Financial management

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Financial management focuses on ratios, equity and debt. Financial managers are the people who will do research and based on the research, decide what sort of capital to obtain in order to fund the company's assets as well as maximizing the value of the firm for all the stakeholders. It also refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized function directly associated with the top management. The significance of this function is not seen in the 'Line' but also in the capacity of the 'Staff' in overall of a company. It has been defined differently by different experts in the field.

The term typically applies to an organization or company's financial strategy, while personal finance or financial life management refers to an individual's management strategy. It includes how to raise the capital and how to allocate capital, i.e. capital budgeting. Not only for long term budgeting, but also how to allocate the short term resources like current liabilities. It also deals with the dividend policies of the share holders.

Concept[edit]

  • “Financial management may be defined as that area or set of administrative function in an organization which relate with arrangement of cash and credit so that organization may have the means to carry out its objective as satisfactorily as possible." - by Howard & Opton.[1]

Objectives of Financial Management[edit]

  • Profit maximization happens when marginal cost is equal to marginal revenue. This is the main objective of Financial Management.
  • Wealth maximization means maximization of shareholders' wealth. It is an advanced goal compared to profit maximization.[2]
  • Survival of company is an important consideration when the financial manager makes any financial decisions. One incorrect decision may lead company to be bankrupt.
  • Maintaining proper cash flow is a short run objective of financial management. It is necessary for operations to pay the day-to-day expenses e.g. raw material, electricity bills, wages, rent etc. A good cash flow ensures the survival of company.
  • Minimization on capital cost in financial management can help operations gain more profit.
  • It is vague :- There are several types of profits before interest, depreciation and taxes, profit before taxes, profit after taxes, cash profit etc

Scope of Financial Management[edit]

  • Estimating the Requirement of Funds: Businesses make forecast on funds needed in both short run and long run, hence, they can improve the efficiency of funding. The estimation is based on the budget e.g. sales budget, production budget.
  • Determining the Capital Structure: Capital structure is how a firm finances its overall operations and growth by using different sources of funds.[3] Once the requirement of funds has estimated, the financial manager should decide the mix of debt and equity and also types of debt.
  • Dividend Decision: A good dividend policy helps to achieve the goal of maximizing wealth. Distributing the whole profit by means of dividends to shareholders or distributing only a certain percentage of it is mostly decided by dividend policy.[4]
  • Investment Fund: A good investment plan can bring businesses huge returns.
  • To ascertain maximum profit as well as maintain the core value of the organization.

Financial Management for Start Up[edit]

For new enterprises, it is important to make a good estimation on costs, sales.[5] Consideration on appropriate length sources of finances can help businesses avoid the cash flow problems even the failure of setting up. There are fixed and current sides of assets balance sheet. Fixed assets refers to assets that cannot be converted into cash easily, like plant, property, equipment etc.[6] A current asset is an item on an entity's balance sheet that is either cash, a cash equivalent, or which can be converted into cash within one year.[7] It is not easy for start ups to forecast the current asset, because there are changes in receivables and payables.[8]

See also[edit]

References[edit]

  1. ^ "Business Finance and Financial Management". UpFina. Retrieved 2015-11-04.
  2. ^ "Wealth Maximization". eFinanceManagement. Retrieved 2015-11-04.
  3. ^ "Capital Structure Definition | Investopedia". Investopedia. Retrieved 2015-11-04.
  4. ^ "Scope of Financial Management". Retrieved 14 December 2018.
  5. ^ Nobanee, Haitham; Abraham, Jaya (2015). "Current assets management of small enterprises". Journal of Economic Studie.
  6. ^ "What are fixed assets? | The e-conomic Accounting Glossary". www.e-conomic.co.uk. Retrieved 2015-11-04.
  7. ^ "Current Asset Definition - AccountingTools". www.accountingtools.com. Retrieved 2015-11-04.
  8. ^ "The Top 4 Cash Flow Forecasting Mistakes". Entrepreneur. Retrieved 2015-11-04.
  9. ^ faustin.G. karamage