FINANCIAL MANAGEMENT
Finance is
one of the major elements which activate the overall growth of the economy.
Finance is
the life blood of the economy, and management is simply taking care /
controlling things / people.
It consists
of planning, organizing, reporting etc.
Financial
management in simple words it is the process of planning, organizing and
controlling the financial resources to achieve the objectives of the company.
The aims / importance of finance are as follows:
- Providing adequate finance
- Effective mobilization of resources
- Life blood of business
- Plan for contingency
- Growth of business
Decisions in financial management:
- Investment decision
- Dividend decision
- Financing decision
- Working capital decision
- Investment decision - it is the process of evaluating and selecting long term investments that are consistent with the firm’s goals of maximizing owners wealth.
- Dividend decision - it is a process of calculating and concerned with decision making mechanism of the management to declare dividends. It is crucial for top management to determine the portion of earnings distributable as the dividend at the end of every reporting period.
- Financing decision - its main focus on the rise / disposal of capital and debt.
- Working capital decision – working capital decision is to be made to maintain liquidity to meet day to day expenses.
The two sources of working capital are:
- Permanent / fixed – shares, debentures, public deposits, loans from financial institutions.
- Temporary / variable – commercial banks, trade creditors, commercial paper, installment credit.
Goals of financial management:
- Profit maximization
- Wealth maximization
- Profit maximization – Every business whether small / big it main objective is to maximize its profit,
- Wealth maximization – it is a process of increasing the shareholders wealth by maximizing the market value of the firm, common stock.
Financial
manager:
He is the
one who heads the department of finance. He makes all the decisions related to
financial resources.
Functions of financial manager:
- Essential of financial requirements
- Selection of right sources of funds
- Allocation of funds
- Analyzing and interpretation of financial performance
- Analysis of cost volume profit
- Working capital management
- Profit planning and control
- Fair returns of the shareholders
- Maintain liquidity and wealth maximization
Benefits / advantages of financial management:
- Better decision making
- Transparency of information
- Finance control
- Enhances managerial efficiency
- Profit maximization
- Wealth maximization
- Avoid debts
- Costly
- Determine adequate capital
Financial
plan – financial plan is a statement estimating the amount of capital and
determining its composition.
Principles
in sound financial planning:
- Simplicity
- Foresight
- Flexibility
- Liquidity
- Economy
- Optimum use
- Contingency
- Long term views
Steps in financial planning:
- Analyzing the business environment
- Developing financial goals
- Framing financial policies and procedures
- Ensuring adopting and flexibility
- Review of financial plan
Factors
affecting sound financial plan:
- Risk taking capacity
- Position of the firm
- Study of financial markets
- Economic conditions
- Future plans
- Government plans and policies
