Learn, Explain Financial Management: Definition, Features, and Scope!
The present age is the age of industrialization. Large industries are being established in every country. The Concept of Financial Management: Meaning of Financial Management, Definition of Financial Management, Features of Financial Management, and Scope of Financial Management! It is very necessary to arrange finance for building, plant and working capital, etc. for the established of these industries. How much of capital will be required, from what sources this much of finance will be collected and how will it be invested, is the matter of financial management? Also learned, Merchant Banking, Financial Management: Definition, Features, and Scope!
Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. It was a branch of economics till 1890, and as a separate discipline, it is of recent origin. Still, it has no unique body of knowledge of its own and draws heavily on economics for its theoretical concepts even today.
In general financial management is the effective & efficient utilization of financial resources. It means creating balance among financial planning, procurement of funds, profit administration & sources of funds. What is the Difference between Cost and Financial Accounting?
#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.
#Definitions of Financial Management:
- According to Solomon, “Financial management is concerned with the efficient use of an important economic resource, namely, capital funds.”
- According to J. L. Massie, “Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.”
- According to Weston & Brigham, “Financial management is an area of financial decision making harmonizing individual motives & enterprise goals.”
- According to Howard & Upton, “Financial management is the application of the planning & control functions of the finance function.”
- According to J. F. Bradley, “Financial management is the area of business management devoted to the judicious use of capital & careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals.”
#Main Features of Financial Management:
On the basis of the above definitions, the following are the main characteristics of the financial management:
- Analytical Thinking: Under financial management financial problems are analyzed and considered. Study of the trend of actual figures is made and ratio analysis is done.
- Continuous Process: previously financial management was required rarely but now the financial manager remains busy throughout the year.
- The basis of Managerial Decisions: All managerial decisions relating to finance are taken after considering the report prepared by the finance manager. The financial management is the base of managerial decisions.
- Maintaining Balance between Risk and Profitability: Larger the risk in the business larger is the expectation of profits. Financial management maintains the balance between the risk and profitability.
- Coordination between Process: There is always a coordination between various processed of the business.
- Centralized Nature: Financial management is of a centralized nature. Other activities can be decentralized but there is only one department for financial management.
#The Scope of Financial Management:
Financial management, at present, is not confined to raising and allocating funds. The study of financial institutions like stock exchange, capital, market, etc. is also emphasized because they influenced underwriting of securities & corporate promotion. Company finance was considered to be the major domain of financial management. The scope of this subject has widened to cover capital structure, dividend policies, profit planning and control, depreciation policies.
Some of the functional areas covered in financial management are discussed as such:
- Determining financial needs:- A finance manager is supposed to meet financial needs of the enterprise. For this purpose, he should determine financial needs of the concern. Funds are needed to meet promotional expenses, fixed and working capital needs. The requirement of fixed assets is related to types of industry. A manufacturing concern will require more investments in fixed assets than a trading concern. The working capital needs depend upon the scale of operations. Larger the scale of operations, the higher will be the needs for working capital. A wrong assessment of financial needs may jeopardize the survival of a concern.
- Choosing the sources of funds:- A number of sources may be available for raising funds. A concern may be resort to the issue of share capital and debentures. Financial institutions may be requested to provide long-term funds. The working capital needs may be met by getting cash credit or overdraft facilities from commercial bands. A finance manager has to be very careful & cautions in approaching different sources.
- Financial analysis and interpretation:- The analysis & interpretation of financial statements is an important task of a finance manager. He is expected to know about the profitability, liquidity position, short-term and long-term financial position of the concern. For this purpose, a number of ratios have to be calculated. The interpretation of various ratios is also essential to reach certain conclusions Financial analysis and interpretation has become an important area of financial management.
- Cost-volume-profit analysis:- This is popularly known as “CVP relationship”. For this purpose, fixed costs, variable costs, and semi-variable costs have to be analyzed. Fixed costs are more or less constant for varying sales volumes. Variable costs vary according to the sales volume. Semi-variable costs are either fixed or variable in the short-term. The financial manager has to ensure that the income of the firm will cover its variable costs, for there is no point in being in business if this is not accomplished. Moreover, a firm will have to generate an adequate income to cover its fixed costs as well. The financial manager has to find out the break-even point that is, the point at which the total costs are matched by total sales or total revenue.
- Working capital management:- Working capital refers to that part of firm’s capital which is required for financings short-term or current assets such as cash, receivables, and inventories. It is essential to maintain the proper level of these assets. Finance manager is required to determine the quantum of such assets.
- Dividend policy:- Dividend is the reward of the shareholders for investments made by them in the shares of the company. The investors are interested in earning the maximum return on their investments whereas management wants to retain profits for future financing. These contradictory aims will have to be reconciled in the interests of shareholders and the company. Dividend policy is an important area of financial management because the interest of the shareholders and the needs of the company are directly related to it.
- Capital budgeting:- Capital budgeting is the process of making investment decisions in capital expenditures. It is an expenditure the benefits of which are expected to be received over a period of time exceeding one year. It is expenditure for acquiring or improving the fixed assets, the benefits of which are expected to be received over a number of years in future. Capital budgeting decisions are vital to any organization. Any unsound investment decision may prove to be fatal for the very existence of the concern.