Financial Management Essay
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 invested There are three key elements to the process of financial management: (1) Financial Planning Management need 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 and fund sales made on credit. In the medium and long term, funding may be required for significant additions to the productive opacity 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 – however there are always financing alternatives that can be considered. For example it is possible to raise finance from 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 further. Discussion on the scope of financial management. Scope of Financial Management The finance department of an enterprise performs several functions in order to achieve the above objectives. The scope of finance function is very wide. It consists of the following activities: Estimating the Requirement of Funds The finance department must estimate the capital requirements of the firm accurately for long term and short term needs. In estimating the capital requirements of the business, the finance department must take help of the budgets of various activities of the business e. G. Ales budget, production budget, expenses budget etc. Prepared by the concerned departments. In the initial stage, the estimate is done by promoters but in a growing concern, it is done by the finance department. Unless the financial forecast is correct, equines is likely to run into difficulties due to excess or shortage of funds. Correct estimates ensure the availability of funds as and when they are needed. In estimating the requirement of funds, nature and size of the business, modernization and expansion plan should be given due consideration. Determining the Capital Structure By capital structure we mean the kind and proportion of different securities for raising the required funds.
Once the total requirement of funds is determined, a decision regarding the type of securities to be issued and the relative proportion between them is to be taken. The finance department must determine the proper mix of debt and equity. It should also decide the ratio between long term and short term debts. In determining these ratios, cost of raising finance from different sources, period for which funds are required and several other factors should be considered. A proper balance between risk and returns should be maintained. Choice of Sources of Finance A company can raise funds from different sources e. G. Shareholders, debenture holders, banks, financial institutions, public deposits etc.
Before raising the funds, it has to decide the source from which the funds are to be raised. The hooch of the source of finance should be made very carefully by taking a number of factors into account such as cost of raising funds, conditions attached, charge on assets, burden of fixed charges, dilution of ownership and control etc. For example, if the company does not want to dilute the ownership, it will depend on any source of finance other than investment in shares. Investment of Funds The funds raised from different sources should be prudently invested in various assets -short term as well as long term to optimize the return on investment.
In taking decisions for the investment of long term funds, a careful assessment of arioso alternatives should be made through capital budgeting, opportunity cost analysis and many other techniques used to evaluate the investment proposals. A part of the long term funds should be invested in working capital of the company. While taking decision for the investment of funds in long term assets, management should be guided by three basic principles, biz. Safety, profitability and liquidity. In taking decisions for the investment of funds in working capital, the finance manager must seek cooperation of marketing and production departments in estimating the funds which are to be involved in carrying of inventories in finished product and credit policy of the marketing department and in raw material and factory supplies of the production department.
Management of Cash It is the prime responsibility of the finance manager to see that an adequate supply of cash is available at proper time for the smooth running of the business. Cash is needed to purchase raw materials, pay off creditors, to pay to workers and to meet the day to day expenses of the business. Availability of cash is necessary to maintain liquidity and credit- worthiness of the business. Excess cash must be avoided as it costs money. It there is any cash in excess, it should be invested in near cash assets such as investments etc. Which may be converted into cash within no time. A cash flow statement should be prepared by the department to know the correct need of cash is essential to achieve the goal of profitability and liquidity.
The finance manager should decide in advance how much cash he should retain to meet current obligations of the company. Disposal of Surplus One of the prime function of the finance department is to allocate the surplus. After paying all taxes, the available surplus of the business can be allocated for here purposes -(a) for paying dividend to the shareholders as a return on their investment, (b) for distributing bonus to workmen and company’s contribution to other profit sharing plans, and (c) for plugging back of profits for the expansion of business. As far as the second alternative is concerned, the amount to be paid to workers is generally fixed either by statute or by agreement and therefore, there is no problem in allocating surplus for this purpose.
But a considerable, attention is to be paid in so far as first and third alternatives are concerned i. E. , how much to be paid to shareholders as dividend and how much to be retained n the business. For this purpose factors like the trend of the earning of the company, trend of the market price of its shares; the requirement of funds for the purpose of expansion and future prospects should be considered. Financial Controls The financial manager is under an obligation to check the financial performance of the funds invested in the business. There are a number of techniques to evaluate the performance biz. Return on Investment (ROI), budgetary control, cost control, internal audit, ratio analysis and break-even point analysis.
The financial manager must lay emphasis on financial planning as well. Q 2- Discuss the various functions of finance manager. VARIOUS FUNCTIONS B FINANCE MANAGER Finance function is one of the major parts of business organization, which involves the permanent, and continuous process of the business concern. Finance is one of the interrelated functions which deal with personal function, marketing function, production function and research and development activities of the business concern. At present, every business concern concentrates more on the field of finance because, it is a very emerging part which reflects the entire operational and profit ability position of the concern.
