Read this article to learn about the concept and scope of financial management!
Finance is the life blood of every business organization. Without finance no business is possible to run or operate. Financial management covers a very wide array. The interesting aspect is that finance department itself is not a profit centre.
Objectives for the department are determined by it, but achievement remains in the hands of others. Primary goal of financial management is to maximize corporate value and reduce risks. In principal, corporate finance is different from managerial finance, which studies financial decisions of all the firms, rather than a company or corporation only, the main concepts of financial management are applicable to financial problems of all kinds of organizations.
Concept of Financial Management:
One way or the other, every day, everyone engages in financial management without knowing it at best. People call it economizing. An average housewife while spending money seeks alternative ways of getting more value. Financial management as a discipline has come out of economics to become a standalone profession.
Financial Management means planning, organizing, directing and controlling the investment, financing, and dividend decisions so as to help the business achieve its objectives. To facilitate the same it makes use of statistical, mathematical and economic tools.
In simple terms it is an intelligent quest for optimal use of financial and other economic resources. It is a combination of mathematical and scientific precisions with variables from the ever complex human behavior.
Scope/Elements of Financial Management:
Financial Management cuts across wide range of sectors and organizations (both old and new) today. Even the government and non-government organizations (NGOs) like business organizations do make use of financial management.
Even the legal practitioners rely on time-value of money to the claims that involve financial compensation.
Financial management involves taking three important decisions, which are as under:
1. Investment decisions:
These decisions include decisions with regard to investment of funds in fixed assets (called as capital budgeting) and current assets (called as working capital decisions). Management has to allocate resources between different activities/projects. Making this allocation requires estimating net present value of each project: a function of the size, timing, and predictability of future cash flows.
2. Financial decisions:
They relate to patterns of corporate financing, how companies issue securities to raise funds. Management must identify the “optimal mix” of financing – the capital structure that results in maximum value.
3. Dividend decision:
The finance manager has to take decision with regards to the distribution of profits by way of:
(а) Dividend for shareholders:
Dividend and its rate has to be decided.
(b) Retained profits:
Amount of retained profits has to be finalized depending upon expansion and diversification plans of the enterprise.
(c) The management must also decide on the form of distribution:
Cash dividend or share buyback or bonus shares. Kotak Mahindra Bank pays small cash dividends, but issues bonus shares at regular intervals. One of the reasons might be saving tax on dividends.
While performing these three functions, finance manager has to make a risk analysis.
Finance manager must know of debt-equity leverage; and commodity, currency and interest rate options to reduce risk. Another important area of concern is corporate governance. It has particularly become important due to financial scandals and failures taking place in the 21st century.