Financial Management

Financial Management is a term that is frequently used in the corporate world. It is defined as an area or function concerning profitability, cash, Investments, credit, and expenses. It is one of the vital activities required to be carried out by all kinds of businesses for ensuring their smooth run. Every other organization needs finances in order to carry out day to day activities as well as for long term investments. Thus, it becomes altogether a significant part of any Company.

Since it is a term dealing with management, it’s applications are applied here too. In other words, it is a process of Planning, Organizing, Controlling, and Monitoring the financial resources. It is basically done to achieve organizational goals and objectives. FM is considered as an ideal practice to control the financial activities of an organization such as procurement of funds, accounting, payments, risks, assessment etc. It deals with every single thing relating to money.

It is beneficial in various ways to the company. Properly managing of finance ensures efficient functioning of day to day activities of the organization. Most often, the company has a separate department solely dedicated to FM. A Finance Manager is hired to look after the company’s finance and manage it’s resources. All financial decisions are taken at this position.

Key Points:

  • Deals with finance.
  • Process of Planning, Organizing, Controlling, and Monitoring of Financial resources.
  • Done to achieve organizational goals.
  • Beneficial.
  • The financial Manager is hired to look after the process.

WHAT IS FINANCIAL MANAGEMENT?

As explained above that FM deals with anything related to money and finance. The basic aim of the FM is to maximize the value of the firm. However, it is much more complex than it. A firm includes many stakeholders like owners, creditors, and various participants in the financial market.

Thus, there is a need for effective procurement and the use of finance. This would lead to the proper utilization of finance. The duty of carrying out these tasks lies in the hands of the Financial Manager. He must ensure to fulfill them.

Key Points:

  • Related to Finance.
  • To maximize the value of the firm.
  • Complex Process.
  • Carried out to effectively procure and use finance.
  • Accountability lies with the Financial Manager.

OBJECTIVES OF FINANCIAL MANAGEMENT

Like any other function, FM also has some objectives. Its basic aim is to maximize the firm’s value. Besides it, there are several other objectives. Some of them are listed below:

  • Profit Maximization by the proper financial decisions and finance utilization.
  • Wealth Maximization by increasing the market value of shares and thus, the dividend of the shareholders.
  • Maintaining proper Cash flow so as to carry day to day activities.
  • Creating Goodwill.
  • Facilitating smooth functioning and survival.

FUNCTIONS OF FINANCIAL MANAGEMENT

FM is a functional activity. It has some basic functions. These functions are majorly performed by the Manager. He carries them out in order to fulfill the aforementioned objectives. Some of the functions are listed down:

  • Ascertaining the Capital Requirements.
  • Making the choice of sources of funds.
  • Managing Cash Flow.
  • Controlling finances.
  • Making Decisions regarding acquisitions and mergers.

SCOPE OF FINANCIAL MANAGEMENT

The next topic is the Scope of FM. This includes three Investment decisions, Financing decisions, and Dividend decisions. Investment decisions further include Long term and short term investment decisions. Financing decisions indicate the possible sources of raising funds. And Dividend decisions relate to the dividend provided to the shareholders.

  • Long term Investment decisions allow investing in resources like fixed assets.
  • Short term Investment decisions allow investing in resources like current assets.
  • Financial Planning is a crucial activity to ensure the availability of the funds when required.
  • Capital Structure decisions involve identifying various sources of funds.
  • Dividend decisions include Dividend for the shareholders and Retained Profits.

PUBLIC FINANCIAL MANAGEMENT SYSTEM

The Central Plan Scheme Monitoring System is now called as the Public Financial Management System (PFMS). It is a Government of India public financial management reforms initiative which aims to monitor various programs pertaining to the social sector and track funds disbursed. It ensures that the money is spent according to it’s intended purpose. Consequently, providing accounting for the same.

There are numerous plans being implemented in the social sector. Moreover, the Central Government also releases funds under the Additional Central Assistance Program. PFMS’s purpose is to provide transparency and accountability to the social sector monitoring. Due to the diversity in and through the number of channels through which the money is spent, the Central Government finds it necessary to ensure that the money is spent according to it’s intended purpose.

FINANCIAL MANAGEMENT ROLE

FM plays a key role in every organization. As mentioned earlier, Financial Management is the process performed by the Financial Manager. He is responsible for the financial condition of the organization. This includes Producing Financial reports, Directing Investment activities, and developing strategies and plans for the goals of the firm. All these are thus the roles of the financial manager and the management.

IMPORTANCE OF FINANCIAL MANAGEMENT

FM is of utmost importance for any firm. No one can neglect it’s importance from any given time and at any situation. It helps in determining the financial needs of the firm and how to acquire those required funds. It further helps in the allocation of those funds in such a way that they can be used in an efficient way. It simply builds value for the firm.

  • Financial Planning.
  • Acquisition of Funds.
  • Proper Use of funds.
  • Financial Decision.
  • Increase in Value.

NATURE OF FINANCIAL MANAGEMENT

FM in it’s nature is a specialized branch of general management. Despite a separate status, it is interlinked with other aspects of management. It is the responsibility of every financial manager. It is multidisciplinary in approach. Although having a hue and cry about the decentralization of authority, it is a matter of centralization

Key Points:

  • A separate branch of Management.
  • Intermingled with other aspects of management.
  • Multidisciplinary in approach.
  • Deals with Centralization.
  • The backbone of Commerce and Industry.

