Meaning
Financial management refers to the planning, procurement, utilization and controlling of financial resources by an organization so as to support in the achievement of predefined organizational objective. Financial resource plays most important role in the establishment of any business organization. Without financial resource it is not possible to start business. Financial management helps to raise the needed amount of capital and also ensures that the funds are utilized effectively and efficiently. It helps to eliminate the unnecessary expenses and also supports business organization in capital budgeting decision.
It supports the business organization to minimize the overall cost of capital by ensuring the optimal mix of sources of financing. It helps the business to make investment in most profitable project by evaluating all the available alternatives through the modern techniques like NPV, IRR, DPBP, and PI. It also supports business organization while distributing profits to the shareholders i.e. dividend decision by formulating and adopting appropriate dividend policy.
In the past years financial management focuses on the profit maximization. But nowadays it focuses on the shareholders’ wealth maximization along with the profit maximization.
Scopes of Financial Management
- Capital Structure Decision
- Capital Budgeting Decision
- Working Capital Decision
- Dividend Decision
Functions of Financial Management
Here we have discussed about some of the main functions or objectives of financial management.
Planning and procurement of financial resources
The main function of financial management is to determine the capital requirement and suggest the appropriate mix of sources of financing. It helps the business organization to mix debt and equity capital in such a way that will minimize the overall cost of financing. It also ensures that the business has used optimal amount of debt capital thereby reducing the financial risk.
Utilization of financial resources
Financial management also helps in the effective utilization of the collected capital. It ensures that the collected fund is utilized in such a way that will maximize the overall return and minimize the risks. Before making any investment decision it evaluates all the available alternatives in terms of risk and profit. In order to choose the most profitable and less risky project it evaluates all the available projects through the techniques like net present value (NPV), internal rate of return (IRR), profitability index (PI), discounted payback period (DPBP) etc.
Disposal of surplus
Disposal of surplus is all about the decision regarding the reinvestment or distribution of profit as a dividend to the shareholders.
Controlling of financial activities
It does not only support in the procurement and utilization of fund but also supports the business organization to control the extra financial costs by eliminating the unnecessary financial activities.