Deciding the proper financial function is the essential and ultimate goal of the business organization. Finance manager is one of the important role players in the field of finance function. He must have entire knowledge in the area of accounting, finance, economics and management. His position is highly critical and analytical to solve various problems related to finance. A person who deals finance related activities may be called finance manager. Finance manager performs the following major functions: 1. Forecasting Financial Requirements It is the primary function of the Finance Manager. He is responsible to estimate the financial requirement of the business concern.
He should estimate, how much finances required to acquire fixed assets and forecast the amount needed to meet the working capital requirements in future. 2. Acquiring Necessary Capital After deciding the financial requirement, the finance manager should concentrate how the finance is embroiled and where it will be available. It is also highly critical in nature. 3. Investment Decision The finance manager must carefully select best investment alternatives and consider the reasonable and stable return from the investment. He must be well versed in the field of capital budgeting techniques to determine the effective utilization of investment. The finance manager must concentrate to principles of safety, liquidity and profitability while investing capital. 4.
Cash Management Present days cash management plays a major role in the area of finance because proper cash management is not only essential for effective utilization of cash but it also helps to meet the short-term liquidity position of the concern. 5. Interrelation with Other Departments Finance manager deals with various functional departments such as marketing, reduction, personnel, system, research, development, etc. Finance manager should have sound knowledge not only in finance related area but also well versed in other areas. He must maintain a good relationship with all the functional departments of the business organization. Q 3- Discuss the importance of financial management in modern business. IMPORTANCE OF FINANCIAL MANAGEMENT Finance is the lifeblood of business organization. It needs to meet the requirement of the business concern.
Each and every business concern must maintain adequate amount of finance for their smooth running of the business once and also maintain the business carefully to achieve the goal of the business concern. The business goal can be achieved only with the help of effective management of finance. We can’t neglect the importance of finance at any time at and at any situation. Some of the importance of the financial management is as follows: Financial Planning Financial management helps to determine the financial requirement of the business concern and leads to take financial planning of the concern. Financial planning is an important part of the business concern, which helps to promotion of an enterprise. Acquisition of Funds Financial management involves the acquisition of required finance to the business concern.
Acquiring needed funds play a major part of the financial management, which involve possible source of finance at minimum cost. Proper Use of Funds Proper use and allocation of funds leads to improve the operational efficiency of the business concern. When the finance manager uses the funds properly, they can reduce the cost of capital and increase the value of the firm. Financial Decision Financial management helps to take sound financial decision in the business concern. Financial decision will affect the entire business operation of the once. Because there is a direct relationship with various department functions such as marketing, production personnel, etc.
Improve Profitability Profitability of the concern purely depends on the effectiveness and proper utilization of funds by the business concern. Financial management helps to improve the profitability position of the concern with the help of strong financial control devices such as budgetary control, ratio analysis and cost volume profit analysis. Increase the Value of the Firm Financial management is very important in the field of increasing the wealth of the investors and the business concern. Ultimate aim of any business concern will achieve the maximum profit and higher profitability leads to maximize the wealth of the investors as well as the nation. Promoting Savings Savings are possible only when the business concern earns higher profitability and maximizing wealth.
Effective financial management helps to promoting and monopolizing individual and corporate savings. Nowadays financial management is also popularly known as business finance or corporate finances. The business concern or corporate sectors cannot function without the importance of the financial management. Q 4- Discuss the main objectives of financial management. Special focus on profit minimization v/s wealth minimization. Profit Minimization V/s Wealth Minimization We know that the goals of financial management are profit minimization and wealth minimization. These are the important objectives of business firms. Now the question arises of the choices, i. E. Which should be the goal of decision making be profit minimization or which strengthen the case for wealth minimization as the goal of the business enterprise. Argument and Counter Argument: Profits cannot be ascertained well in advance to express the profitability of turn as future is uncertain. It is not at possible to maximize what cannot be known. The executive or the decision maker may not have enough confidence in the estimates of future returns so that he does not attempt future to maximize. It is argued that firm’s goal cannot be maximize profits but attain a certain level of profit holding certain shares of the market or certain level of sales. There must be a balance between the expected return and risk.
The possibility of higher expected yields are associated with greater risk to recognize such a balance and wealth minimization is brought in to the analysis. In such cases, higher capitalization rate involves. Such combination of expected returns with risk variations and related capitalization rate cannot be considered in the concept of profit minimization. The goal of profit minimization is consider being a narrow outlook. Evidently when profit minimization becomes the basis of financial decision of the concern, it ignores the interest of the community on one hand and that of the Gobo. , workers and other concerned persons in the enterprise on the other hand.
Keeping the above objection in view, most of the thinkers on the subject eave come to the conclusion that the aim of an enterprise should be wealth minimization not the profit minimization. Proof. Solomon of Stanford University has handled the issue very logically. He argues that it is useful to make a distinction between profit and profitability minimization of profit with a view to maximizing the wealth of shares holders is clearly an unreal motive. On the other hand, profitability minimization with a view to using resources to yield economic value higher than the joint values of inputs required is useful goal. Thus the proper goal of financial management is wealth minimization.