Meaning and Definition of Financial Management
According to Weston & Brigham___“Financial management is an area of financial decision making harmonizing individual motives & enterprise goals”.
According to Howard & Upton___” It is the application of the planning & control functions of the finance functions”.
Thus, Financial management refers to the management of finance. It is the effective & efficient utilization of financial resources. It means creating a balance among financial planning, procurement of funds, profit administration & source of funds.
Importance of Financial Management
- Financial planning and control: Finance is a base for all the business activities. Business activities should be not only harmonized but also planning determination and implementation offer analysis of finance. All activities revolve around the finance. So finance planning and control are important function.
- Essence of Managerial Decision: It provides a sound base to all managerial decisions, financial management is the focal point in the process of decision making. Production, sales, employees, research & development decisions are based on financial management.
- Improve Profitability: Profitability of the concern purely depends on the effectiveness and proper utilization of funds by the business concern. It helps to improve the profitability position of the concern with the help of strong financial control devices such as budgetary control, ratio analysis and cost volume profit analysis.
- Centralized Nature: All business activities are centrally administered & control. All financial decisions in business are taken at a central point. Functional areas such as marketing & production are decentralized in the modern industrial concern, but financial co-ordination and control are achieved through centralization.
- Basis of a managerial Process: Financial management is the basis of whole management process, such as planning,co-ordination and control. According to sound financial planning all other plans are executed and controlled.
- Measure of Performance: Financial management deals with risk and uncertainty factors which are directly hit by profitability and risk.
Objectives of Financial Management
- To ensure regular and adequate supply of funds to the concern.
- To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.
- To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
- To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.
- To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.
Functions of Financial Management
- Estimation of capital requirements.
- Determination of capital composition.
- Choice of sources of funds.
- Investment of funds.
- Management of cash.
- Financial control.