Financial Management is a subject of study under finances and accounting and deals with the thorough management and utilisation of the finances of a company or business. It is a business function concerned with cash flow, expenses, profit management, and asset utilisation.
The scope of financial management revolves around three major decisions. These are financing decisions, investment, and dividend decisions. Thus, financial management offers a series of varied job profiles in risk management, investment, credit management, accounting, debt management, financial forecasting, asset management, etc.
The Major objectives of financial management are always centered around profit and wealth maximization. Besides, it focuses on increasing the worth of shares and running a successful business.
Financial Management is a significant feat in the study of finances. Strategically managed finances help boost the capital value of a company and facilitate greater monetary gains in the long run. We will understand all these key points of financial management in detail.
What is Financial Management?
Financial management is the strategic management of the finances of a company. It involves all actions of finance management, such as planning, controlling, budgeting, and reporting all the financial data. This data helps in the asset management of the company and is useful in making profitable investments.
Financial management merges accounting and management to keep track of finances for the business owners, shareholders and clients. It is a comprehensive business function that is associated with capital, expenses, credit, and cash flow.
Activities such as cash flow management, financing, accounting, investing, credit management, forecasting, budgeting, etc. are a part of financial management. At all these levels of financial management, there is a scope for aspirants to carve out a suitable career for them;)
Financial Management: Key Takeaways
- Financial Management incorporates the total management and utilisation of the finances of a company or business. The most important objective of financial management is to successfully manage the finances to make maximum monetary gains.
- It is a significant mark in the matter of a successful business and offers a range of career opportunities as investors, forecasters, budgeters, risk managers, financiers, accountants, etc.
- Financial Management is a skillful and strategic process of making profitable money-minded decisions.
Nature of Financial Management
Management of finances is a tough job. Financial management offers a crucially comprehensive way to do that. Let us understand some of its vital characteristics in detail.
- Estimation of Capital Requirement
To minimize the cost of capital, it is essential to maintain a balance between equity and debt. Financial management techniques help in that. Besides, they facilitate in figuring out the right capital requirement for running the day-to-day and long-term operations of the company.
- Valuation of a Business or Company
The prime motive of financial management is to increase the financial value of the company. This is what all financial decisions lead to. Thus, financial management is characterized as the process of determining the value or worth of a company.
- Wealth Management
A major characteristic of financial management is wealth management i.e.; cash flow. A financial manager keeps an eye on how money comes in and flows out to make profitable decisions.
- Evaluation of Risk and Returns
An important concern in financial decisions revolves around the relationship between risks and returns on investments. Financial managers work to determine how much risk a company can face and what returns such a risk will bring for the company.
- Fund Source
The choice of sources of funds is an important financial decision from the purview of financial management. Financial managers analyze, assess, and find the least risky and most suitable funding resources for the company. These can be bonds, shares, debentures, etc.
- Investment
Making profitable investment decisions is a crucial task for financial managers. This involves the proper assessment of risk and returns.
- Company Stocks Improvement
In the end, financial management is characterized by the management of finances in such a way that it leads to an improvement in the stocks of the company. This is done by cutting costs and maximizing profits to increase the value of shareholders.
What is the scope of Financial Management?
Choosing a career can be a difficult task. However, if finances fascinate you then financial management has a range of career opportunities to offer. These job opportunities are time-tested, reliable, and a need-of-the-hour in the growing entrepreneurial world.
From budgeting, funding, accounting, and reporting to investing, there are several roles that financial managers play to aid in the financial growth of a company. Some of the most fascinating career opportunities under the scope of financial management include:
- Risk Manager
- Investor and Investment Advisor
- Credit Manager and Credit Risk Analyst
- Accountant
- Financial Analyst
- Financial Advisor
- Forecasting
- Wealth Management and Profit Management
- Investment Banker and NBFC
- Corporate Finance
What are the objectives of Financial Management?
Financial Management is concerned with profit maximization and business survivability. We have already dealt with the scope and nature of financial management. Let us now go through some of the major objectives of Financial Management.
- Profit Maximization
A big goal of financial management is to make as much monetary gains as possible. Thus, financial managers work in all ways to manage cash flow, and risk, and make investments that maximize the return.
