After reading this article you will learn about Financial Management:- 1. Meaning of Financial Management 2. Importance of Financial Management 3. Role.
Meaning of Financial Management:
It is an applied branch of general management. It looks after the finance function of the business. In itself it constitutes a sub-system of the business enterprises, inter-related very closely with production, marketing and personnel functions or sub-systems.
Financial management is called upon to take three major decisions:
1. Investment decision; e.g., capital budgeting or financial plan.
2. Financing decision or formulation of the best financing mix or capital structure of the enterprise; and
3. Dividend decision or dividend policy.
Financial management involves the implementation of these three major decisions. The decisions are interrelated and should be implemented jointly. Together, these vital decisions determine the value of the enterprise to its shareholders and investors. Financial management makes use of analytical tools in the analysis, planning and control of the enterprise involving funds.
Importance of Financial Management:
Prof. Soloman says that financial management is an integral part of overall management rather than merely a staff activity concerned with fund raising operations.
At present, a financial manager occupies a central position in any business firm and financial management involves the application of all managerial functions such as planning, organising, directing, and controlling in the finance function sine qua non of industrialisation.
Managerial personnel connected with financial planning and policies will have specific responsibility for the following:
1. Fair return on capital invested in business.
2. Plough back of profits for growth and expansion.
3. Planning, directing and controlling the use of financial resources in order to ensure optimum efficiency of operations and establish cordial relations with financiers, suppliers, workers and members.
4. Co-ordination of operations of different departments of the business.
5. Control through appropriate measures to secure financial discipline in the use of available financial resources.
Role of Financial Management:
A business enterprise as a system has a dynamic flow of funds represented by the funds- flow cycle. Financial management is in charge of efficient planning and control of the cycle of flow of funds inflow and outflow of funds.
There are three responsibilities of the financial manager in connection with direction of the flow of funds as per plan:
1. The appropriate magnitude or volume of funds needed for efficient operations (capitalisation);
2. The wise allocation of financial resources to particular assets fixed and current;
3. The fund raising activities short-term and long-term liabilities and their composition.