MEANING, DEFINITION, NATURE, SCOPE, AND OBJECTIVE OF FINANCIAL MANAGEMENT
In this topic, we will explain the basic concepts of financial management i.e. meaning, definition, nature, scope & objectives. Financial management is a very important part of every business which plays a vital role in every organization.
Finance is called “The science of money”. It studies the principles and the methods of obtaining, control of money from those who have saved it, and of administering it by those into whose control it passes. It is the process of conversion of accumulated funds to productive use. Financial management is the science of money management. It is that managerial activity which is concerned with planning and controlling of the firm’s financial resources. In other words, it is concerned with acquiring, financing, and managing assets to accomplish the overall goal of a business enterprise.
MEANING, DEFINITION, AND NATURE OF FINANCIAL MANAGEMENT:
Meaning and Definition
Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. In other words, it is concerned with acquiring, financing and managing assets to accomplish the overall goal of a business enterprise (mainly to maximize the shareholder’s wealth).
“Financial management is concerned with the efficient use of an important economic resource, namely capital funds” – Solomon Ezra & J. John Pringle.
“Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient business operations”- J.L. Massie.
“Financial Management is concerned with managerial decisions that result in the acquisition and financing of long-term and short-term credits of the firm. As such it deals with the situations that require selection of specific assets (or combination of assets), the selection of specific liability (or combination of liabilities) as well as the problem of size and growth of an enterprise. The analysis of these decisions is based on the expected inflows and outflows of funds and their effects upon managerial
objectives”. – Phillippatus.
The creation of new and improved financial products through innovative design or repackaging of existing financial instruments.
Financial engineers use various mathematical tools in order to create new investment strategies. The new products created by financial engineers can serve as solutions to problems or as ways to maximize returns from potential investment opportunities.
The management of the finances of a business/organization in order to achieve financial objectives
Taking a commercial business as the most common organizational structure, the key objectives of financial management would be to:
- Create wealth for the business
- Generate cash, and
- Provide an adequate return on investment – bearing in mind the risks that the business is taking and the resources
There are three key elements to the process of financial management:
(1) Financial Planning
Management needs to ensure that enough funding is available at the right time to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees, etc.
In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions.
(2) Financial Control
Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as:
- Are assets being used efficiently?
- Are the businesses assets secure?
- Do management act in the best interest of shareholders and in accordance with business rules?
(3) Financial Decision-making
The key aspects of financial decision-making relate to investment, financing, and dividends:
- Investments must be financed in some way – such as selling new shares, borrowing from banks or taking credit from suppliers
- A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits
Nature of Financial Management
- It is an indispensable organ of the business
- Its function is different from accounting
- It is a centralized function.
- Helpful in decisions of top
- It applies to all types of
- It needs financial planning, control, and follow-up.
- It related to different disciplines like economics, accounting, law, information technology, mathematics, etc.
SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT:
The scope of financial management has undergone changes over the years. Until the middle of this century, its scope was limited to the procurement of funds. In modern times, financial management includes besides procurement of funds,the three different kinds of decisions as well namely investment, financing, and dividend. Scope and importance of financial management includes-
- Estimating the total requirements of funds for a given
- Raising funds through various sources, both national and international, keeping in mind the cost-effectiveness;
- Investing the funds in both long term as well as short term capital needs;
- Funding day-to-day working capital requirements of the business;
- Collecting on time from debtors and paying to creditors on time;
- Managing funds and treasury operations;
- Ensuring a satisfactory return to all the stakeholders;
- Paying interest on borrowings;
- Repaying lenders on due dates;
- Maximizing the wealth of the shareholders over the long term;
- Interfacing with the capital markets;
- Awareness to all the latest developments in the financial markets;
- Increasing the firm’s competitive financial strength in the market; and
- Adhering to the requirements of corporate