Fundamentals of financial management explained

By the word financial management we mean the process of planning and organizing of the financial activities of a company in such a way that it becomes easy to organize and control the activities and movements of the company in the profitable direction. It simply involves the application of the management principles in general for the proper utilization of the resources of the company.

Important investment decisions of a company include investing in fixed assets which is known as capital budgeting, and investing in current assets which is known as working capital decisions.

Another important field on which financial decision has to be taken by the management of a company is regarding the raising of funds from various sources. This decision should be based on the actual needs of the company and will include matters like the source of the money, the amount needed to be borrowed, and the terms of repayment which includes the interest rate and the period of repayment.

Another important aspect of financial management is to decide on the dividend to be paid to the share holders.  Usually the net profit is divided into two portions. One portion is given as dividend to the share holders at the rate decided by the company and the other portion is retained by the company as the amount needed for the future growth and diversification of the company.

Objectives of financial management

Financial management of a company is often concerned with the allocation and control of the finances of the company which was obtained as a result of the decision of the financial management. The important points in this regard are:

 

  • Arrange adequate funds for the company
  • Ensure adequate returns to the share holders
  • Ensure optimum utilization of the funds of the company
  • To ensure safety to the funds invested by the company
  • To ensure balance between equity and debt of the company

Functions of financial management

It is the duty of the finance manager of a company to keep an eye on the capital requirements of a company and provide whenever needed.  This is often based on the expected costs of production and income that will be generated from the products and the future programs and policies that can very well alter the financial condition of the company. The estimates so arrived at must be realistic and  capable of increasing the earning capacity of the company.

Once the amount is finalized it becomes the next duty of the financial management to decide the manner in which the required amount is going to be collected. This decision will be based on the equity capital possessed by the company plus the amount that has to be raised by other sources. The sources of funds for the capital of a company can be in the form of debentures or shares, loans from banks or financial institutions or public deposits. The selection process will be based on the merits and demerits of the source and the period of financing required

Another important aspect the financial manager has to consider is the investment of the surplus fund in profitable ventures that can ensure safety and returns as far as possible. This can be done in two ways.   A good portion of the surplus or the net profit can be disbursed among the share holders as their dividend and another portion can be utilized for the development of the company as well as for diversification of the company.

Management of cash

It is the duty of the finance manager to manage the available cash and its resources in such a manner that important matters like payment of wages, payment of bills pertaining to water, electricity etc are paid in time and the creditors are satisfied, the maintenance work is properly carried out and the purchase of raw materials etc are done in an efficient and appropriate manner.

It is the duty of the finance manager to plan how to procure and use funds at the appropriate time for the vital needs of the company. It is also his duty to enforce control over finance which can be done with the help of modern technique known as ratio analysis.   He is also the man to forecast financial needs and maintain cost and profit control.