance to the business concern.
Acquiring needed funds play a major part of the financial management, which involve
possible source of finance at minimum cost.
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Financial Management
Proper Use of Funds
Proper use and allocation of funds leads to improve the operational efficiency of the business
concern. When the finance manager uses the funds properly, they can reduce the cost of
capital and increase the value of the firm.
Financial Decision
Financial management helps to take sound financial decision in the business concern.
Financial decision will affect the entire business operation of the concern. Because there is
a direct relationship with various department functions such as marketing, production
personnel, etc.
Improve Profitability
Profitability of the concern purely depends on the effectiveness and proper utilization of
funds by the business concern. Financial management helps to improve the profitability
position of the concern with the help of strong financial control devices such as budgetary
control, ratio analysis and cost volume profit analysis.
Increase the Value of the Firm
Financial management is very important in the field of increasing the wealth of the investors
and the business concern. Ultimate aim of any business concern will achieve the maximum
profit and higher profitability leads to maximize the wealth of the investors as well as the
nation.
Promoting Savings
Savings are possible only when the business concern earns higher profitability and
maximizing wealth. Effective financial management helps to promoting and mobilizing
individual and corporate savings.
Nowadays financial management is also popularly known as business finance or
corporate finances. The business concern or corporate sectors cannot function without
Objectives of financial management fix the target of finance manager. Under the scope of financial management, he has to achieve different objective of financial management.
We can make the list of these objectives:
1. To Reduce the Misuse of Funds
It is the objective of financial management to reduce the misuse of funds. I can take my own example. I hate misusing of my hard earned money. Last month, I have bought DVD writer for starting business of CD and DVD of educational tutorials. But, after spending one month, DVD writer is being used for production or business purposes; I think this is misuse of my fund. If I deposited it in bank, I can earn interest on saving account on daily basis. Like me, company also misuses his funds in bad projects. We should learn from objective of financial management and reduce the misuse of even one rupee.
2. To Maximize the Profit in Long Run
If a businessman invests his money and wants to earn high profit, it means, it is taking high risk according to risk theory of financial management. This is not objective of financial management, but to maximize the profit in long run is real aim of financial management.
3. To Maximize the Wealth of Company
An investor only purchases shares, if he hopes that he will earn high profit on it, otherwise, he can deposit his money in saving account of bank. So, it is the objective of financial management to maximize the value of share. It can be possible by following way.
a) To Increase Dividend per share
b) To Increase Earning per share
c) To Analyze the value of share in market
4. To Fulfill the Social Responsibility
Company uses the natural resources and earns money and funds. Suppose Xyz Company started a plant in F place and use water, land and machines, it earned 10 million dollars from that plant. According to my view, Xyz Company takes his all natural resources from society in the form of land, water, metal and minerals. God has made these things for whole society not a particular Xyz company. If Xyz Company has used these resources, then it is the duty of xyz Company to fulfill his responsibility toward society. This is the main objective of financial management. Company’s reputation can be calculated with how many employees are working in it. What facilities are given by company to his employees? If company only shows his balance sheet of dead plants, machinery and other assets but there is not provision of any social activity or donation, that company will not get any goodwill. Some companies are being operated on the basis of public deposits instead of share capital. Why? And answer is security and that company can give only the security who wants to benefit of society like a social worker. Ok
FUNCTIONS OF FINANCE MANAGER
Finance function is one of the major parts of business organization, which involves the
permanent, and continuous process of the business concern. Finance is one of the interrelated
functions which deal with personal function, marketing function, production function and
research and development activities of the business concern. At present, every business
concern concentrates more on the field of finance because, it is a very emerging part which
reflects the entire operational and profit ability position of the concern. Deciding the proper
financial function is the essential and ultimate goal of the business organization.
Finance manager is one of the important role players in the field of finance function.
He must have entire knowledge in the area of accounting, finance, economics and
management. His position is highly critical and analytical to solve various problems related
to finance. A person who deals finance related activities may be called finance manager.
Finance manager performs the following major functions:
1. Forecasting Financial Requirements
It is the primary function of the Finance Manager. He is responsible to estimate
the financial requirement of the business concern. He should estimate, how much
finances required to acquire fixed assets and forecast the amount needed to meet
the working capital requirements in future.
2. Acquiring Necessary Capital
After deciding the financial requirement, the finance manager should concentrate
how the finance is mobilized and where it will be available. It is also highly critical
in nature.
3. Investment Decision
The finance manager must carefully select best investment alternatives and consider
the reasonable and stable return from the investment. He must be well versed
in the field of capital budgeting techniques to determine the effective utilization
of investment. The finance manager must concentrate to principles of safety,
liquidity and profitability while investing capital.
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4. Cash Management
Present days cash management plays a major role in the area of finance because
proper cash management is not only essential for effective utilization of cash but
it also helps to meet the short-term liquidity position of the concern.
5. Interrelation with Other Departments
Finance manager deals with various functional departments such as marketing,
production, personel, system, research, development, etc. Finance manager should
have sound knowledge not only in finance related area but also well versed in
other areas. He must maintain a good relationship with all the functional
departments of the business organization.
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