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meaning of Financial Management

meaning of Financial Management

Discuss meaning of Financial Management within the Financial Management forums, part of the PUBLISH / UPLOAD PROJECT OR DOWNLOAD REFERENCE PROJECT category; meaning of Financial Management Financial Management Management of funds is a critical aspect of financial management. Management of funds act ...

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DK 2424
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dk2424
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meaning of Financial Management - August 21st, 2007

meaning of Financial Management

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 business undertaking 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 business objectives.
Procurement of funds:
As funds can be procured from multiple sources so procurement of funds is considered an important problem of business concerns. 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 business will 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.
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DK 2424
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dk2424
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Re: meaning of Financial Management - August 21st, 2007

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.
2) Wealth Maximization:
It is commonly understood that the objective of a firm is to maximize value and wealth.
The value of a firm is represented by the market price of the company's stock. The market price of a firm's stock represents the assesment of all market participants as to what the value of the particular firm is. It takes in to account present and prospective future earnings per share, the timing and risk of these earning, the dividend policy of the firm and many other factors that bear upon the market price of the stock. Market price acts as the performance index or report card of the firm's progress and potential.
Prices in the share markets are affected by many factors like general economic outlook, outlook of the particular company, technical factors and even mass psychology. Normally this value is a function of two factors:
The anticipated rate of earnings per share of the company
The capitalization rate.
The likely rate of earnings per shares depend upon the assessment of how profitable a company may be in the future.
The capitalization rate reflects the liking of the investors for the company.
Methods of Financial Management:
In the field of financing there are multiple methods to procure funds. Funds may be obtained from long term sources as well as from short term sources. Long term funds may be procured by owners that are shareholders, lenders by issuing debentures, from financial institutions, banks and the general public at large. Short term funds may be availed from commercial banks, public deposits, etc. Financial leverage or trading on equity is an important method by which a finance manager may increase the return to common shareholders.
At the time of evaluating capital expenditure projects methods like average rate of return, pay back, internal rate of returns, net present value and profitability index are used. A firm can increase its profitability without adversely affecting its liquidity by an efficient utilization of the current resources at the disposal of the firm. A firm can increase its profitability without negatively affecting its liquidity by efficient management of working capital.
Similarly, for the evaluation of a firm's performance there are different methods. Ratio analysis is a common technique to evaluate different aspects of a firm. An investor takes in to account various ratios to know whether investment in a particular company will be profitable or not. These ratios enable him to judge the profitability, solvency, liquidity and growth aspect of the firm.
Financial Management Defined
What is Financial Management?
Financial Management can be defined as:
The management of the finances of a business/organization in order to achieve financial objectives
Taking a business as the most common structure, the key objectives of financial management would be to:
• Create wealth for the business
• Generate cash, and
• Provide a return on investment keeping in mind the risks that the business is taking and the resources invested
There are three primary elements to the process of financial management:
(1) Financial Planning
Management need to ensure that sufficient funding is available to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit.
In the medium and long term, funding may be needed for significant additions to the productive capacity of the business or to facilitate acquisitions.
(2) Financial Control
Financial control is a critically important activity to help the business ensure that said business is meeting its goals. Financial control addresses questions such as:
• Are assets being used efficiently?
• Are the businesses assets secure?
• Does management act in the best interest of the shareholders and in accordance with business rules?
(3) Financial Decision Making
The primary aspects of financial decision making relate to investment, financing and dividends:
• Investments must be financed in some way; however there are always financing alternatives that can be considered. For example it is possible to raise funds from selling new shares, borrowing from banks or taking credit from suppliers.
• A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits.


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dk2424
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Re: meaning of Financial Management - August 21st, 2007

Types of Business Finance
We have mentioned above, that funds are required by business firms for different purposes — to acquire fixed assets, to provide for operating expenses, and to improve methods of production. Depending on the nature and purpose to be served, we may distinguish between three types of finance. These are:
(i) Long term finance;
(ii) Medium term finance;
(iii) Short term finance.

(i) Long term finance: Funds which are required to be invested in the business for a long period (say more than five years) are known as long term finance. It is also known as long term capital or fixed capital. This type of finance is used for acquiring fixed assets, such as land, building, plant and machinery, etc. The amount of long term funds required naturally depends on the type of business and the investment required for fixed assets. For example, the manufacture of steel, cement, chemicals, etc. involve heavy expenses to be incurred on buildings, machinery and equipments. A small factory or a small workshop repairing electrical goods will require much smaller investment in fixed assets. On the other hand, traders generally, require smaller amounts for long term investment as compared to the requirement of manufacturers. This is because trading concerns do not require expensive long-lived assets to be used for their activities. The size of the business firm also determines the amount to be invested in fixed assets.
Large scale manufacturing and trading activities will obviously require more long term capital than small scale enterprises. Long term finance is required for acquisition of assets and modernisation purposes.

(ii) Medium term finance:
Business firms often need funds for a period exceeding one year and not more than 5 years for particular purposes. This is referred to as medium term finance or medium term capital. They may include expenses on modernisation of plant and machinery, or introduction of a new product, adoption of new methods of production or distribution, or an advertisement campaign. The necessity of this type of finance generally, arises on account of changes in technology or increasing competition. Manufacturing industries are more often in need of such finance. The amount required depends on the nature or purpose. The expenditure incurred is regarded as an investment because higher returns are expected out of it.

(iii) Short term finance: This type of finance is required for a short period upto one year. It refers to funds
EXTERNAL TRADE 187 needed to meet day-to-day requirements and for holding stocks of raw materials, spare parts, etc. to be used for current operations. Short term finance is often called working capital or short term capital, or circulating capital. As soon as goods are sold and funds are recovered the amount is again used for current operations. Generally, speaking, production processes are completed within a year and goods are ready for sale. Hence, short term funds can be used over and over again from year to year.
How much short term finance will be required depends on (a) the nature of business undertaken; (b) the time gap between commencement of production or purchase of goods and their sale; and
(c) The volume of business. Trading firms normally require proportionately more of short term capital than long term capital. Manufacturing concerns, on the other hand, need relatively smaller amounts of short term capital as compared to long term capital.
Again, if production time and the timegap between production and sale is shorter (say one or two months), it will require much less short term finance than if the time gap is one year. The volume or scale of business activity also determines the amount of short term finance. Thus, a small factory needs much less short term capital than a large manufacturing enterprise.


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Re: meaning of Financial Management - September 25th, 2007

awsome... thank u so much
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Re: meaning of Financial Management - February 17th, 2008

hi dk2424 the notes are very good & useful too
thanks
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Re: meaning of Financial Management - January 9th, 2009

Quote:
Originally Posted by dk2424 View Post
meaning of Financial Management

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 business undertaking 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 business objectives.
Procurement of funds:
As funds can be procured from multiple sources so procurement of funds is considered an important problem of business concerns. 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 business will 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.
Hi,
Can I please get full details of "Accounting Profit" & "Economic Profit" and how does they differ from each other.

Early response is much appreciated.

Thanks,
Ramesh
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Re: meaning of Financial Management - October 26th, 2009

Thanks a lot for the information.........................
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