Nature of Financial Management

Topics: Finance, Economics, Corporate finance Pages: 11 (2098 words) Published: March 17, 2013
Nature of Financial Management

Financial Management Defined
* It refers to that part of the management activity which is concerned with the planning and controlling of firms financial resources. * Financial management is concerned with raising financial resources and their effective utilization towards achieving organizational goals. It is the process of putting the available funds to the best advantage from the long term point of view of business objectives.

Purpose of Financial Management
* Primary Objective
* Maximization of return to the shareholder
* Secondary Objectives
* Customer Satisfaction
* Reduce Misuse of Funds
* Increase in Market Shares
* Growth
* Survival
* Innovation

Scope of Financial Management
1. Estimating the Financial Requirement
* The finance executives have to estimate the amount of fixed capital and working capital required in a given period of time. 2. Investment Decision
* The funds raised from different resources are to be intelligently invested in various assets as to optimize their return of investment. 3. Management of cash flows
* Cash is needed to pay off creditors, for purchase of materials, pay labor and to meet everyday expenses. There should not be shortage of cash at any time as it will damage credit-worthiness of the company. 4. Management of earnings

* The finance executive has to decide about allocation of earnings among several competitive needs. 5. Choice of sources of finance
* Finance executives have to evaluate and choose the best source.

Functions of Financial Management
1. Procurement of short term and long term funds from financial institutions. * Capital must be made available at the least cost when it is needed.

2. Efficient Utilization of Financial Resources
* It refers to economical use, in other words we see to it that financial resources are actually being used for what they have intended.

3. Effective Utilization of Financial Resources
* It refers to their use towards the attainment predetermined objective. This requires periodic review of operations to determine whether they are in accordance with plans.

Financial Management, Management Accounting, and Financial Accounting * Financial Management
* Financial Management encompasses everything that involves finances, assets and resources. It takes part in financial planning, control, and decision – making. * Management Accounting
* Management accounting information commonly addresses individual or divisional concerns rather than those of the firm as a whole it provides both the historical and forward-looking information for managers. It provides information to internal users. * It does not require compliance to generally accepted accounting principles (GAAP) and may be presented in formally or informally. * Financial Accounting

* Financial Accounting describes and provides information about the performance of a business over a specified period and the state of affairs at the end of that period. * It provides information to external users and is required to comply with the generally accepted accounting principles (GAAP). The information it provides is historical, quantitative, monetary, and verifiable.

Relationship of Financial Objectives with Organizational Objectives * Financial Objectives
* Often focus on simply the cash flow and long term financial planning on the business. * Organizational objectives and strategy
* Objectives can include desired projections on an internal and external level of the company. Strategy is the plan of how the firm will fulfill its goals and objectives by deploying its resources to create value for customers and shareholders.

Financial Decisions
* It involves choosing the best source of raising funds and deciding optimal mix of various source of finance. A company cannot defend upon only one source of finance; hence a varied...
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