Financial Management
Management of funds is a critical aspect of financial management. Management of funds act as the foremost concern whether it is in a busineundertaking or in an educational institution. Financial management, which is simply meant dealing with management of money matters.
Meaning of Financial Management
By Financial Management we mean efficient use of economic resources namely capital funds. Financial management is concerned with the managerial decisions that result in the acquisition and financing of short term and long term credits for the firm. Here it deals with the situations that require selection of specific assets, or a combination of assets and the selection of specific problem of size and growth of an enterprise. Herein the analysis deals with the expected inflows and outflows of funds and their effect on managerial objectives. In short, Financial Management deals with Procurement of funds and their effective utilization in the business.
So the analysis simply states two main aspects of financial management like procurement of funds and an effective use of funds to achieve busineobjectives.
Procurement of funds:
As funds can be procured from multiple sources so procurement of funds is considered an important problem of busineconcerns. Funds obtained from different sources have different characteristics in terms of potential risk, cost and control.
Funds issued by the issue of equity shares are the best from risk point of view for the company as there is no question of repayment of equity capital except when the company is liquidated.
From the cost point of view equity capital is the most expensive source of funds as dividend expectations of shareholders are normally higher than that of prevailing interest rates.
Financial management constitutes risk, cost and control. The cost of funds should be at minimum for a proper balancing of risk and control.
In the globalised competitive scenario, mobilization of funds plays a very significant role. Funds can be raised either through the domestic market or from abroad. Foreign Direct Investment (FDI) as well as Foreign Institutional Investors(FII) are two major sources of raising funds. The mechanism of procurement of funds has to be modified in the light of requirements of foreign investors.
Utilization of Funds:
Effective utilization of funds as an important aspect of financial management avoids the situations where funds are either kept idle or proper uses are not being made. Funds procured involve a certain cost and risk. If the funds are not used properly then running businewill be too difficult. In case of dividend decisions we also consider this. So it is crucial to employ the funds properly and profitably.
Scope of Financial Management
Sound financial management is essential in all types of organizations whether it be profit or non-profit. Financial management is essential in a planned Economy as well as in a capitalist set-up as it involves efficient use of the resources.
From time to time it is observed that many firms have been liquidated not because their technology was obsolete or because their products were not in demand or their labour was not skilled and motivated, but that there was a mismanagement of financial affairs. Even in a boom period, when a company make high profits there is also a fear of liquidation because of bad financial management.
Financial management optimizes the output from the given input of funds. In a country like India where resources are scarce and the demand for funds are many, the need of proper financial management is required. In case of newly started companies with a high growth rate it is more important to have sound financial management since finance alone guarantees their survival.
Financial management is very important in case of non-profit organizations, which do not pay adequate attentions to financial management.
How ever a sound system of financial management has to be cultivated among bureaucrats, administrators, engineers, educationalists and public at a large.
Objectives of Financial Management
Efficient Financial management requires the existence of some objectives, which are as follows
1) Profit Maximization:
The objective of financial management is the same as the objective of a company which is to earn profit. But profit maximization alone cannot be the sole objective of a company. It is a limited objective. If profits are given undue importance then problems may arise as discussed below.
The term profit is vague and it involves much more contradictions.
Profit maximization must be attempted with a realization of risks involved. A positive relationship exists between risk and profits. So both risk and profit objectives should be balanced.
Profit Maximization fails to take into account the time pattern of returns.
Profit maximization does not take into account the social considerations.
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