Scope of Financial Management free essay sample

Financial Management can be defined as:The management of the finances of a business / organisation in order to achieve financial objectives. Taking a commercial business as the most common organisational structure, the key objectives of financial management would be tocreate wealth for the business ,generate cash, andprovide an adequate return on investment bearing in mind the risks that the business is taking and the resources invested. There are three key elements to the process of financial management: Financial Planning Financial Control Financial Decision-making Meaning and Defination Meaning of Financial Management Financial Management is that specialised function of general management which is related to the procurement of finance and its effective utilisation for the achievement of common goal of the organisation. It includes each and every aspect of financial activity in the business. Financial Management has been defined differently by different scholars. A few of the definitions are being reproduced below:- â€Å"Financial Management is an area of financial decision making harmonizing individual motives and enterprise goals. We will write a custom essay sample on Scope of Financial Management or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page †- Weston and Brigam. Financial Management is the application of the planning and control functions to the finance function. †- Howard and Upton. â€Å"Financial Management is the operational activity of a business that is responsible for obtaining and effectively, utilizing the funds necessary for efficient operations. †- Joseph and Massie. From the above definitions, it is clear that financial management is that specialised activity which is responsible for obtaining and affectively utilizing the funds for the efficient functioning of the business and, therefor, it includes financial planning, financial administration and financial control. According to me, â€Å" Financial Management is a system in which rotate planning , control and decision making. †-chudasama sulochanaba Objectives of Finance Function For optimum financial decisions, the objectives of financial management shall be clearly defined. They should be so laid down that they contribute directly towards the achievement of overall business objectives. Objectives provide a normative framework within which a firm is to take decisions. Financing is the functional area of objective of the business and contribute directly towards it. The main objectives of a business are survival and growth. In order to survive ups and downs in the business, the business must earn sufficient profits and it should also maintain proper relations with shareholders, customers, suppliers and other social groups. The financial management of an organisation must seek to achieve the following objectives: †¢To ensure adequate and regular supply of funds. †¢To provide a fair rate of return to the suppliers of capital viz. shareholders. †¢To ensure effective utilization of funds by maintaining proper balance between profitability, liquidity and safety. to generate and build up sufficient surplus for expansion and growth through ploughing back of profits. †¢To minimize cost of capital by developing a sound capital between various securities issued by the company. †¢To coordinate the activities of the finance department with the activities of other departments in the organisation. Scope of Functions of Financial Manag ement The finance department of an enterprise performs several functions in order to achieve the above objectives. The scope of finance function is very wide. It consists of the following activities: 1. Estimating the Requirement of Funds :- The finance department must estimate the capital requirements of the firm accurately for long term and short term needs. In estimating the capital requirements of the business, the finance department must take help of the budgets of various activities of the business e. g. sales budget, production budget, expenses budget etc. prepared by the concerned departments. In the initial stage, the estimate is done by promoters but in a growing concern, it is done by the finance department. Unless the financial forecast is correct, business is likely to run into difficulties due to excess or shortage of funds. Correct estimates ensure the availability of funds as and when they are needed. In estimating the requirement of funds, nature and size of the business, modernization and expansion plan should be given due consideration. 2. Determining the Capital Structure :- By capital structure we mean the kind and proportion of different securities for raising the required funds. Once the total requirement of funds is etermined, a decision regarding the type of securities to be issued and the relative proportion between them is to be taken. The finance department must determine the proper mix of debt and equity. It should also decide the ratio between long term and short term debts. In determining these ratios, cost of raising finance from different sources, period for which funds are required and several other factors should be considered. A proper balance between risk and re turns should be maintained. Choice of Sources of Finance:- A company can raise funds from different sources e. g. hareholders, debenture holders, banks, financial institutions, public deposits etc. Before raising the funds, it has to decide the source from which the funds are to be raised. The choice of the source of finance should be made very carefully by taking a number of factors into account such as cost of raising funds, conditions attached, charge on assets, burden of fixed charges, dilution of ownership and control etc. For example, if the company does not want to dilute the ownership, it will depend on any source of finance other than investment in shares. 4. Investment of Funds:- The funds raised from different sources should be prudently invested in various assets -short term as well as long term to optimize the return on investment. In taking decisions for the investment of long term funds, a careful assessment of various alternatives should be made through capital budgeting, opportunity cost analysis and many other techniques used to evaluate the investment proposals. A part of the long term funds should be invested in working capital of the company. While taking decision for the investment of funds in long term assets, management should be guided by three basic principles, viz. afety, profitability and liquidity. In taking decisions for the investment of funds in working capital, the finance manager must seek cooperation of marketing and production departments in estimating the funds which are to be involved in carrying of inventories in finished product and credit policy of the marketing department and in raw material and factory supplies of the production department. 