Meaning of Financial Management
Financial management is broadly concerned with the acquisition of and use of funds by the business firm. Its scope may be defined in terms of the following questions.
How large should the firm be and how fast should it grow?
What should be the composition of firm’s assets?
What should be the mix of firms financing?
How should the firm analyze, plan and control its financial affairs?
Financial management is concerned with the efficient use of important economic resource namely capital funds.
Thus FM includes-Anticipating financial needs, Acquiring financial resources and Allocating fund sin business.(Three A’s of FM).
Management of long terms funds.
- Capital Structure.
- Cost of capital
- Sources of long term funds.
- Financial leverage.
- Dividend policy
Management of long terms Assets.
> Risk analysis.
Scope and functions of FM
This is divided into two broad categories.
Traditional Approach: The traditional Approach, which was popular in the early stage deals with the following aspects:.
Arrangement of funds from financial institutions.
Arrangement of funds from financial instruments like shares, bonds etc.
Looking after the legal and accounting relationship between a corporation and sources of funds
Modern approach: Finance function covers both acquisition of funds as well as their allocation. The main contents are as follows.
The investment decision
The financing decision
The funds requirement decision.
Functions of FM may be classified on the basis of Liquidity, Profitability and Management.
Liquidity: It is ascertained on the basis of three important considerations.
Forecasting cash flows i.e.managing the inflows against cash outflows.
Raising Funds i.e.the sources from which funds would be raised.
Managing the flow of internal funds.
> Profitability: Following factors are taken into into account.
a. Cost Control
c. Forecasting future profits
d. Measuring cost of capital
Management: It includes
a. The management of long term funds.
b. The management of short term funds.
Important terms in Financial Management:
Financing decision of an enterprise includes decision for short term capital and long term capital requirement. Financing decision include decision upon the needs and source of new outside financing and caring on negotiations for new outside financing. Financing means procurement of finance at most convenient and economic rates.
Investment Decisions– Funds acquired from different sources are to be invested in profitable projects so that maximum profit can be earned and the value of the wealth becomes maximum. Long term funds are invested for the acquisition of fixed assets and current assets also. The investment of funds in different projects should be made carefully so that the funds can be utilized in the maximum possible ways. Capital budgeting techniques is used or making investment decisions. Investment decision considers the management of current assets such as cash, marketable securities, etc. Capital budgeting which includes identification, selection, implementation of capital projects, etc. and management of mergers, reorganization, disinvestment, etc.
Dividend Decisions- The financial managers takes dividend decisions. For taking decision in respect of dividend, the factor to be consider include- availability of cash, tax position of the shareholders, trend of earnings, requirements of funds for the future, etc. Dividend decision considers the allocation of net profit. Dividend decision gives emphasis on the checking on financial performance. The financial manager takes initiatives to take proper dividend decisions as to the amount of dividend to be paid and the time of payment of dividend. He tries to set balance between dividend retention and distribution. Dividend decisions are taken considering the overall liquidity and profitability of the enterprise. Dividend decisions are taken taking into account the disposition of profits between dividend and retained earnings.