Financial management includes the adoption of general management principles for financial implementation. The following may be said as the related aspects of financial management raising of funds, using of these funds profitably, planning of future activities, controlling of present implementations and future developments with the help of financial accounting, cost accounting, budgeting and statistics.
It acts as guidance where more opportunities for investment is available. Financial management is used as a tool for allotment of resources to various projects depending on their importance and repayment capacity.
James Van Morne defines Financial Management as follows:
“Planning is an inextricable dimension of financial management. The term financial management connotes that funds flows are directed according to some plan”. Financial management can be said a good guide for allotment of future resources of an organisation.
Preparing and implementation of some plans can be said as financial management. In other words, a collection of funds and their effective utilisation for the efficient running of an organization is called financial management. Financial management has an influence on all activities of an organisation. Hence it can be said as an important one.
Its main responsibility is to complete the finance function successfully. It also has relations with other business functions. All business decisions also have financial implications. According to Raymond Chambers, Management of finance function is the financial management’.
However, financial management shall not be considered as the profit extracting device. If finance is properly utilised through plans, they lead to profits. Besides, without profits, there won’t be finance generation. All these are facts. But this is not complete.
The implication of financial management is not only attaining efficiency and getting profits but also maximising the value of the firm. It facilitates to protect the interests of various classes of people related to the firm.
Hence, managing a firm for profit maximisation is not the meaning for financial management. Financial management is applicable to all kinds of organisations. According to Raymond Chambers, ‘the word financial management is applicable to all kinds of firms irrespective of their objectives’.
Aims of Financial Management:
The aims of financial management should be useful to the firm’s proprietors, managers, employees and consumers. For this purpose, the only way is the maximisation of firm’s value.
The following aspects have the place in maximising firm’s value:
1. A rise in profits:
If the firm wants to maximise its value, it should’ increase its profits and revenues. For this purpose increase of sales volume or other activities can be taken up. It is the general feature of any firm to increase profits by proper utilisation of all opportunities and plans.
Theoretically, the firm gets maximum profits if it is under equilibrium. At that stage the average cost is minimal and the marginal cost and the marginal revenues are equal. Here, we can’t say the sales because there must be the suitable market for the increased sales. Further, the above costs must also be controlled.
2. Reduction in cost:
Capital and equity funds are utilised for production. So all types of steps should be taken to reduce firm’s cost of capital.
3. Sources of funds:
It should be decided by keeping in view the value of the firm to collect funds through issue of shares or debentures.
4. Reduce risks:
There won’t be profits without risk. But for this reason, if more risk is taken, it may become a danger to the existence of the firm. Hence risk should be reduced to a minimum level.
5. Long run value:
It should be the feature of financial management to increase the long-run value of the firm. To earn more profits in short time, some firms may do the activities like releasing of low-quality goods, neglecting the interests of consumers and employees.
These trials may give good results in the short run. But for increasing the value of the firm in the long run, avoiding; such activities are more essential.
Scope and functions of financial management:
The scope of financial management includes three groups. First – relating to finance and cash, second – rising of the fund and their administration, third – along with the activities of raising funds, these are part and parcel of total management, Isra Salomon felt that in view of funds utilisation the third group has the wider scope.
It can be said that all activities done by a finance officer are under the purview of financial management. But the activities of these officers change from firm to firm, it becomes difficult to say the scope of finance. Financial management plays two main roles, one – participating in funds utilisation and controlling productivity, two – Identifying the requirements of funds and selecting the sources for those funds. Liquidity, profitability and management are the functions of financial management. Let us know very briefly about them.
Liquidity can be ascertained through the three important considerations.
i) Forecasting of cash flow:
Cash inflows and outflows should be equalized for the purpose of liquidity.
ii) Rising of funds:
Finance manager should try to identify the requirements and increase of funds.
iii) Managing the flow of internal funds:
Liquidity at higher degree can be maintained by keeping accounts in many banks. Then there will be no need to depend on external loans.
While ascertaining the profitability the following aspects should be taken into consideration:
1) Cost of control:
For the purpose of controlling costs, various activities of the firm should be analyzed through proper cost accounting system,
Pricing policy has great importance in deciding sales level in company’s marketing. Pricing policy should be evolved in such a way that the image of the firm should not be affected.
iii) Forecasting of future profits:
Often estimated profits should be ascertained and assessed to strengthen the firm and to ascertain the profit levels.
iv) Measuring the cost of capital:
Each fund source has different cost of capital. As the profit of the firm is directly related to cost of capital, each cost of capital should be measured.
It is the duty of the financial manager to keep the sources of the assets in maintaining the business. Asset management plays an important role in financial management. Besides, the financial manager should see that the required sources are available for smooth running of the firm without any interruptions.
A business may fail without financial failures. Financial failures also lead to business failure. Because of this peculiar condition the responsibility of financial management increased. It can be divided into the management of long run funds and short run funds.
Long run management of funds relates to the development and extensive plans. Short run management of funds relates to the total business cycle activities. It is also the responsibility of financial management to coordinate different activities in the business. Thus, for the success of any firm or organization financial management is said to be a must.