Financial management can be referred to as a branch of finance dealing with the managerial significance of the finance techniques. It involves planning, organizing, directing, and controlling the financial activities of a business firm, like procurement and utilization of the funds of the business firm. Different authors and websites have given different definitions for financial management, the most important one being, “the management of a business’ finances so as to accomplish its financial objectives.”
Elements of Financial Management
The key elements of financial management include:
Financial planning, as an important element of financial management, ensures that adequate finances are available at the requisite time to meet the needs of a business. These needs include short-term requirements like investing in equipment & stocks, employees’ payments, and fund sales made on credit. The long-term needs, on the other hand, include need for finance might arise for making significant additions to the business’ productive capacity.
2. Financial Control
Financial control, another important element of financial planning, aims at ensuring that the business is meeting its goals. The questions addressed by financial control include:
i. Are the assets being utilized efficiently?
ii. Are the business’ assets secured?
iii. Does the management act in the best way to meet the interest of the shareholders also keeping in mind the rules of the business?
3. Financial Decision-making
This element of financial management relates to financing, investment, and dividends. This aspect states that investments should be financed in some way or the other. However, financing alternatives can always be considered. For instance, finance can be raised through sale of new shares, taking credit from suppliers, or borrowing from banks.
One of the most crucial financing decisions is deciding on what is to be done with the profits earned by the business – whether to retain them or to distribute them among shareholders in the form of dividends. If, in case, dividends are excessively high, the business might experience a starving situation of financing to reinvest so as to produce revenues and thus the profits.
To wrap up, financial management is, basically, concerned with the procurement, allocation, and control of the financial resources of a business concern.
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Most WantedFinancial Terms
- Most Important Financial Ratios
- Debt-to-Equity Ratio
- Current Ratio
- Interest Coverage Ratio (ICR)
- Financial Leverage
- Break-even Point