Tips on Financial Management

Meaning of financial management

Financial management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

Scope/Elements

1. Investment Decisions includes investment in fixed asset (called as capital budgeting). Investment in current assets are also apart of investment decision called as working capital decision.
2. Financial Decisions: They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing and the returns thereby.
3. Dividend decision: The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two parts:

•   Dividend for shareholders: Dividend and the rate of it have to be decided.

•   Retained Profits: Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. The financial management is generally concerned with procurement, allocation and control of financial resources of concern

Objectives

• To ensure regular and adequate supply of funds to the concerns
• To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholder
• To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
• To ensure safety on investment i.e. funds should be invested in safe ventures so that adequate rate of return can be achieved.
• To plan a sound capital structure, there should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.
Functions
• Estimation of Capital requirements: A finance manager has to make estimation with regards to capital requirement of the company. This will depend upon expected costs and profit and future programmes and policies of a concern.
• Determination of Capital Composition: Once the estimation has been made, the capital structure have to be decided. This involves short-term and long-term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.

• Issues of shares and debentures

•   Loans to be taken from banks and financial institutions

•   Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing.

•   Retained profits: The volume has to be decided which will depend upon expansion, innovation diversification plans of the company.

Management of Cash: Financial manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity etc.

Financial Controls: The finance manager has only to plan, produce and utilize the fund and also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting.