Having a sound and sustainable financial condition is imperative to start a business. Finances create the framework of an economic establishment. An amount of money and effective financial planning is necessary to ensure a business's longevity. If a company has maintained solid financial management throughout its tenure, it is beneficial even at the time of dissolution.
Every company has a sum of funds to manage and specific procedures to balance the same. Thus, a company must also have a system to examine the business's financial reports in its runtime. In addition, many online training courses provide a clear understanding of financial management. Nevertheless, to put it simply, a company that manages its finances expertly sees growth and development. In comparison, a company with poor financial management indulges in questionable activities and suffers losses.
In this article, we will learn more about what is financial management, its scope, objectives, and importance for any business.
What is Financial Management
Financial Experts Guthman and Dougal define financial management as "Financial Management is the procedure concerned with planning, raising, controlling, and administering the funds used in the business."
The most important aspect of the term financial management is to fabricate a system that increases the profitability and the scale of the business organization and achieves short-term goals. Generally, it is the responsibility of the Chief Financial Officer or the Vice President of finance to frame specific data that indicates how and where to invest and generate the company's funds. To define financial management is to understand that it consists of liquidity, profitability, and cash revenue procedures.
In other words, financial management is a business solution that invests a company's financial capital to generate a higher return on investment (ROI). The role of experts working under the financial management department is to map out the transactions of an organization, make plans to control it, and create procedures to maximize scalability. These professionals also monitor the original investment by the founder, debt financing, venture funding, public issue, or other available financial resources. With the help of all this data, financial management professionals of a business provide real-time financial fluidity. At the same time, they also keep track of day-to-day transactions for a smooth period-end closing of books.
Scope of Financial Management
After understanding what financial management is, we'll now understand the different scope of financial management.
1. Capital Budgeting
The company's financial management executives are responsible for making predictions regarding all the business transactions and costs of operations. Based on this estimate, they generate the probable estimate of fixed capital and working capital required by the company in a particular period. Moreover, the financial professionals also have to make projections for any additional funds the company may receive from investors. Accordingly, they create a budget for the allocation of those funds.
2. Capital Structure
After projecting the financial budget, the financial management experts must formulate a plan for structuring this capital. First, they have to control the transactions and divide the available money into different parts, such as the owner's risk capital, borrowed capital, and short-term and long-term debt-equity ratio. Subsequently, the executives also have to consider various financial components like the cost of assembling the capital from investors and other external sources and the amount of time for which this capital will be utilized.
3. Financial Decision
Financial decisions include all sorts of choices regarding sources to generate funds, investment decisions, and cash flow management. The business can raise funds from different sources like investors, shareholders, banks, public deposits, and other financial lenders. The financial management department scrutinizes all these sources and chooses the source with maximum profit and minimum liability. In addition to generating funds, financial professionals also make plans for wise investment of these funds to improve the company's return on investment. They carry out capital budgeting through opportunity cost analysis and make investments while ensuring the business's safety, liquidity, and profitability.
4. Working Capital Management
Working capital management is an important element of financial management. It requires three primary tasks to maintain a solid financial position for the company:
First, financial executives record the company's assets and liabilities to ascertain the cash flow. This cash flow is used to cover short-term operational costs and short-term liabilities.
The finance department scans different ratios to manage the working capital. These include the working capital ratio, the collection ratio, and the inventory ratio. The results obtained after the study help professionals carry out smooth operations in the business.
Proper working capital management enables cash flow and revenue maintenance, allowing the organization to utilize its resources in profitable directions.
5. Dividend Decision
A company has two options: pay dividends to shareholders or hold on to the profits. Financial management meaning focuses on the decision between these two options that will support the company's growth. The main aim of a financial manager is to optimize the shareholder's wealth as it works in the company's goodwill. The dividend decision is the essential scope of financial management. Dividends are payouts to shareholders and are calculated using Earning Per Share. The distributed amount is directly proportional to the shareholder's favor and the company's right set of investment conditions.
6. Profit management
The financial management has to take steps to distribute the company's revenues and profits appropriately. The company has various debatable requirements, and the funds must be assembled according to priorities and returns. Sometimes, companies keep aside some funds as a reserve. This is taken from the business's earnings. In addition, some amount of funds is either pulled out or reinvested. The financial department's responsibility is to draw out the strengths and shortcomings of different sources for using the company's profits and earnings before coming to a conclusion.
Objectives of Financial Management
1. Assessing Capital Needs
Financial professionals' duties entail them to get a measure of certain attributes. These attributes include the cost of current fixed assets, the cost of promotions, the requirement, and measure of buffer capital, long-term expenses, and human resource operations. As a result, organizations that constantly develop in the financial domain have predefined their short-term and long-term finances and conduct their business according to these estimates.
2. Capital Structure
Suppose a company has a solid capital structure. In that case, it means that there is sustainable groundwork for financial decision-making, like projections of debt-equity ratio in the short-term and long-term.
3. Business Survival
According to the exceptionally renowned scientist Charles Darwin, the phrase 'survival of the fittest' warrants adapting to one's surroundings to persist through life. The same goes for business decisions. A company endures and abides by market conditions with the help of secure financial management.
4. Balanced Structure
Maintaining a balance is crucial to keep running smoothly under any circumstances. When pertaining to business, the role of financial executives is to ensure this structure by fabricating a plausible capital strategy. This is possible after considering all capital sources and assessing the business's liquidity, current economic conditions, and financial stability.
5. Effective Financial Policies
Apart from making sound financial decisions, it is also essential for the funds' manager to create profitable financial policies that administer cash flow and lending and borrowing procedures.
