Financial management refers to the management of all financial functions and aspects of a company or an individual. It involves strategic planning, organizing, controlling and evaluating all financial activities including procurement of funds, utilization, etc.
Good financial management allows the CFO (Chief Financial Officer) of a company to make informed decisions, get insights on how to procure funds and create a long-term vision. It helps in maintaining organizational efficiency, maximizing profits and minimizing expenses.
There are 3 main scopes (elements) of proper financial management:
The following are some of the functions of financial management:
Financial management provides the foundation for proper fund utilisation and strategic planning to uphold fiscal supervision. Managing finances is crucial since it adds value to an organisation and strengthens the customer relationship. Financial management involves managing cash movement, risk management and managing credit.
Imagine a financial institution (banks or Non-banking financial institutions) operating under the strict supervision of the central bank. Since the Central Banks control the monetary mechanism, they can regulate the general functioning of banks by tweaking repo/reverse repo rate values, etc. Banks essentially earn profits from the difference in interest income earned from extending loans and interest paid by their customers.
When banks face financial trouble, they may reach the central bank for policy changes that can keep them running. This may include raising taxes or aiming to reduce non-performing assets.
Some basic objectives or perks of efficient financial management include:
The five A’s of managing finances resourcefully include-
Also Read: Personal Finance Calendar 2022: Best Financial Habits To Look Forward To This Year
There are four types of financial decisions:
Employing funds in different assets is integral to any organisation. Long-term investment decisions affect profitability and liquidity. Hence they are generally irreversible and struggle to maintain the organisation’s dignity.
For example, to cope with competition, Mahindra made long term decisions to invest in electric vehicles. This decisive decision can potentially change the course of the Indian automobile sector or can backflip if not done right. Bad capital budgeting can destabilize their financial fortune and affect their position in the stock market.
Sourcing funds to ensure smooth functioning is the quintessential decision organisations need to make. Raising funds from long-term sources includes equity, shares, debentures, bank loans, etc. Capital structure essentially considers the risks involved in the repayment of such borrowed funds.
The cost of raising/repaying capital varies, and so does the risk associated with it. Additionally, floatation costs like commissions, brokerage, etc., make funding less appealing.
Profit distribution determines how well a company understands and regards contributions. Sharing dividends among shareholders involves devising an approach determined by the dividend per share. Normally, it does not change concerning minor changes in profits.
Dividend sharing also determines a company’s growth prospects and cash flow positions. Availability of adequate cash is crucial, especially when the economy is vulnerable to fluctuations.
It involves effectively employing an organisation’s available working capital. Companies need to analyse their assets and liabilities for a stable cash flow. This would eventually assist them in meeting short term debt obligations and maintaining production costs.
Working capital management works with several financial ratios that can effectively ensure the smooth operation of the cash conversion cycle.
Also Read: 5 Pro Personal Finance Tips For Millennials
With Hindustan Motors shutting down operations in 2014, it is evident that growing financial indiscipline, critical fund shortage and inappropriate demand can be fatal for an organisation. Efficient financial management is therefore essential for profit maximisation and long-run survival.
Ans: Some books on financial management include ‘Fundamentals of Financial Management by Eugene Brigham, Financial management: Theory and Practice by Brigham and Ehrhardt, etc.
Ans: Financial management can decide if an organization requires more capital from various means. This is then handled by accountants who use statistics from the balance sheet and analyze the circumstances.
Ans: Treasury dept. implements the financial plans formulated, coordinated and administered by financial managers. Thus the former is short term depending on the execution, while the latter is for the long run.
National Pension Scheme (NPS) – How to Open NPS Account?
National Pension Scheme or NPS is a voluntary contribution-based retirement benefits scheme introdu... Read More »Senior Citizen Savings Scheme (SCSS) – Interest Rate 2023
The Senior Citizen Savings Scheme is a government savings scheme launched for the senior citizens o... Read More »Mahila Samman Saving Certificate Scheme – Meaning, Eligibility, Features and Interest Rate
If you're a woman looking for a secure investment option, the Mahila Samman Saving Certificate migh... Read More »List of GST State Codes and Jurisdiction 2023
What is the GST State Code? GST state code is the first two digits of the number on the GS... Read More »Open PPF Account Online and Offline – Features, Documents Required and Benefits
PPF (full form: Public Provident Fund) is a government backed long-term savings scheme that comes w... Read More »How to Invest in the Share Market in 2023 – A Beginner’s Guide
A share market is a platform where buyers and sellers trade shares of publicly-listed companies. Co... Read More »What is Management Buyout (MBO) – Process and Example
A management buyout means a type of business acquisition where a business is acquired from its exis... Read More »What are Indian Government Bonds – Types and Interest Rates
Government bonds in India are debt securities issued by the government of India to finance its fisc... Read More »Bad Debt – Provision, Example and How to Calculate It?
Bad debt is the amount of debt that cannot be recovered as the customer is unable to repay it. Ther... Read More »PPF Account for Minors – Eligibility, Taxation and How to Open?
A Public Provident Fund or PPF account can easily be opened for minors with a deposit of just ₹10... Read More »PPF Withdrawal Rules – Rules, Process and Tax Implication
PPF Withdrawal Rules The table given below will explain the PPF account withdrawal rules along w... Read More »Debt Service Coverage Ratio (DSCR) – Formula and Calculation
Debt Service Coverage Ratio or DSCR is a measurement of a firm’s short-term financial health. It ... Read More »Top 10 Chit Fund Schemes in India in 2023
Chit funds are one of the most popular return-generating saving schemes in India. It is a financial... Read More »10 Best Gold ETFs in India to Invest in March 2023
Gold ETFs or Gold Exchange Traded Funds are passively managed funds that track the price of physica... Read More »10 Best Demat Accounts in India for Beginners in 2023
Creation of Demat accounts revolutionised the way trades were conducted at the stock exchanges.&nbs... Read More »20 Best Index Funds to Invest in India in March 2023
What is an Index Fund? An index fund is a type of mutual fund or exchange-traded fund (ETF) that... Read More »Best Arbitrage Mutual Funds to Invest in India in March 2023
Arbitrage funds are hybrid mutual fund schemes that aim to make low-risk profits by buying and sell... Read More »10 Best SIP Plans in India to Invest in March 2023
What is SIP? SIP or Systematic Investment Plan is a method of investing a fixed amount in ... Read More »10 Best Corporate Bond Funds in India to Invest in March 2023
Corporate bond funds are debt funds that invest at least 80% of the investment corpus in companies ... Read More »10 Best Bank for Savings Account in India 2023 – With Interest Rates
Savings account is a type of financial instrument offered by several banks. It lets you safely depo... Read More »