Financial Management Definitions, Scope, Objectives and Importance

Financial management is the method of managing an organization’s all types of finances. Like it can be successful for business growth. It involves strategic planning, organizing, directing, and controlling financial undertakings in an organization or an institute.

This includes applying management principles to the financial assets of an organization. While also playing an important role in fiscal management.

Making decisions and regulating the organization’s money is one of the most important roles of financial management. Financial managers use many techniques like financial forecasting, ratio analysis, and profit-and-loss analysis. To prepare for potential hazards and plan financial activities and resources.

Good financial management is essential for every business’s survival. Basically, it helps the business to ensure that the organization’s financial resources are used properly.

So by managing financial resources, organizations. It can increase profitability, reduce costs, and mitigate risks.

Moreover, financial management ensures that a company is in conformity with legislation. And it can deliver accurate financial reports to stakeholders. Such as investors, creditors, and management.

Definitions

Solomon: Financial management is concerned with the efficient use of capital funds.

S.C. Kuchal says that Financial management is concerned with the acquisition and deployment of short- and long-term financial resources to achieve the objectives of the enterprise.

Wikipedia: Financial management is concerned with profitability, expenses, cash and credit, so that the “organization may have the means to carry out its objective as satisfactorily as possible.”

Lawrence Gilman and Chad J. Zutter says that Financial management involves the acquisition, financing, and management of assets to maximize shareholder wealth.

Clive Marsh says that Financial management is the process of planning, organizing, directing, and controlling the financial activities of an organization.

James Van Horne and John Wachowicz tell that Financial management is concerned with the acquisition, financing, and management of assets to maximize shareholder wealth.

Scope of Financial Management

Financial management involves several key decisions, including investment decisions, working capital decisions, financing decisions, and dividend decisions. It also ensures liquidity and profit maximization.

Working capital management is an important part of financial management. It involves tracking various ratios. Such as the working capital ratio, collection ratio, and inventory ratio.

The scope of financial management is broad and includes projecting cash flow needs, allocating funds to grow or add new products or services, and dividing net profits into different categories.

Decision-making

Financial managers must carefully consider potential investment opportunities to determine. It would produce the highest profits while posing the least risk.

For example, if a business is thinking about investing in a new product line. So financial management must compare the potential return on investment against the risks associated.

Working capital management

This involves managing the company’s cash flow to ensure that it has enough funds to cover its day-to-day operations. For example, if a business relies on seasonal sales. Then it may need to take out short-term loans to cover its expenses during down/slow periods.

Financing decision-making

Financial managers need to decide how to fund the company’s operations and investments. Whether through debt financing or equity financing. For example, a company may decide to take out a loan to fund a new project or issue shares of stock to raise capital.

Dividend decision-making

Financial managers need to determine how much of the company’s profits should be paid out to shareholders as dividends. For example, if a company is doing well and generating a significant profit. It may decide to increase its dividend payments to attract more investors.

Liquidity

Financial managers need to ensure that the company has enough cash on hand to cover its short-term debts. This involves managing the company’s current assets and liabilities. Such as accounts receivable & accounts payable.

Profit management

Financial managers need to ensure that the company is generating profit. And its resources are being used efficiently. This involves examining financial statements, identifying areas where costs can be reduced, and looking for opportunities to increase revenue.

According to the above statement, we can say that financial management includes investment decisions, working capital management, financing decisions, dividend decisions, liquidity management, and profit management. So by effectively managing these areas. Financial managers can help their companies achieve financial success and sustainable growth.

Nature of Financial Management

Financial management involves estimating capital requirements, deciding on capital structure, selecting sources of funds, and raising shareholders’ value.

Capital structure refers to the combination of debt and equity by a company to finance its operations and growth.

Companies prefer to fit into a hierarchy of financing sources. Budget preparation is also an important aspect of financial management.

The Primary Objectives of Financial Management

1. Optimizing the financial benefits of an investment,
2. Reducing the cost of finance
3. Ensuring sufficient availability of funds,
4. Maximizing profit margins with better cost controls,
5. Implementing controls on sales expenses
6. Administrative costs

In short, we can say that the basic aim of financial management is to create financial discipline and improve the financial well-being of an organization.

The primary objectives of financial management involve optimizing the financial benefits of investments, reducing the cost of finance, ensuring enough availability of funds, maximizing profit margins through better cost controls, and implementing controls on sales expenses and administrative costs.

Optimizing the financial benefits of an investment involves analyzing potential investments and determining which ones offer the best return on investment.

Reducing the cost of finance involves finding ways to reduce interest rates, minimize fees, and negotiate favourable terms with lenders. Ensuring sufficient availability of funds involves maintaining adequate cash reserves and establishing lines of credit to cover unexpected expenses.

Maximizing profit margins with better cost controls involves monitoring expenses and implementing strategies to reduce unnecessary costs.

Finally, implementing controls on sales expenses and administrative costs involves developing effective budgeting and expense management systems to minimize waste.

When setting goals related to financial management, it is important to make them SMART: Specific, Measurable, Achievable, Relevant, and Time-bound. A clear and measurable aim, for example, could be to boost sales by 10% over the following six months by executing targeted marketing initiatives.

An achievable and relevant goal could be to reduce overhead costs by 5% within the next year by renegotiating contracts with suppliers and reducing energy usage.

Finally, a time-bound goal could be to establish a line of credit with a bank within the next three months to ensure sufficient availability of funds in case of emergencies.

In creating an action plan, it is important to identify specific actions, assign responsibility, and establish deadlines. For example, to increase sales, an action plan could involve meeting with the top 20% of customers and devising strategies to generate more sales per customer. So the customer sales manager is responsible for completing the plan by a specific date. To create a products and service brochure, the marketing manager could be responsible for completing the plan by a specific date.