Financial Management - Meaning, Scope, Objectives & Functions

Meaning of Financial Management

Financial Management means planning, organizing, directing, and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to the financial resources of the enterprise.

Scope/Elements

  1. Investment decisions include investment in fixed assets (called capital budgeting). Investment in current assets is also a part of investment decisions called working capital decisions.

  2. Financial decisions - They relate to the raising of finance from various resources which will depend upon the decision on the type of source, period of financing, cost of financing, and the returns thereby.

  3. Dividend decision - The finance manager has to make a decision about the net profit distribution. Net profits are generally divided into two:

    1. Dividend for shareholders- Dividend and the rate of it has to be decided.
    2. Retained profits- The amount of retained profits has to be finalized which will depend upon the expansion and diversification plans of the enterprise. 

Objectives of Financial Management

Financial management is generally concerned with procurement, allocation, and control of financial resources of a concern. The objectives can be-

  1. To ensure a regular and adequate supply of funds to the concern.

  2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, the market price of the share, and expectations of the shareholders.

  3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in the maximum possible way at the least cost.

  4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that an adequate rate of return can be achieved.

  5. To plan a sound capital structure-There should be a sound and fair composition of capital so that a balance is maintained between debt and equity capital.

Functions of Financial Management

  1. Estimation of capital requirements: A finance manager has to make an estimation of the capital requirements of the company. This will depend upon expected costs and profits and future programs and policies of concern. Estimations have to be made in an adequate manner which increases earning capacity of the enterprise.

  2. Determination of capital composition: Once the estimation has been made, the capital structure has to be decided. This involves short-term and long-term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.

  3. Choice of sources of funds: For additional funds to be procured, a company has many choices like-

    1. Issue of shares and debentures
    2. Loans to be taken from banks and financial institutions
    3. Public deposits are to be drawn in form of bonds.

    Choice of factor will depend on the relative merits and demerits of each source and period of financing.

  4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns are possible.

  5. Disposal of surplus: The net profits decision has to be made by the finance manager. This can be done in two ways:
    1. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonuses.
    2. Retained profits - The volume has to be decided which will depend upon expansional, innovational, and diversification plans of the company.

  6. Management of cash: The finance manager has to make decisions about cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc.

  7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Financial Planning - Definition, Objectives, and Importance

Definition of Financial Planning

Financial Planning is the process of estimating the capital required and determining its competition. It is the process of framing financial policies about procurement, investment, and administration of funds of an enterprise.

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to:

  1. Determining capital requirements- This will depend upon factors like the cost of current and fixed assets, promotional expenses, and long-range planning. Capital requirements have to be looked at in both aspects: short-term and long-term requirements.

  2. Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt-equity ratio- both short-term and long-term.

  3. Framing financial policies with regards to cash control, lending, borrowings, etc.

  4. A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at the least cost to get maximum returns on investment.

Importance of Financial Planning

Financial Planning is the process of framing objectives, policies, procedures, programs, and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as-

  1. Adequate funds have to be ensured.

  2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.

  3. Financial Planning ensures that the suppliers of funds are easily investing in companies that exercise financial planning.

  4. Financial Planning helps in making growth and expansion programs which helps in the long-run survival of the company.

  5. Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.

  6. Financial Planning helps in reducing the uncertainties which can be a hindrance to the growth of the company. This helps in ensuring stability and profitability in concern.