Financial Management – Meaning, Objectives, and Functions
Financial Management is a critical topic in business. The reason is that a company cannot function without the proper use of funds. It might even suffer stunted growth. To understand and apply the right management practices in the handling and use of funds, one has to know how valuable financial management is to a business.
In this post, we shall discuss financial management, its objectives, meaning, and function in an organization.
What is the Meaning of Financial Management?
Before dividing into the function and objectives of financial management, let’s define what the term means. Through the definition, one would appreciate the importance of the concept and why it needs to be considered in the business environment.
The most popular and acceptable definition of financial management as given by S.C.Kushal is that “Financial Management deals with procurement of funds and their effective utilization in the business”.
Weston and Brigham: Financial Management “is an area of financial decision-making, harmonizing individual motives and enterprise goals”.
Joshep and Massie: Financial Management “is the operational activity of a business
that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations”
Financial Management is critical to any company, whether small or big. It is like the lifeline of the business. It is also a vital activity that must be performed in any organization.
However, financial management entails the process of planning, organizing, monitoring, and also controlling the financial resources of an organization. The idea for doing such is to be able to achieve the vision or goals of the company at the stipulated time frame.
It controls every single thing regarding the company’s financial activities which includes the procurement of funds, use of funds, payments, accounting, risk assessment, and other things that are related to finances.
And that is one of the reasons it is considered to be an integral part of the company because, without proper use of funds, the business can go down. It might also not have what it takes to carry out production or activities.
The general principles of management are also applied to the financial management of the company too. But the main focus shouldn’t be to create principles or department to manage the finances of the business.
They must be set up to follow the best practices, use the required financial management tools, and also deploy the right strategies to minimize cost, and ensure production or business activities function smoothly.
In other words, the use of business funds matters. It’s the reason financial management is like the engine room of the company and can affect every other department if not handled properly.
So in order to eliminate any form of barrier that may hinder the growth of the business, firms must ensure that the right financial management mechanism is put in place.
The Objectives of Financial Management
There are objectives or reasons firms implement these management strategies to grow their business.
1. Profit Maximization
One of the reasons a company employs a financial manager is to maximize profit while managing the finance of the company.
The gain can be in the short or long-term. But the main focus is that the individual or department handling the financial issues of the company must ensure that the company in question is making sufficient profit.
2. Proper Mobilization of Finance
The collection of funds to run the business is also an integral part of financial management that the manager needs to handle appropriately.
Once the manager concludes the estimation of the amount needed for a business process, the required amount can then be requested from any legal sources such as debenture, shares, or even request for a bank loan. But the point is that there should be a proper balance between the money the firm has and the amount borrowed.
3. The Company’s Survival
The survival of the company is essential. That is one of the reasons the management considers hiring financial managers in the first place. The manager has to make adequate financial decisions to ensure the company is successful.
4. Proper Coordination
There must be a proper understanding and corporation among the various departments. The finance department must understand and agree with other departments within the company for the business to function smoothly.
5. Lowers Cost of Capital
Financial managers also try their very best to reduce the cost of capital, which is something that is vital to the business. They ensure money borrowed attracts little interest rates so the company can maximize profit.
Financial Management Functions
These are the duties of a fiscal manager. They are there to ensure that everything concerning finances within a company is in order.
Below are Financial Management Functions:
1. Financial Planning and Forecasting
It is the financial manager’s responsibility to plan and estimate the business’s financial needs. He needs to provide details regarding the amount of money that would be required to purchase different assets for the company.
The management through the financial manager needs to know what they need to spend on working capital and fixed assets for the business too.
Another vital duty of the financial manager is to make futuristic plans for funds that the company would need. And the manner in which the funds will be realized and used is also of utmost importance to the financial manager.
2. Determination of capital composition
Once the Planning and Forecasting have been made, the capital structure has to be decided. The mix of debt and equity used to finance the company’s future profitable investment opportunities is referred to as capital structure.
3. Fund Investment
The financial manager has to ensure that funds made available to the business are used adequately to grow the business. The cost of acquiring the said fund and value of the returns need to be compared and balanced.
The financial manager also needs to look into the channels of the business that is yielding higher returns and improve them.
4. Maintain Proper Liquidity
Cash is the best source for maintaining liquidity. The business requires it to buy raw materials, pay salaries, and tackle other financial needs of the company.
However, the financial manager has to determine if there is a demand for liquid assets. He also has to arrange these assets in a manner that the business won’t experience scarcity of funds.
5. Disposal of Surplus
Selling surplus assets and investing in more productive ways will increase profitability and therefore increase the ROCE.
6. Financial Controls
Financial control may be construed as the analysis of a company’s actual results, approached from different perspectives at different times, compared to its short, medium, and long-term objectives and business plans.
Financial management is a hot topic in the business world because of the importance of finance to the business.
The reason for establishing a company is to make a profit and also run for many years. However, it’s the financial manager’s responsibility that the finances of the company are used adequately.