Categories: Financial Management

Financial Control: Meaning, Definition, Objectives, Importance, and Steps

What does mean Financial Control? They have now become an essential part of any company’s finances. Financial control refers to the systems implemented in place to trace the directed resources of an organization with timely monitoring and measurement. So, what is the topic we are going to discuss; Financial Control – Meaning, Definition, Objectives, Importance, and Steps. Hence, it is very important to understand the meaning of financial control, its objectives and benefits, and the steps that must be taken if it is to be implemented correctly.

The Concept of Financial Control explained; their Meaning, Definition, Objectives, Importance, and finally Steps.

Exercising financial control is one of the important functions of a finance manager. It aims at planning, evaluation, and coordination of financial activities to achieve the objective of the firm.

Meaning and Definition of Financial Control:

Control of financial activities carried out in an organization to achieve the desired objectives. They also provide a set of rules and regulations about the financial management systems followed in an organization.

All organizations have financial controls to ensure effective financial management. Most organizations have financial controls to ensure that everyone is aware of procedures to be followed and to ensure that there is a better understanding of each one’s responsibility.

The concept of Financial Control: It is concerned with the policies and procedures framed by an organization for manag­ing, documenting, evaluating and reporting financial transactions of an organization. In other words, they indicate those tools and techniques adopted by a concern to control its various finan­cial matters.

Objectives of Financial Control:

The main objectives of financial control are discussed below:

Economic Use of Resources:

They aim to evaluate and coordinate financial activities. This helps prevent leakage of funds and thus desired returns on investments can be realized.

Preparation of Budget:

They help the management prepare the budget for a particu­lar department. Budgets provide a basis to compare actual performance with standard performance.

Maintenance of Adequate Capital:

It shows the way to maintain adequate capital, i.e. proper implementation of financial control verifies the adequacy of capital and hence the evils of over-capitalization or under-capitalization can be avoided.

Maximization of Profit:

They compel the management to procure funds from cheaper sources and to apply the said funds efficiently to lead to profit maximization.

Survival of Business:

A good financial control system ensures proper utilization of resources, which creates a sound and strong base for an organization’s existence.

Reduction in Cost of Capital:

They aim at raising capital from cheaper sources by maintaining a proper debt-equity mix. So, the overall cost of capital remains at its lowest.

Fair Dividend Payment:

Their system aims to distribute a fair and adequate dividend to the investors thereby creating satisfaction among the shareholders.

Strengthening Liquidity:

One of the important objectives of financial control is to maintain the liquidity of the firm by exercising proper control over different components of the working capital.

Checking that everything is running on the Right Lines:

Sometimes, it just checks that everything is running well and that the levels set and objectives proposed at the financial level regarding sales, earnings, surpluses, etc., are being met without any significant alterations.

The company thus becomes more secure and confident, its operating standards and decision-making processes being stronger.

Detecting Errors or Areas for Improvement:

An irregularity in the company finances may jeopardize the achievement of an organization’s general goals, causing it to lose ground to its competitors and in some cases compromising its very survival.

Therefore, it is important to detect irregularities quickly. Various areas and circuits may also be identified which while not afflicted by serious flaws or anomalies could be improved for the general good of the company.

Increase in Goodwill:

A sound financial control system increases the productivity and efficiency of a firm. This helps in increasing the prosperity of the firm in the short run and its goodwill in the long run.

Increasing Confidence of Suppliers of Funds:

Proper, they prepare the ground to cre­ate a sound financial base of a firm and thereby increases the confidence of investors and suppliers.

Financial Control: Meaning, Definition, Objectives, Importance, and Steps. Image credit from #Pixabay.

Importance of Financial Control:

Finance is important for any organization and financial management is the science that deals with man­aging of finance; however the objectives of financial management cannot be achieved without the proper controlling of finance.

The importance of financial control is discussed below:

Financial Discipline:

They ensure adequate financial discipline in an organization by efficient use of resources and by keeping adequate supervision on the inflow and outflow of resources.

Coordination of Activities:

They seek to achieve the objectives of an organization by coordinating the activities of different departments of an organization.

Ensuring Fair Return:

Proper financial control increases the earnings of the company, which ulti­mately increases the earnings per share.

Reduction in Wastages:

Adequate financial control ensures optimal utilization of resources leav­ing no room for wastages.

Creditworthiness:

They help maintain a proper balance between the debt collection period and the creditors’ payment period—thereby ensuring proper liquidity exists in a firm that increases the creditworthiness of the firm.

The Steps of Financial Control:

According to Henry Fayol,

“In an undertaking, control consists in verifying whether everything occurs in conformity with the plan adopted, the instructions issued and principles established”.

Thus, as per the definition of Fayol’s, the steps of financial control are:

Setting the Standard:

The first step in financial control is to set up the standard for every financial transaction of the concern. Standards should be set in respect of cost, revenue, and capital. Standard costs should determine in respect of goods and services produced by the concern taking into account every aspect of costs.

Revenue standard should fix taking into account the selling price of a similar product of the competitor, sales target of the year, etc. While determining capital structure, the various aspects like production level, returns on investment, cost of capital, etc., should take into account so that over-capitalization or under-capitalization can avoid.

However, while setting up the standard, the basic objective of a firm, i.e. wealth-maximization, should take into account.

Measurement of Actual Performance:

The next step in financial control is to measure the actual per­formance. For keeping records of actual performance financial statements should systematically prepare periodi­cally.

Comparing Actual Performance with Standard:

In the third step, actual performances compare with the pre-determined standard performance. The comparison should finish regularly.

Finding Out Reasons for Deviations:

If there are any deviations in the actual performance with the standard performance, the amount of variation or deviations should also ascertain along with the causes of the deviations. This should report to the appropriate authority for necessary action.

Taking Remedial Measures:

The last and the final step in financial control is to take appropriate steps so that the gaps between actual performance and standard performance can be bridged in the future, i.e. so that there is no deviation between actual and standard performance in the future. Read and share, Their Meaning, Definition, Objectives, Importance, and Steps in Hindi.

Nageshwar Das

Nageshwar Das, BBA graduation with Finance and Marketing specialization, and CEO, Web Developer, & Admin in www.ilearnlot.com.

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