FINANCIAL MANAGEMENT BOOKS

The importance and nature of FM make it necessary for commerce enthusiasts to study about it. Studying about FM is beneficial in many ways. It helps in skills enhancement and gaining knowledge about in finance industry. Obviously, it makes the person economically well aware and hence stable. Below is the list of some popular FM Books:

  • Fundamentals of FM by Eugene Brigham and Joel Houston.
  • FM: Theory and Practice by Prasanna Chandra.
  • FM: Core Concepts by Raymond Brooks.
  • The Economist Guide to FM by John Tennent.
  • FM: Text and Problems by Jain P K and M. Y. Khan.

FINANCIAL MANAGEMENT SALARY

Financial management is a trendy and significant part of an organization that attracts a handsome Salary. The financial Manager is the person performing who performs all the tasks. Thus, He is the one receiving the amount. The annual average pay depends on the country. The annual average salary for a Financial Manager in India is Rs 991389 as per the latest data of 2020.

FINANCIAL MANAGEMENT COURSES

A Financial Management course introduces the role of Financial Managers, core Financial concepts and terminology. It includes Risk and returns trade-off, Corporate decision making, Merging transactions, Valuation and Deregulation. Many undergraduate and postgraduate programs are introduced by many reputed institutions like the Indian Institute of Financial Planning, International College of Financial Planning, and National Institute of Financial Management. Many institutions also offer standalone continuing education courses and certificates in FM.  

Here is the list of courses that can be pursued by the students in FM:

  • MBA in Financial Management.
  • Chartered Accountant.
  • Cost Accountant.
  • Certified Financial Planner.
  • Chartered Financial Analyst.

STRATEGIC FINANCIAL MANAGEMENT

Strategic Financial Management is an important part of FM. It is the study of finance along with considering the strategic goals of the enterprise. It is a modern term. FM is nowadays increasingly referred to as Strategic Financial Management.

It is all about creating profits for the firm while ensuring an acceptable Return on Investment. It is focused on long term success. It involves readjusting short term goals in order to attain the long term goals. Thus it’s an integral part of any organization.

ACCOUNTING AND FINANCIAL MANAGEMENT

Accounting and Financial Management are two separate terms. Accounting is a systematic process of identifying, measuring, processing, classifying, and recording of financial transactions. It summarizes, analyzes, and records the information to be reported to employees, management, investors, etc. It is done using the Generally Accepted Accounting Principle (GAAP).

Whereas, Financial Management deals with the managerial part. It refers to Planning, organizing and monitoring the finance. It’s basic aim is to effectively acquire and allocate funds. And hence, achieving profit and wealth maximization.   

LEVERAGE IN FINANCIAL MANAGEMENT

Leverage is a term associated with FM. It refers to use of debt to amplify returns from investments. It is used to increase the buying power in the market by Investors. Companies use leverage to finance their assets. Thus, it’s an important term used in the corporate world.

  • Associated with Financial Management.
  • Use of debt to amplify ROI.
  • To increase the buying power. (Investors)
  • To Finance assets. (Companies)

FINANCIAL MANAGEMENT APPROACHES

Traditional and Modern are the 2 approaches followed in FM. Traditional View is concerned with the acquisition, financing, and management of finance. The modern view takes into consideration various reforms in the financial sector aiming at a diversifies, efficient, and competitive financial system.

DIFFERENCE BETWEEN FINANCIAL MANAGEMENT AND COST ACCOUNTING

Cost Accounting and Financial Management are two separate terms. FM is a broader concept as compared to Cost Accounting. Cost Accounting is a part of Accounting and is concerned with cost. FM is concerned with the management of finance.

COST ACCOUNTINGFINANCIAL MANAGEMENT
Narrow ConceptBroad Concept
Part of the Accounting Process.Part of Managerial Process.
Deals with cost of raw materials, WIP, etc.Deals with the Acquisition and Allocation of financial resources.

WEALTH MAXIMISATION IN FINANCIAL MANAGEMENT

Wealth Maximization refers to an increase in the wealth of shareholders. Financial Manager tries to give a maximum dividend to shareholders. He also tries to increase the market value of shares. Wealth maximization leads to large Profit.

LIMITATIONS OF FINANCIAL MANAGEMENT

There are few limitations of FM. It creates rigidity. It sometimes is incapable of coping up with the dynamic environment. It requires huge cost. Other limitations include Difficulty in recognizing deviations and Problems regarding apply measures. 

FAQs

✅ What is an example of Financial Management?

Answer: FM related with management of finance. Thus the examples would relate to the same. Such as enquiring about the needs of funds. Acquiring and Allocating the same can also be examples of FM. 

✅ What are the 5 principles of FM?

Answer: FM is a strategic and systematic process. Thus, the Financial Manager needs to perform his duties according to some principles. Those are Consistency, Documentation, Timeliness, Justification, and Certification. All these need to be strictly followed.

✅ What is the main objective of FM?

Answer: The major aim of FM is to build a value for the firm. It ensures Firm’s name in the market through actively managing it’s finance related activities. It is achieved by Wealth and Profit Maximization. Other objectives include efficient use of financial resources and effective Budgeting. 

✅ What are 4 elements of FM?

Answer: There are 4 recognized elements of FM. These are Planning, Organizing, Controlling and Decision Making. They are related to management. Financial Management is done keeping all these applications in mind. 

✅ What is Financial Planning?

Answer: It is a part of FM. It refers to task of determining the funds needed for a firm for it’s survival. A financial Plan describes activities, resources and equipment needed to attain all the financial objectives of the firm.

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About the Author

Rachit believes in the power of education and has studied from the top institutes of IIIT Allahabad, IIM Calcutta, and Francois Rabelias in France. He has worked as Software Developer with Microsoft and Adobe. Post his MBA, he worked with the world’s # 1 consulting firm, The Boston Consulting Group across multiple geographies US, South-East Asia and Europe.

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