Financial Management – MBA Tutorials

Financial Management

Meaning of FM :-

Financial Management means planning, organizing, controlling and directing the financial activities such as procurement and utilization of funds of the organization. It means applying common management principles to financial resources of the firm.

Scope/Elements of Financial Management:-

  1. Investment decisions– includes investment in fixed assets which is called as capital budgeting. Investment in current assets are a part of investment decisions which are called as working capital decisions.
  2. Financial decisions – They relate to the raising of finance from many resources which will depend upon decision on type of period, source of financing, cost of financing and the returns thereby.
  3. Dividend decision – The finance manager has to take this decision with regards to the net profit distribution. Net profits can be divided into two:
    • Dividend for shareholders– Dividend and the rate of it has to be decided in this.
    • Retained profits– Amount of retained profits has to be finalized which will depend upon diversification and expansion plans of the organization.

Objectives of Financial Management

The financial management is basically concerned with procurement, allocation and control of financial resources of an organization. The objectives can be-

  1. To ensure adequate and regular supply of funds to the concern.
  2. To ensure adequate returns to the shareholders which will depend upon the market price of the share, earning capacity, expectations of the shareholders.
  3. To ensure optimum utilization of funds. Once the funds are procured, they should be utilized in maximum possible way at low cost.
  4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be taken in return.
  5. To plan a sound capital structure-There should be fair and sound composition of capital so that a balance is maintained between equity and debt capital.

Functions of Financial Management

  1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the organization. This depends upon expected profits, costs, future programmes and policies of a concern. Estimations have to be made in an adequate and accurate manner which increases earning capacity of firm.
  2. Determination of capital composition: Once the assessment have been made, the capital structure have to be decided. This involves long- term and short- term debt equity analysis. This will depend upon the proportion of equity capital an organization is possessing and additional funds which have to be raised from outside parties.
  3. Choice of sources of funds: For the additional funds which are to be procured a company has many choices like-
    1. Issue of debentures and shares
    2. Loans to be taken from financial institutions or banks
    3. Public deposits must be drawn like in form of bonds. Factor of choice will depend on relative merits and demerits of every source and period of financing.
  4. Investment of funds: It is work of finance manager to decide how to allocate funds into profitable ventures so that there is safety on investment and regular returns can be possible.
  5. Disposal of surplus: The net profits decision is to be taken by the finance manager. There are two ways of doing this:
    1. Dividend declaration – It includes determining the rate of dividends and other benefits like bonus.
    2. Retained profits – The volume has to be decided which will depend upon innovational, expansional, diversification plans of the company.
  6. Management of cash: Finance manager make decisions with regards to cash management. Cash is required for many purposes like payment of salaries and wages, payment of water and electricity bills, meeting current liabilities, payment to creditors, maintainance of stock, purchase of raw materials, etc.
  7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over money or finance. This can be done through many techniques like financial forecasting, ratio analysis, cost and profit control, etc.

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