Scope And Significance of Financial Management

Financial Management

The heart of every company is finances. Along with the majority of resources, finances are limited. Despite this, the needs and desires of the business remain unlimited. To help resolve this dilemma, finances must be managed efficiently. The financial administration must make investments returning more funds than required for financing the business. The administration can decrease business costs, invest in a company portfolio, or apply for a credit card. We refer to the entire process as financial management. The responsibilities of financial management include:

• Determining methods to decrease the financial expenses of the business

• Making certain sufficient funds are available

• Organizing, planning and controlling activities related to finance

What is the Scope and Nature of Financial Management?

The four major financial management scopes are financing decisions, investment decisions, working capital decisions and dividend decisions.

Financing Decisions:

The significance of financial management includes all financing decisions. Decisions must be made regarding the combination of finances, financial structure and assets of the business. Sources and methods must be considered when raising funds for the company including alternative investment, financing, and securities sources. Numerous sources are available to ensure the company is able to raise the necessary funds. The financial manager is critical for the role of ethics in financial management. The responsibilities for this position determine the success or failure of the business.

The financial manager develops the most effective combination of capital for the company to ensure the market price is maximized for company shares in the future. We have found the correct balance between equity and debt is necessary to ensure shareholder’s high equity with low risk. Financial and debt leverage impact the risk and return for the shareholders. The best way to maximize market value is by matching the return to the risk. Determining the best method for issuing securities, and raising funds are determined by the finance department.

Investment Decisions:

Investment decisions include evaluating risk, determining a projects estimated value, and measuring the cost of capital. We believe the two key factors of investment decisions are capital liquidity and budgeting. Capital budgeting is required to allocate capital, or commit funds towards assets with a high potential for future earnings. Capital budgeting is also required for renovating or replacing company assets. The finance manager must establish a proper balance between current and fixed assets.

The result is the maintenance of liquidity, and maximizing profitability for the company. The future growth and success of the company are dependant on capital budgeting. The decision for financial administration is difficult because there are unknown factors regarding estimating benefits and costs.

Working Capital Decisions:

Working capital decisions encompass both current liabilities and investments including cash, inventory, receivables and short-term securities. Liabilities include creditors, outstanding expenses, credit card balances, bank overdrafts, and general bills. We classify current assets as anything capable of being converted into cash in a 12 month period. Our liabilities remain liabilities until full payment has been made. We also make certain there are available funds, then invest, manage, and control these funds properly.

The other significant factors including estimating financial requirements and investment returns, profit planning, working capital assessments and all other financial matters.

Dividend Decisions:

The development of a good dividend policy is necessary to meet goals for maximizing wealth. The key decision is whether the balance should be retained with a portion of the profits redistributed, or if all dividend profits should be retained by the company. We consider numerous aspects prior to making this decision including the payout ratio for our shareholders, available investment opportunities, and any plans we have for either expansion or growth. The other important considerations are dividend stability and the type of dividends such as stocks or cash.

Financial Management Objectives

The role of ethics in financial management includes controlling the financial assets, allocation and procurement. Our most important objectives include:

• Ensuring the supply of funds is adequate for the business concerns.

• Ensuring the share market price and earning capacity meet shareholder expectations.

• Investing funds safely to ensure the rate of return is adequate.

• Ensuring procured funds are used in the best possible way.

• Ensuring capital is balanced between equity and debt ratios.

Functions of the Financial Administration

Financial managers need to estimate the company’s capital requirements. This is dependent on the profits, costs, and policies of future programs. Adequate estimations are required to increase the earning potential of the business. Estimations are critical regarding the significance of financial management. No decision can be made regarding capital structure without an estimation. A long and short-term debt-equity analysis is necessary. Additional funds expected from outside parties and company funds must be considered to achieve the correct portion of equity.

We have used a wide variety of sources for procuring adequate funding. The current choices include issuing debentures and shares, loans from financial institutions and banks, and public deposits drawn from bonds. Every source has advantages and disadvantages including the financing period. Funds can be used for safe and profitable ventures to help ensure regular returns. The finance manager must decide how the net profits will be used. The first option is a dividend declaration. The bonuses, dividend rate, and benefits must be identified.

The second option is retaining profits. The percentage retained is dependant on the company’s diversification, innovation, and expansion plans. The financial manager is responsible for planning, procuring, and using the funds. This means control over finances is extremely important. We have used a variety of techniques including profit and cost control, financial forecasting, and ratio analysis. Cash management decisions are critical for the success and growth of the business. Adequate cash is required to pay employee salaries and wages.

Cash is also necessary to pay water and electricity bills, meet current liabilities, maintain the appropriate amount of stock, pay creditors and purchase all required materials.

Benefits of Different Types of Investments

Estimating the benefits of different types of investments for the future is difficult, with no estimate guaranteed. The key risk for investments is the uncertainty of the returns. For this reason, the risk and expected return must be evaluated. Funds must be committed to new investments. Budgeting is an important consideration. When an asset is no longer profitable or becomes less productive, the funds must be recommitted to another investment. Determining the expected rate of return and risks are dependent on the specific of each investment.

