Financial Management Nature, Importance

30/07/2021 2 By indiafreenotes

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.

Financial Planning is the process of estimating the capital required and determining its competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.

Nature of Financial Management

Management of Cash:

Financial management monitors all funds movement in an organization. Finance managers supervise all cash movements through proper accounting of all cash inflows and outflows. They ensure that there is no situation like deficiency or surplus of cash in an organization. Finance manager observes all cash movements (inflow and outflow) and ensures they should face any deficiency or surplus of cash. Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.

Selects Investment Pattern:

Once funds are procured it is important to allocate them among profitable investment avenues. The investment proposal should be properly analyzed regarding its safety, profitability, and liquidity. Before investing any amount in it all risk and return associated with it should be properly evaluated. Before investing the amount, the investment proposal should be analysed and properly evaluates its risk and returns.

Decides Capital Structure:

Deciding optimum capital structure for an organization is a must for attaining efficiency and earning better profits. It involves deciding the proper portion of different securities like common equity, preferred equity, and debt. The proper balance between debt and equity should be attained which minimizes the cost of capital. Proper balance between debt and equity should be attained, which minimizes the cost of capital.

Financial management decides proper portion of different securities (common equity, preferred equity and debt).

Apply Financial Controls:

Implying financial controls in business is a beneficial role played by financial management. It helps in keeping the company actual cost of operation within the limit and earning the expected profits. There are various processes involved in this like developing certain standards for business in advance, comparing the actual cost or performance with pre-established standards, and taking all required remedial measures.

Raises Shareholders Value:

Financial management works towards raising the overall value of shareholders. It aims at increasing the amount of return to shareholders by reducing the cost of operations and increasing the profits. The finance manager focuses on raising cheap funds from different sources and invest them in the most profitable avenues.

Select Sources of Fund:

Choosing the source of funds is one of the crucial decisions for every organization. There are various sources available for raising funds like shares, bonds, debentures, venture capital, financial institutions, retained earnings, owner investment, etc. Every business should properly analyze different sources of funds available and choose one which is cheapest and involves minimal risk.

Estimates Capital Requirements:

Financial management helps in anticipation of funds required for running the business. It estimates working and fixed capital requirements for carrying out all business activities. The finance manager prepares a budget of all expenses and revenues for a particular time period on the basis of which capital requirements are determined.

Importance of Financial Management

Manages Cash Movements:

Financial management monitors and manages all cash movements in business organizations. All cash inflows and outflows in an organization are properly recorded by financial managers. They ensure that there is no deficiency or surplus of cash.

Facilitates Cost Control:

Financial managers focus on controlling all costs associated with the business. They prepare a budget for all activities of the business and ensure that all expenses go in accordance with the pre-determined budget. Financial managers take all remedial measures if the cost is found to be more than pre allotted budget.

Determines Capital Structure:

Financial management decides the optimum capital structure of the organization. It decides the proportion of equity and debt to be included in the capital. The proper balance between debt and equity should be attained which minimizes the cost of capital.

Forecasts Cash Flows:

Financial management forecasts the fund required for carrying out the activities by the business. Estimation of fund requirement is the foremost and primary function played by financial management.

Better Disposal Of Surplus:

Decisions regarding using the surplus or profit earned by the business are taken by financial managers. They decide whether it should be distributed as dividends to shareholders or should be retained for plowing it back into the business. The finance manager decides an optimum dividend payout ratio out of available profit by considering all expansion and growth opportunities available to the organization.

Proper Use of Funds:

Financial management ensures that all financial resources are properly utilized in the organization. Financial managers supervise the use of all funds and checks whether they are invested in better assets. Before allocating any funds in any investment avenue they properly evaluate risk and return associated with it.

Raises the Funds:

Once the fund required by business are estimated, financial managers are responsible for the acquisition of such funds. Financial managers choose among different sources available for raising funds like shares, debentures, loans, etc. They choose the one which provides funds at low cost and has fewer conditions attached to them.