What is Financial Management: Definition, Objectives, Functions

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Pratibha Devasenapathy | Nov-05-2020

What is financial management?

For any organisation to have a solid impact in the market, it’s important that the cash flow is regular and undisrupted. Regular checks on working capital, current assets, liabilities, cash flow, debtor management, etc. ensure that your business continues to function at its best ability with optimum results at the end.

Financial management helps achieve most of a company’s objectives. Sound financial planning aids business owners get a holistic view of their company’s financial health. Financial management is nothing but planning, organizing, directing and controlling various financial activities such as procurement and utilization of funds of the enterprise. Basically, application of general management principles to financial resources of the enterprise is the crux of sound financial management.

Objectives of financial management

Being financially independent is one of the primary objectives when starting a business. Business owners must consider the potential consequences of their management decisions on profits, cash flow and on the financial condition of the company. The activities of every aspect of a business have an impact on the company's financial performance and must be evaluated and controlled by the business owner. Here are the primary objectives of financial management that make or break a business:

  • As any business grows and matures, it will require more cash to finance its growth. Most companies experience losses and negative cash flows during their initial period. Financial management is extremely important during this time and managers must ensure that they have ample cash at hand to pay salaries to the employees as well as suppliers, despite having more money going out than coming in during the early months of the business
  • Financial management helps plan and budget for various needs. It helps business owners decide whether to fund the expansion of the functions, internally or by borrow funds from investors or money lenders. Finding the proper source of funds at the lowest minimum cost is what financial management is all about
  • Financial planning and management also help in controlling the company's cost of capital and not letting the balance sheet become too highly leveraged with debt, which would eventually have an adverse effect on the company’s credit rating
  • The process of financial management also ensures that the funds are utilised in the maximum and the most optimum way possible after procurement
  • It also ensures planning on safe investments to achieve adequate rate of returns
  • Financial reports or financial management also assists in providing adequate returns to the shareholders which depends on the earning capacity, market price of the share, expectations of the shareholders.

What are the key functions of financial management?

Financial management is one of the key functions in an organisation to achieve your targets. Based on your company’s functions, operations and size, you can get an astute financial manager to manage the money, diligently. Here are some of the most important function which a finance manager must ensure for sound financial management:

Financial planning and forecasting

In any growing company, the inflow and outflow of cash is unpredictable. No matter how much planning is in place, there are several instances which do not comply with our current needs. Thus, it is the responsibility of a finance manager to plan and estimate the business’ current and future financial needs. A financial manager must be able to draw out details of the money that would be required to purchase different assets for the company.

Investment of funds

Financial manager must have a keen eye for what’s happening in the market and how high or low the shares of companies are performing. This will allow him to provide his advice to business owners, on where, when and how to invest. The advisor must be able to identify the channels through which the company would get the highest of returns for smooth operability of the business.

Liquidity maintenance

Whether it is to buy inventory, raw materials, pay salaries or tackle other financial requirements, liquefiable funds play the most important role. Though cash is the best source for proper maintenance of liquidity, financial manager must determine if there is a demand for liquid assets. He/she must also be able to arrange these assets in a way that the business don’t face scarcity of funds at any point.

Measuring the cost of capital

Each fund source has different cost of capital. As the profit of the firm is directly associated with cost of capital, each cost of capital should be measured. A finance manager must be able to identify these costs of capital with fund source it is associated with, to take crucial financial decisions.

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