6. Resource Optimization
The best financial management executives have the skill and efficiency to use all obtainable financial resources and maximize their ratio. This results in little expense and an exponential rise in cash flow to produce a greater return on investment.
7. Profit Maximization
Profit maximization is probably one of financial management's most important and tricky attributes. The company has to frame means to generate profits in the short-term and long-term. As a result, a financial manager has to focus more on profit optimization and ensure that all business operations' actions are sustainable and correct.
8. Proper Mobilization
Mobilizing profits is as critical as maximizing them. One does not simply spend all their earnings without creating separate criteria for savings. In a business, the financial management department has to assess and project the allocation and application of available funds. This is achieved through investment in shares, new products, or acquiring a portion of small companies. However, there are various factors to evaluate before coming to these decisions.
9. High Efficiency
The meaning and definition of financial management entail the creation of a stable work relationship with other company departments. It tries to improve performance by appropriate allocation of funds to different departments. This distribution is carried out considering the resources and effort required to amplify the company's efficiency.
10. Reduce Risks
Along with maintaining the performance, it is also necessary to minimize the risks. Risks often present themselves in unforeseen circumstances or unexpected market conditions. Financial managers need to have a foolproof plan against such situations. In addition, they must calculate potentially risky situations beforehand with the help of professionals and try to steer clear of those.
Importance of Financial Management
1. Helps organizations in financial planning
To understand what financial management is and examples of financial management, you must know that financial planning is a crucial part of an integrated and sustainable organization because it assists in branding the company among competitors. In addition, financial management helps the company to ascertain fund requirements and decides the necessary steps to meet those requirements.
2. Assists in acquiring funds from different sources
Another important role of financial management is to understand available sources and acquire funds for the business. This acquisition must be made keeping in mind the cost and liabilities.
3. Helps in investing an appropriate amount of fund
The very definition of financial management entails managing and allocating available finances. The proper functioning of the finance department boosts the growth and efficiency of the organization. When the funds are utilized in a precise manner, the financial management can work toward holding the cost of capital and amplifying the company's worth. This will ultimately solidify the financial standing of the organization.
4. Increases organizational efficiency
Financial management focuses on establishing a firm position for the company in the market. It achieves this through a framework for increasing the investors' and shareholders' wealth. The main objective of an organization is to perform well and optimize profits while stumping up the economy.
5. Reduces delayed production
Production delays are the root cause of poor financial management. It causes inefficiency in every department. Secure financial planning monitors production timelines and deadlines and tries to reduce production delays.
6. Financial costs planning
This involves projections regarding the company's financial requirements to meet its short-term and long-term objectives. Financial management executives provide a vision for daily operations and enable planning for cost reduction and profit maximization.
7. Provides economic stability
Maintaining economic stability is a prerequisite for an organization to achieve constant growth. Sound financial resources will help an organization expand its horizons and thrive in the business. To achieve financial stability, it is important to have efficient financial management in place.
8. Financial decisions making
Financial professionals assist the senior professionals in the company in forming rules and creating policies by giving a precise report of the daily finances and data on appropriate key performance indicators.
9. Guideline for earning maximum profits with minimum cost
Maximizing profits is the end goal for every organization. And the earrings and revenues are solely based on the productive employment of financial resources. A solid financial foundation comprises different attributes such as budget control, cost control, ratio analysis, trend analysis, and cost-volume-profit numbers. Thus, financial management is crucial to enhancing profits and minimizing operations costs.
10. Increases shareholders' wealth
Shareholders act as assets for an organization. They are investors in the company. This is why a company's main objective should be to maximize its shareholders' wealth. It will retain the funds and benefit the economy.
11. Encourages employees to save money
A transparent and sustainable financial management system enables employees to understand the available resources. In addition, it authorizes professionals in every department to work toward the company's betterment by functioning under a budget.
Functions of Financial Management
1. Financial Planning and Forecasting
For social and non-profit organizations, the ultimate goal of running a business is the greater good of society. But most companies have the objective of getting more return on investment. These profits act as a buffer between the current financial status of the company and its future standing. An appropriate allocation of funds enables the financial management to plan and forecast the company's future. It allows them to make decisions regarding the generated profits, whether an organization will benefit from pulling out the funds and procuring assets or reinvesting the profits in the company and improving marketing strategies.
2. Cash Management
The financial department is in control of all the cash flow operations. A company needs cash for several reasons, such as paying salaries, electricity bills, property bills, purchasing goods, and maintaining storage space.
3. Estimating Capital Expenses
The financial executive must devise projections for the capital needed to run daily operations. These projections include cost estimates, profits, future expenses, and a window for plausible losses. The capital expenses are calculated so that the company's revenue grows uninterruptedly.
4. Determining Capital Structure
After creating the framework for capital expenses, the financial management creates a capital structure. The capital structure portrays the debt analysis in the short-term and long-term future. Therefore, it is directly proportional to the available financial resources and the potential procurement of funds.
5. Procurement of Funds
The following function of financial management is to devise strategies to procure funds for the organization. A business needs credibility in the market to ensure stable cash fluidity. Thus, a company procures funds with the help of equity or debt financing.
6. Investment of Funds
Once the organization has acquired funds, it needs to allocate them to efficient businesses that help grow the business and give profitable returns with a window for safety.
7. Surplus Disposal
Every company reaches a point where it has a surplus amount of funds after the allocation and smooth operation. Financial management is responsible for strategically taking care of the earned and capital surplus.
An organization thrives on a secure financial standing. Professions in the financial department are crucial to the organization's growth, development, sustainability, and prospects for expansion. Financial management has ample scope for learning and improving critical thinking skills. KnowledgeHut online training courses offer specialization in financial management. Moreover, these courses also instill leadership values and allow professional growth.