MEANING OF FINANCIAL MANAGEMENT
Financial Management means planning,
organizing, directing and controlling the financial activities such as
procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
SCOPE/ELEMENTS
1. Investment
decisions includes investment in fixed assets (called as capital budgeting).
Investment in current assets is also a part of investment decisions called as
working capital decisions.
2. Financial
decisions - They relate to the raising of finance from various resources which
will depend upon decision on type of source, period of financing, cost of
financing and the returns thereby.
3. Dividend
decision - The finance manager has to take decision with regards to the net
profit distribution. Net profits are generally divided into two:
a.
Dividend for shareholders- Dividend
and the rate of it has to be decided.
b.
Retained profits- Amount of retained
profits has to be finalized which will depend upon expansion and
diversification plans of the enterprise.
OBJECTIVES OF FINANCIAL MANAGEMENT
The financial management is
generally concerned with procurement, allocation and control of financial
resources of a concern. The objectives can be-
1.
To ensure regular and adequate
supply of funds to the concern.
2.
To ensure adequate returns to the
shareholders which will depend upon the earning capacity, market price of the
share, expectations of the shareholders.
3.
To ensure optimum funds utilization.
Once the funds are procured, they should be utilized in maximum possible way at
least cost.
4.
To ensure safety on investment, i.e,
funds should be invested in safe ventures so that adequate rate of return can
be achieved.
5.
To plan a sound capital structure-There
should be sound and fair composition of capital so that a balance is maintained
between debt and equity capital.
FUNCTIONS
OF FINANCIAL MANAGEMENT
1.
Estimation
of capital requirements: A finance
manager has to make estimation with regards to capital requirements of the
company. This will depend upon expected costs and profits and future programs
and policies of a concern. Estimations have to be made in an adequate manner
which increases earning capacity of enterprise.
2.
Determination
of capital composition: Once the
estimation has been made, the capital structure have to be decided. This
involves short- term and long- term debt equity analysis. This will depend upon
the proportion of equity capital a company is possessing and additional funds
which have to be raised from outside parties.
3.
Choice of
sources of funds: For additional funds to be
procured, a company has many choices like-
a.
Issue of shares and debentures
b.
Loans to be taken from banks and
financial institutions
c.
Public deposits to be drawn like in
form of bonds.
Choice
of factor will depend on relative merits and demerits of each source and period
of financing.
4.
Investment
of funds: The finance manager has to decide
to allocate funds into profitable ventures so that there is safety on
investment and regular returns is possible.
5.
Disposal
of surplus: The net profits decisions have to
be made by the finance manager. This can be done in two ways:
a.
Dividend declaration - It includes
identifying the rate of dividends and other benefits like bonus.
b.
Retained profits - The volume has to
be decided which will depend upon expansional, innovational, diversification
plans of the company.
6.
Management
of cash: Finance manager has to make
decisions with regards to cash management. Cash is required for many purposes
like payment of wages and salaries, payment of electricity and water bills,
payment to creditors, meeting current liabilities, maintainance of enough
stock, purchase of raw materials, etc.
7.
Financial
controls: The finance manager has not only to
plan, procure and utilize the funds but he also has to exercise control over
finances. This can be done through many techniques like ratio analysis,
financial forecasting, cost and profit control, etc.