One of the most important responsibilities of the financial manager is making financial decisions. Decisions need to be made regarding how and where the funds will be acquired to meet the needs of the business. We believe the most important aspect is determining the correct balance between debt and equity. The success of the capital structure of the company requires the best possible combination. If the value of the market shares has been optimized, the capital structure of the company is solid. Investment decisions should consist of different resources and outlets.

Placing all investments with the same source is extremely risky. When a company has different types of investments, the chances of all of them becoming unprofitable within the same period of time is incredibly small. If the finance manager believes outside investments have become necessary for the well-being of the company, an acquisition or merger with another company becomes an important consideration. When appropriate investments are made, the liquidity and profitability of the business will improve.

The efficient management of all current assets is necessary to protect the company from illiquidity risks. During extreme situations, the business can become insolvent due to a loss of liquidity. The most common cause is an improper balance between the liquidity and profitability of the business’s current assets. When a business does not make investments in current assets for sufficient liquidity, the business is placed at risk. When the finance manager makes heavy investments in current assets for liquidity alone, interest will be lost because the assets will not be profitable.

Without proper balance, the company can fail. This can be avoided when the financial manager has developed good techniques for the management of current assets. Funds must be available when required by the business. Another important decision is regarding investments in dividends. The decision needs to be made as to the most appropriate distribution of the profits. Shareholder dividends are generally paid in cash. The company should also consider other available options such as bonus shares. Shareholders can be issued bonus shares with no charge.

The financial manager needs to consider cash dividends, bonus shares, and dividend stability. If the financial manager does not take the time and complete the necessary research, the financial management of the company is placed at significant risk.

FAQ

What is nature of financial management?

The financial administration is defined as the finance function that is in charge of the economic and financial management system of a business. The principles of financial management in a company can be summarized as generating greater wealth or adding value to the company’s finances. Side by side, the financial management is based on the use of financial tools and techniques that the person in charge of this area must integrate into his or her strategic vision, in order to maximize wealth or generate a greater value of a business organization. All in all, the nature of financial management is to maximize the value of the investment for shareholders or owners. Strictly speaking, the essence of financial management: It is the creation of business value.

Why do you need financial planning?

Financial planning is an essential tool for financial management practices in business. It is the process that is carried out to make a comprehensive, detailed, organized, and personalized financial plan, which ensures that the financial objectives that have been previously determined are achieved. As well as the deadlines, costs, balance sheet, and financial resources required to make it possible. It allows the entrepreneur to have a map that marks the route that money will take within financial management. Surely, when a business lacks this information or it is simply not clear, making a financial decision goes through quite a few detrimental changes.

What financial problems may affect strategic planning? 

Financial discipline is vital for the future of any company in the world. In contemplation of the financial problems, these are the main cause of the company’s bankruptcy. Sound financial management can combat these problems in order to avoid a crisis in a business concern. Several obstacles can be identified inside this environment, which impedes the execution of a financial activity. Some obstacles are internal and others are external. The first is related to: miscommunication, the application took longer than expected, a deficit in the capacity of employees, absence of clarity in general objectives, the inefficiency of performance coordination. While those of external nature is associated with the crisis that distracted the application, the emergence of unforeseen external problems, and the external factors that impacted the application. In conclusion, the difficulties are more associated with internal factors, and a firm that planned strategically reduced the effect of these factors and ensured more efficiently the financial reports. It is imperative to have financial control over a firm, therefore, If a financial plan is perfectly structured, it will be able to have a panoramic perspective of all the elements that are affecting the different areas to choose a certain path within strategic financial management that will provide good results. In short, this will make a company have sustainable growth.

What are the advantages of financial management?

There will always be advantages that help and facilitate many areas of a company. In financial management, we have many. Starting from the tasks’ organization and financial control that it brings. One advantage is that it always helps to keep the focus on activities that are performed and do not go beyond the estimated cost. This is thanks to the improved decision making, and all on the basis of sums and facts. An important advantage is that the recorded information is made available to business users in a systematic way, so that understanding can flow properly within the company. Furthermore, they avoid debt and estimate the capital needed by a company to continue its activities. Definitely, corporate finance needs proper financial management to make any investment decision or oversee business areas.

What are the disadvantages of financial management?

Financial management of a firm is not easy work and has to be treated very seriously. As every financial job, there are disadvantages and we must know what they are. Mainly, we have to take into consideration in the financial practices if a manager has finished a task it does not mean that he has really concluded it. The work done has to be reviewed often and change the budget in case there are any mistakes. Since they follow rules that are usually not able to keep up with the dynamic changes in the market environment. They manage and avoid financial deviations in these cases, but it is difficult for them to identify reasons for current deviations, which is an issue but not completely their area. Another disadvantage is that the tools used by a manager are not economic; a considerable investment is needed when we talk about its needs so that they can properly do their job. Although there are disadvantages, they make efforts to prevent the early closure of a company and to ensure their productivity in a long term, since it often happens that a business owner gives up before reaching 5 years of business.

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