Financial Management: Strategies for Business Success
Financial Management: Strategies for Business Success
Financial management is the managerial activity concerned with the planning and controlling of a firm’s financial resources. In other words, it involves acquiring, financing, and managing assets to accomplish the overall goal of a business enterprise.
Objectives of Financial Management
- Create wealth for the business
- Generate cash flow
- Provide an adequate return on investment, considering the risks and resources invested
Elements of Financial Management
- Financial planning
- Financial control
- Financial decision-making
Nature of Financial Management
- It is an indispensable organ of business management
- Its function is different from the accounting function
- It is a centralized function
- Helpful in decisions of top management
- It is applicable to all types of concerns
- It requires financial planning, control, and follow-up
- It is multidisciplinary, involving accounting, law, and management
Scope and Functions of Financial Management
- Estimating the total requirements of funds for a given period
- Raising funds through various sources, both national and international, keeping in mind cost-effectiveness
- Investing the funds in both long-term and short-term capital needs
- Funding day-to-day working capital requirements of the business
- Collecting from debtors and paying creditors on time
- Managing funds and treasury operations
- Ensuring a satisfactory return to all stakeholders
- Paying interest on borrowings
- Repaying lenders on due dates
- Maximizing the wealth of the shareholders over the long term
- Interfacing with the capital markets
- Maintaining awareness of all the latest developments in the financial markets
- Increasing the firm’s competitive financial strength in the market
- Adhering to the requirements of corporate governance
Key Functions of Financial Management
The functions of financial management can be broadly classified into three major decisions:
- Investment Decisions: These decisions relate to the selection of assets in which funds will be invested by a firm. Funds procured from different sources have to be invested in various kinds of assets.
- Financing Decisions: These decisions relate to acquiring the optimum finance to meet financial objectives and seeing that fixed and working capital are effectively managed.
- Dividend Decisions: These decisions relate to the determination of how much and how frequently cash can be paid out of the profits of an organization as income for its owners/shareholders, and the amount to be retained to support the growth of the organization.
Functional Areas of Financial Management
- Capital budgeting
- Working capital management
- Dividend policies
- Acquisitions and mergers
- Corporate taxation
- Determining financial needs
- Determining sources of funds
- Financial analysis
- Optimal capital structure
- Cost-volume-profit analysis
- Profit planning and control
- Fixed assets management
- Project planning and evaluation
Capital Budgeting
Capital budgeting is the process of making investment decisions in capital expenditures. A capital expenditure may be defined as an expenditure, the benefits of which are expected to be received over a period exceeding one year. Capital budgeting techniques help to determine the viability of the investment proposal or making long-term investment decisions.
Capital Budgeting Process
- Identification of investment proposals
- Screening the proposals
- Evaluation of various proposals
- Fixing priorities
- Final approval and preparation of the capital expenditure budget
- Implementing the proposal
- Proposal review