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Meaning of Financial Management: Scope/Elements

Financial management involves planning, organizing, directing, and controlling a company's financial resources and activities. The key functions of a financial manager include raising funds through equity and debt, allocating funds optimally based on the company's growth and asset needs, and planning profits through proper usage and reinvestment. Financial managers must also understand capital markets and make sound investment decisions to ensure safety of funds and adequate returns.

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144 views9 pages

Meaning of Financial Management: Scope/Elements

Financial management involves planning, organizing, directing, and controlling a company's financial resources and activities. The key functions of a financial manager include raising funds through equity and debt, allocating funds optimally based on the company's growth and asset needs, and planning profits through proper usage and reinvestment. Financial managers must also understand capital markets and make sound investment decisions to ensure safety of funds and adequate returns.

Uploaded by

Lovida Aspila
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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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.

Scope/Elements
1.Investment decisions includes investment in fixed
assets (called as capital budgeting). Investment in
current assets are also a part of investment
decisions called as working capital decisions.
2.Financial decisions - They relate to the raising of
finance from various resources which will depend
upon decision on type of source, period of financing,
cost of financing and the returns thereby.
3.Dividend decision - The finance manager has to take
decision with regards to the net profit distribution.
Net profits are generally divided into two:
a.Dividend for shareholders- Dividend and the
rate of it has to be decided.
b. Retained profits- Amount of retained profits has
to be finalized which will depend upon

expansion and diversification plans of the


enterprise.

Objectives of Financial Management


The financial management is generally concerned with
procurement, allocation and control of financial resources of a
concern. The objectives can be1. To ensure regular and adequate supply of funds to the
concern.
2. To ensure adequate returns to the shareholders which will
depend upon the earning capacity, market price of the
share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are
procured, they should be utilized in maximum possible way
at least cost.
4. To ensure safety on investment, i.e, funds should be
invested in safe ventures so that adequate rate of return
can be achieved.

Functions of Financial Management


1. Estimation of capital requirements: A finance manager
has to make estimation with regards to capital
requirements of the company. This will depend upon
expected costs and profits and future programmes and
policies of a concern. Estimations have to be made in an

adequate manner which increases earning capacity of


enterprise.
2. Determination of capital composition: Once the
estimation have been made, the capital structure have to
be decided. This involves short- term and long- term debt
equity analysis. This will depend upon the proportion of
equity capital a company is possessing and additional
funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be
procured, a company has many choices likea.

Issue of shares and debentures

b. Loans to be taken from banks and financial


institutions
c.

Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and


demerits of each source and period of financing.
4. Investment of funds: The finance manager has to decide
to allocate funds into profitable ventures so that there is
safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be
made by the finance manager. This can be done in two
ways:

a.

Dividend declaration - It includes identifying the rate


of dividends and other benefits like bonus.

b. Retained profits - The volume has to be decided


which will depend upon expansional, innovational,
diversification plans of the company.

6. Management of cash: Finance manager has to make


decisions with regards to cash management. Cash is
required for many purposes like payment of wages and
salaries, payment of electricity and water bills, payment to
creditors, meeting current liabilities, maintenance of
enough 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 finances. This can be done through
many techniques like ratio analysis, financial forecasting,
cost and profit control, et

Role of a Financial Manager


Financial activities of a firm is one of the most important and
complex activities of a firm. Therefore in order to take care of
these activities a financial manager performs all the requisite
financial activities.
A financial manger is a person who takes care of all the
important financial functions of an organization. The person in
charge should maintain a far sightedness in order to ensure

that the funds are utilized in the most efficient manner. His
actions directly affect the Profitability, growth and goodwill of
the firm.

Following are the main functions of a


Financial Manager
1. Raising of Funds
In order to meet the obligation of the
business it is important to have
enough cash and liquidity. A firm can
raise funds by the way of equity and
debt. It is the responsibility of a
financial manager to decide the ratio
between debt and equity. It is
important to maintain a good balance
between equity and debt.
2. Allocation of Funds
Once the funds are raised through
different channels the next important

function is to allocate the funds. The


funds should be allocated in such a
manner that they are optimally used.
In order to allocate funds in the best
possible manner the following point
must be considered
The size of the firm and its growth
capability
Status of assets whether they are
long-term or short-term
Mode by which the funds are raised
These financial decisions directly and
indirectly influence other managerial
activities. Hence formation of a good
asset mix and proper allocation of
funds is one of the most important
activity

3. Profit Planning
Profit earning is one of the prime
functions of any business
organization. Profit earning is
important for survival and sustenance
of any organization. Profit planning
refers to proper usage of the profit
generated by the firm.
Profit arises due to many factors such
as pricing, industry competition, state
of the economy, mechanism of
demand and supply, cost and output.
A healthy mix of variable and fixed
factors of production can lead to an
increase in the profitability of the firm.
Fixed costs are incurred by the use of
fixed factors of production such as
land and machinery. In order to
maintain a tandem it is important to

continuously value the depreciation


cost of fixed cost of production. An
opportunity cost must be calculated in
order to replace those factors of
production which has gone thrown
wear and tear. If this is not noted then
these fixed cost can cause huge
fluctuations in profit.
4. Understanding Capital Markets
Shares of a company are traded on
stock exchange and there is a
continuous sale and purchase of
securities. Hence a clear
understanding of capital market is an
important function of a financial
manager. When securities are traded
on stock market there involves a huge
amount of risk involved. Therefore a
financial

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