- Wealth Maximization
Wealth maximization is a little different from profit maximization. It focuses on the maximization of the worth of shares of the shareholders. This is because shareholders are considered the real owners of a company or business. A finance manager takes action to increase the value of shareholders.
- Maintenance of Liquidity
Another key objective of financial management is the maintenance of liquidity. A finance manager keeps an eye on the inflow and outflow of money and maintains a healthy cash flow. This is crucial to have minimum liquidity as backup for continuing the operations of the company in case of a pitfall.
- Organizational Effectiveness
Financial management is beneficial in maintaining the organizational effectiveness of the company at all levels and departments.
- Proper estimation, mobilization, and utilization of financial resources
Financial management aids in the estimation of the running costs required to keep the company operating in good health and meet its goals. Moreover, financial managers mobilize the finances adequately so as to utilize them in the most profitable ways.
They are responsible for managing the different sources of funds such as shares, debentures, loans, etc., and for managing their outflow as investments, credit payments, share profits, etc.
Besides, financial management facilitates credit payments to creditors timely payment of dues, and fulfillment of other financial responsibilities.
- Decreasing the cost of capital expenditures
Another way of making a profit other than generating more monetary gains is to cut down on the total expenditure of the company. This can be done by boosting greater efficiency in the working of the company, investing in efficient technology, proper analysis of risks, and much more.
- Development of financial scenarios
Financial management incorporates financial forecasting as well. The development of favorable financial scenarios, proper analysis of market trends, and adequate investments aid in drawing greater monetary gains.
- Measure your company’s success
Lastly, the measurement of the success of the company is a major objective of financial management. It helps in keeping track of the financial data of the company including its assets, shares, investments, debentures, cash flow, etc. This facilitates the analysis of the current performance of the company, and its comparison to its past performances and aids in coming up with more productive ideas.
Financial management, in all senses, works in different ways covering every financial aspect to boost the success of a company, its longer survivability in the market, and greater profitability.
Significance and Importance of Financial Management
Financial Management is crucial in the business world. It combines finance, marketing, strategic management, and sustainable growth. Though it involves dealing with numbers, for the most part, financial management is more than that. It is the skill of steering through a tempest of business while filling buckets of fish for oneself on the way.
A financial manager seeks optimal sources of company funds and allocates those funds to meet costs such as shares, mortgages, salaries, raw materials, etc. for company operations. They manage cash flow, assets, and profit to make investments for further financial gains.
Financial management is important to achieve the organizational goals of a company, maximizing the value of shareholders, and improving the efficiency and profitability of a business. It is vital to meet business objectives and safeguard the company’s finances.
There are several aspects of financial management. These include budgeting and financial planning, financial reporting and analysis, and financial decision-making. All these focus on the financial growth of the company, its long-term survivability in the business world, and profit maximization.
Financial Management is significant for a company to ensure the optimal use of its finances, achieve its financial goals, fulfill its financial responsibilities, and make monetary gains along the way.
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Also Read:
- Financial Modeling Course
- Scope of a Career in Financial Management
- Understanding Financial Risk Plus Tools to Control It
Financial Management FAQs
Q1. What are the 4 types of financial management? Explain.
Ans: The four types or elements of financial management include the following:
1. Planning: Planning involves the strategic preparation of the aspects of financial management.
2. Controlling: Controlling is concerned with the control of finances, all assets, liabilities, financial data, etc.
3. Organising and Directing: This function involves the organisation of the financial data systematically and then the organisational direction for the execution of profitable business.
4. Decision Making: This is the last function in financial management in which financiers make the final decisions.
Q2. What is a financial management role?
Ans: Financial management offers a wide variety of roles. Financial managers organise, plan, manage, control, and report the finances of the company. They analyse financial trends in markets and make profitable investment suggestions based on forecasts. They prepare accounts and are responsible for advising ways to maximize profits.
Q3. What is the main goal of financial management?
Ans: The main goal of financial management is wealth or profit maximization. Every company or business employs financiers and financial managers in different roles to attain maximum monetary gains. Besides, financial management works for the overall survivability of a business.
Q4. Why is financial management important?
Ans: Financial management is associated with adequate procurement and management of the finances of a company. Along with this, financial management involves risk management and financial forecasts as well. This way, financial management is important in every sense to a business and its shareholders.
