Financial Management

FINANCIAL MANAGEMENT
Financial management is the combination of two words FINANCIAL and

MANAGEMENT. Financial means procuring sources of money supply and allocation of these
sources on the basis of forecasting monetary requirements of the business. The word
management refer to planning, organization, co-ordination and control of human activities
and physical resources for achieving the objective of an enterprise. Thus, financial
management is that part of business management which is concerned with planning and
controlling of firms financial resources. It includes investment decision, financing decision,
dividend decision, liquidity decision, capital budgeting, budgetary control etc.
DEFINITION
According to J.L. Massic “financial management is the operational activity of a business that
is responsible for obtaining and effectively utilizing the funds necessary for efficient
operations.”
According to Wheeler “Financial management is the activity which is concerned with the
acquisition and administration of capital funds in meeting the financial needs and overall
objectives of business enterprise”.
OBJECTIVES
The main objective of business are survival and growth. In order to survive and
growth in business, a business must earn sufficient profits. Financial
management of an organization may seek to achieve the following objectives :-
1.To ensure adequate and regular supply of funds to the business.
2.To provide a fair rate of return to the investor.
3.To ensure efficient utilization of capital according to the principles of
profitability, liquidity and safety.
4.To device a definite system for internal investment and financing.
5.To minimize the cost of capital by developing a sound and economical
combination of corporate securities.
6.To coordinate the activities of the finance department with the activities of
other department of the organization.
FUNCTIONS
For the sake of convenience, these finance functions may be classified broadly
into following two groups :-
1.Administrative finance function
2.Routine finance function
ADMINISTRATIVE FINANCE FUNCTION
1. FINANCIAL PLANNING :- Financial planning is primarily a decision making
function. First of all, a financial manager has to formulate a sound
financial plan for the enterprise whether it is old or new. It involves three
basic steps and they are –
 determining financial objectives, both short term and
long term.
 Formulating financial policies such as capital structure,
source of finance, dividend etc.
 Making adjustment and re-adjustment that is planning
for removing defects and in effectiveness.
2.FINANCIAL CONTROL :- The establishment and use of financial control
device is an important function of financial management. These devices include
budgetary control, cost control, ratio analysis. In financial control, first of all
standard of financial performance are determined. There after actual
performance is compared with the standard performance and if there is any
deviation the steps are taken to rectify it.
3.FINANCING DECISION :- this function is related to raising finance from
different sources. Financial manager has to decide what proportion of total
funds will be raised from loan and what proportion will be provided by
shareholders. The mixing of debt and equity is known as leverage. Raising of
funds through debt results in higher return to shareholders but it also increases
risk. Hence a proper balance will have to be ensured between debt and equity.
4.INVESTMENT DECISION:- It is also knows as capital budgeting. This is also
related to the selection of long term assets or projects in which investments will
be made to the business. Long term assets are those assets which would yield
benefit in future. Since the future benefits are difficult to measure and cannot be
predicted with certainty, it involves risk. Investment decisions should, therefore
be evaluated in terms of both expected return and risk.
5.WORKING CAPITAL DECISION:- It is concerned with the management of
current assets and current liabilities. Current assets should be managed in such
a way so that the investment in it is neither inadequate nor necessary funds are
locked up in current assets. If the investment in current assets is inadequate
then it will become illiquid and unable to meet its current obligation thus
inviting the risk of bankruptcy. And if the investment in current assets is too
large, the profitability of company is adversely affected. So it’s the function of
financial management to develop sound technique of managing current assets.
6.DIVIDEND DECISIONS:- Dividend decision is related to the allocation of
income and is very important function of financial manager. He has to decide
about the portion of new profit that has to be retained in business for further
investment and the part of profit which should be distributed among
shareholders as dividend. Hence the dividend policy should be such that it has
positive impact on the wealth of shareholders.
ROUTINE FINANCE FUNCTIONS

Routine functions are those functions of financial manager which are clerical in
nature and are necessary for the execution of decision taken by the executives.
Following are the main routine functions :-
1.To record every transaction
2.To prepare various financial statements
3.To arrange cash funds
4.To arrange credit transaction
5.Proper custody of and safeguarding of various documents
6.Administration of person and welfare plans
7.Administration of internal audit
8.Compliance with governmental regulations.

Financial Management

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FINANCIAL MANAGEMENT

Financial management is the combination of two words FINANCIAL and

ROUTINE FINANCE FUNCTIONS

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