5. Management of Cash:- It is the prime responsibility of the finance manager to see that an adequate supply of cash is available at proper time for the smooth running of the business. Cash is needed to purchase raw materials, pay off creditors, to pay to workers and to meet the day to day expenses of the business. Availability of cash is necessary to maintain liquidity and credit- worthiness of the business. Excess cash must be avoided as it costs money. It there is any cash in excess, it should be invested in near cash assets such as investments etc. which may be converted into cash within no time. A cash flow statement should be prepared by the department to know the correct need of cash is essential to achieve the goal of profitability and liquidity. The finance manager should decide in advance how much cash he should retain to meet current obligations of the company. 6. Disposal of Surplus:- One of the prime function of the finance department is to allocate the surplus. After paying all taxes, the available surplus of the business can be allocated for three purposes -(a) for paying dividend to the shareholders as a return on their investment, (b) for distributing bonus to workmen and companys contribution to other profit sharing plans, and (c) for ploughing back of profits for the expansion of business. As far as the second alternative is concerned, the amount to be paid to workers is generally fixed either by statute or by agreement and therefore, there is no problem in allocating surplus for this purpose. But a considerable, attention is to be paid in so far as first and third alternatives are concerned i. e. , how much to be paid to shareholders as dividend and how much to be retained in the business. For this purpose factors like the trend of the earning of the company, trend of the market price of its shares; the requirement of funds for the purpose of expansion and future prospects should be considered. . Financial Controls:- The financial manager is under an obligation to check the financial performance of the funds invested in the business. There are a number of techniques to evaluate the performance viz. Return on Investment (ROI), budgetary control, cost control, internal audit, ratio analysis and break-even point analysis. The financial manager must lay emphasis on financ ial planning as well. Importance of financian management Importance of finance cannot be over-emphasised. It is, indeed, the key to successful business operations. Without proper administration of finance, no business enterprise can reach its full potentials for growth and success. Money is a universal lubricant which keeps the enterprise dynamic-develops product, keeps men and machines at work, encourages management to make progress and creates values. The importance of financial administration can be discussed under the following heads (i) success of Promotion Depends on Financial Administration:- One of the most important reasons of failures of business promotions is a defective financial plan. If the plan adopted fails to provide sufficient capital to meet the requirement of fixed and fluctuating capital an particularly, the latter, or it fails to assume the obligations by the corporations without establishing earning power, the business cannot be carried on successfully. Hence sound financial plan is very necessary for the success of business enterprise. (ii) Smooth Running of an Enterprise:- Sound Financial planning is necessary for the smooth running of an enterprise. Money is to an enterprise, what oil is to an engine. As, Finance is required at each stage f an enterprise, i. e. promotion, incorporation, development, expansion and administration of day-to-day working etc. , proper administration of finance is very necessary. Proper financial administration means the study, analysis and evaluation of all financial problems to be faced by the management and to take proper decision with reference to the present circumstances in regard to the procurement and utilisation of funds. (iii) Financial Administration Co-ordinates Various Functional Activities:- Financial administration provides complete co-ordination between various functional areas such as marketing, production etc. o achieve the organisational goals. If financial management is defective, the efficiency of all other departments can, in no way, be maintained. For example, it is very necessary for the finance-department to provide finance for the purchase of raw materials and meting the other day-to-day expenses for the smooth running of the production unit. If financial department fails in its obligations, the Production and the sales will suffer and consequently, the income of the concern and the rate of profit on investment will also suffer. Thus Financial administration occupies a central place in the business organisation which controls and co-ordinates all other activities in the concern. (iv) Focal Point of Decision Making:- Almost, every decision in the business is take in the light of its profitability. Financial administration provides scientific analysis of all facts and figures through various financial tools, such as different financial statements, budgets etc. , which help in evaluating the profitability of the plan in the given circumstances, so that a proper decision can be taken to minimise the risk involved in the plan. v) Determinant of Business Success:- It has been recognised, even in India that the financial manger splay a very important role in the success of business organisation by advising the top management the solutions of the various financial problems as experts. They present important facts and figures regarding financial position an the performance of various functions of the company in a giv en period before the top management in such a way so as to make it easier for the top management to evaluate the progress of the company to amend suitably the principles and policies of the company. The financial manges assist the top management in its decision making process by suggesting the best possible alternative out of the various alternatives of the problem available. Hence, financial management helps the management at different level in taking financial decisions. (vi) Measure of Performance:- The performance of the firm can be measured by its financial results, i. e, by its size of earnings Riskiness and profitability are two major factors which jointly determine the value of the concern. Financial decisions which increase risks will decrease the value of the firm and on the to the hand, financial decisions which increase the profitability will increase value of the firm. Risk an profitability are two essential ingredients of a business concern. Conclusion:- In short Financial Management is very important for any business. If we want to fully use our money we have to implement financial management in our business . e can see the importance of financial management from success of promotion depends on financial administration, smooth running of an enterprise, focal point of decision making, financial administration co-ordinates various functional activities, determinant of business success, measure of performance.