Financial Management – Meaning, Objectives, and Functions
Meaning of Financial Management
Scope/Elements
- Investment decisions include the purchase of fixed assets (called capital budgeting). Investment in current assets is also a type of investment decision that is referred to as a working capital decision.
- Financial decisions are related to the raising of finance from various resources, which will depend on the decision on the type of source, the length of financing, the cost of financing, and the resulting returns.
- Dividend decision – The finance manager must make a decision regarding the distribution of net earnings. Net gains are often separated into two categories:
- Dividends for shareholders- Dividends and the rate at which they are paid must be decided.
- Retained earnings- The amount of retained profits must be finalized, which will be determined by the enterprise’s expansion and diversification objectives.
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Objectives of Financial Management
- To secure a consistent and adequate supply of cash to the organization.
- To secure adequate returns to shareholders, which will be determined by earning capability, the market price of the share, and shareholder expectations.
- To guarantee that monies are used as efficiently as possible. Once the funds are obtained, they should be used most efficiently and cost-effectively feasible.
- To ensure investment safety, assets should be invested in safety initiatives to get a sufficient rate of return.
- To plan a solid capital structure-Capital should be composed in a sound and equitable manner so that a balance between debt and equity capital is maintained.
Functions of Financial Management
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Estimation of capital requirements:
A finance manager must make an estimate of the company’s capital requirements. This will be determined by a company’s predicted costs and profits, as well as its future programs and policies. Estimates must be prepared sufficiently to boost the earning capacity of the enterprise.
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Determination of capital composition:
Once an estimate has been made, the capital structure must be determined. This includes both short- and long-term debt-equity analysis. This will be determined by the amount of equity capital a company possesses as well as the number of additional funds that must be raised from third parties.
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Sources of funding:
A corporation has various options for obtaining additional finances, such as-
- Shares and debentures are issued.
- Borrowings from banks and financial entities
- Deposits from the general public are to be drawn in the form of bonds.
4. Investment of money:
The finance manager must select how to invest funds in successful companies so that there is safety on investment and regular returns are feasible.
5. Disposal of surplus:
The finance manager must make the choice on net earnings. There are two ways to accomplish this:
a) Dividend declaration – This involves specifying the dividend rate and additional advantages such as bonuses.
b)Retained earnings – The volume must be determined, which will be determined by the company’s expansion, innovation, and diversification objectives.
6. Cash management: The finance manager must make judgments on cash management. Cash is needed for a variety of reasons, including the payment of wages and salaries, the payment of electricity and water bills, the payment of creditors, the fulfillment of current liabilities, the maintenance of adequate stock, the acquisition of raw materials, and so on.