Financial Management Meaning, Definitions, Nature and Scope
[Financial Management Notes for NEP and CBCS Pattern]
Financial Management Meaning
Financial management is management principles and practices applied to finance. General management functions include planning, execution and control. Financial decision making includes decisions as to size of investment, sources of capital, extent of use of different sources of capital and extent of retention of profit or dividend payout ratio. Financial management, is therefore, planning, execution and control of investment of money resources, raising of such resources and retention of profit/payment of dividend.
Financial Management Definitions
Howard and
Upton define financial management as "that administrative area or set of
administrative functions in an organisation which have to do with the
management of the flow of cash so that the organisation will have the means to
carry out its objectives as satisfactorily as possible and at the same time
meets its obligations as they become due.”
According
to Guthamann and Dougall,” Business finance can be broadly defined as the
activity concerned with the planning, raising, controlling and administering
the funds used in the business.”
Bonneville
and Dewey interpret that financing consists in the raising, providing and
managing all the money, capital or funds of any kind to be used in connection
with the business.
Osbon
defines financial management as the "process of acquiring and utilizing
funds by a business”.
Considering
all these views, financial management may be defined as that part of management
which is concerned mainly with raising funds in the most economic and suitable
manner, using these funds as profitably as possible.
Financial Management is also called as Business Finance/ Corporation Finance.
Financial Management Features
Features/Nature/Characteristics of
financial management is concerned with its functions, its goals, trade-off with
conflicting goals, its indispensability, its systems, its relation with other
subsystems in the firm, its environment, its relationship with other
disciplines, the procedural aspects and its equation with other divisions
within the organisation.
1) Financial
Management is an integral part of overall management. Financial considerations
are involved in all business decisions. So financial management is pervasive
throughout the organisation.
2) The
central focus of financial management is valuation of the firm. That is
financial decisions are directed at increasing/maximization/ optimizing the
value of the firm.
3) Financial
management essentially involves risk-return trade-off Decisions on investment
involve choosing of types of assets which generate returns accompanied by
risks. Generally higher the risk, returns might be higher and vice versa. So,
the financial manager has to decide the level of risk the firm can assume and
satisfy with the accompanying return.
4) Financial
management affects the survival, growth and vitality of the firm. Finance is
said to be the life blood of business. It is to business, what blood is to us. The
amount, type, sources, conditions and cost of finance squarely influence the
functioning of the unit.
5) Finance
functions, i.e., investment, rising of capital, distribution of profit, are
performed in all firms - business or non-business, big or small, proprietary or
corporate undertakings. Yes, financial management is a concern of every
concern.
6) Financial
management is a sub-system of the business system which has other subsystems like
production, marketing, etc. In systems arrangement financial sub-system is to
be well-coordinated with others and other sub-systems well matched with the
financial subsystem.
7) Financial
management of a business is influenced by the external legal and economic
environment. The investor preferences, stock market conditions, legal
constraint or using a particular type of funds or on investing in a particular
type of activity, etc., affect financial decisions, of the business. Financial
management is, therefore, highly influenced/constrained by external
environment.
8) Financial
management is related to other disciplines like accounting, economics, taxation
operations research, mathematics, statistics etc., It draws heavily from these
disciplines.
Financial Management Scope
Financial management is one of the
important parts of overall management, which is directly related with various
functional departments like personnel, marketing and production. Financial
management covers wide area with multidimensional approaches. The following are
the important scope of financial management:
1. Financial Management and Economics:
Economic concepts like micro and macroeconomics are directly applied with the
financial management approaches. Investment decisions, micro and macro
environmental factors are closely associated with the functions of financial
manager. Financial management also uses the economic equations like money value
discount factor, economic order quantity etc. Financial economics is one of the
emerging area, which provides immense opportunities to finance, and economical
areas.
2. Financial Management and Accounting:
Accounting records includes the financial information of the
business concern. Hence, we can easily understand the relationship between the
financial management and accounting. In the olden periods, both financial management
and accounting are treated as a same discipline and then it has been merged as
Management Accounting because this part is very much helpful to finance manager
to take decisions. But now a day’s financial management and accounting
discipline are separate and interrelated.
3. Financial Management or Mathematics:
Modern approaches of the financial management applied large number
of mathematical and statistical tools and techniques. They are also called as
econometrics. Economic order quantity, discount factor, time value of money,
present value of money, cost of capital, capital structure theories, dividend
theories, ratio analysis and working capital analysis are used as mathematical
and statistical tools and techniques in the field of financial management.
4. Financial Management and Production Management:
Production management is the operational part of the business
concern, which helps to multiple the money into profit. Profit of the concern
depends upon the production performance. Production performance needs finance,
because production department requires raw material, machinery, wages,
operating expenses etc. These expenditures are decided and estimated by the
financial department and the finance manager allocates the appropriate finance
to production department. The financial manager must be aware of the
operational process and finance required for each process of production
activities.
5. Financial Management and Marketing:
Produced goods are sold in the market with innovative and modern approaches.
For this, the marketing department needs finance to meet their requirements.
The financial manager or finance department is responsible to allocate the
adequate finance to the marketing department. Hence, marketing and financial
management are interrelated and depends on each other.
6. Financial Management and Human Resource:
Financial management is also related with human resource department,
which provides manpower to all the functional areas of the management.
Financial manager should carefully evaluate the requirement of manpower to each
department and allocate the finance to the human resource department as wages,
salary, remuneration, commission, bonus, pension and other monetary benefits to
the human resource department. Hence, financial management is directly related
with human resource management.
Also Read: Introduction to Financial Management Important Questions for Upcoming Exams
Q. Explain the objectives of financial management in modern era. 2012, 2013, 2014, 2015, 2016, 2021
Q. Explain the importance of financial management in modern era. 2012, 2013, 2014, 2015, 2016
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