Management is concerned with the flow of funds and involves decisions relating to the procurement of funds, investment of funds in long-term and short-term assets, and distribution of earnings to owners called financial management.
FINANCIAL MANAGEMENT IS THE LIFEBLOOD OF BUSINESS.
Interaction of arranging, sorting out, controlling, and checking monetary assets so as to accomplish authoritative objectives and goals.
“FINANCIAL MANAGEMENT is the activity concerned with planning, raising, controlling and administering funds used in business”.
- Guthman and Dougal
“FINANCIAL MANAGEMENT is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations”.
SCOPE OF FINANCIAL MANAGEMENT
Estimation of financial management: FM involves the estimation of both long term and short-term financial requirements. It is possible only by studying the present and future needs of funds.
The decision regarding optimal capital structure: Capital structure is the proportion of different securities used for financing the operation of the business. FM involves various decisions for the optimal capital structure.
Selection of sources of finance: there are many sources of finance such as shares, debenture, etc. FM is concerned with the selection of the best sources of finance.
Maintenance of liquidity: Liquidity refers to adequate cash available in business every time to meet the day-to-day needs of concern. FM involves maintaining liquidity in business for smooth running.
Easy availability of funds: FM aims are easily available for funds. The management ensures that funds should be available whenever the need arises.
Optimal use of funds: FM aims for optimum use of funds by maintaining a balance between liquidity and solvency.
FINANCIAL DECISIONS
Investment decisions: where to invest. It refers to funds in short-term and long-term assets.
Long haul investment choices: likewise called capital budgeting decisions It refers to investing in fixed assets such as buildings, furniture, machines, etc
Short-term investment decisions: it is also called working capital decisions. it refers to investing in current assets.
(2) Finance Decisions: It refers to decisions about the best sources of finance. It means choosing or selecting the best sources of finance for the raising of finance for the short term or long term. It must ensure easy availability of funds.
(3) Dividend Decisions: it refers to decisions about how much finance is distributed to shareholders and how much is retained in the business for a long period to meet any uncertainty.
Part of the financial aspects concentrates on the administration of cash and different resources.
It is considered as the lifeblood of business.
It provides access to all other resources required for business.
Raising finance
Investing in assets
Distributing returns earned from assets to shareholders
Determining the financial needs
Financial Decision
Investing Decision
Working capital decisions
Dividend policy decision
Financial control
Routine capabilities: for the robust execution of the money capabilities, specific standard capabilities must be acted in the ordinary course of the business. the standard capabilities are :
Management of money receipts and installments and shielding of money balance
Opening bank accounts and managing them
Safeguarding of securities, insurance policies, and other valuable documents.
Maintaining records and preparation of reports.
Laying out a legitimate arrangement of inside review.
OBJECTIVE OF FINANCIAL MANAGEMENT
It is the obligation of the top administration to set out the targets or objectives which are to be accomplished by the business.
Profit Maximization :
Measurement of performance
Effective distribution and usage of assets
Maximization of social welfare
Source of incentive
Helpful in facing adverse business conditions
Helpful in the growth of the firm.
Wealth Maximization :
This approach is now universally accepted as an appropriate criterion for making financial decisions as it removes all the limitations of the profit maximization approach.
It is also known as the net present value (N.P.V) maximization approach.
The contrast between the current worth of future money inflows produced by a resource and its expense is known as net present worth (N.P.V)
Profit Maximization Versus Wealth Maximization: -
The abundance boost approach is better than the benefit augmentation approach.
It has the following advantages in its favor
It uses cash flows instead of accounting profits: it gives due importance to the time value of money.
It gives due significance to the installment of ordinary profits
It gives due importance to risk factors and analyses risk and uncertainty.
Indispensable organ of business management.
Continuous process.
Different from accounting functions.
Coordination with other departments.
Decision-making for the top level.
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