Financial management is the operational process of a company that wants to acquire and utilise the funds efficiently which is required for company activities. It is primarily focusing on the efficient management of funds in the enterprise. According to the layman, businesses’ financial management is known as corporation finance/business finance as practised by businesses. And you should know about the concept of financial management to become a financial expert.
The nature of financial management relates to its connection with disciplines such as economy and accounting, among others. Financial management is an essential component of managing. And the basic concept of financial management is associated with other disciplines and fields of study such as economy, accounting, manufacturing, marketing, human resources, and quantitative techniques.
Goal Of Financial Management
Effective procurement and proper use of finance results in suitable financial growth. These are some goals that firms should target. It is an essential component of the financial manager’s job. As a result, the financial manager must establish the fundamental goals of financial management. Financial management goals are classified into two parts:
Maximising profits
Maximisation of wealth
Application Of Financial Management
The concept of financial management covers the entire range of activities and functions listed below. In most organisations, the head of finance is regarded as an essential advisor to the CEO and plays a strategic role. The duties will include the following:
To find the total amount of funds required for a given period.
Increasing funds from different sources, both national and international, while maintaining cost efficiency in mind.
Investing the funds in each of these long-term and short-term capital necessities.
Funding the day-to-day operating capital demands of the enterprise.
Obtaining on the period from debtors as well as paying creditors on period.
Maintaining funds, treasury functions, and satisfying profit to all stakeholders.
Paying interest on debts, paying the lenders, and interfacing with capital businesses.
Two Basic Concepts Of Financial Management
The term financial management means obtaining and managing funds. And the primary objective of financial management is to increase the firm’s value. So, what is the concept of financial management? There are two basic concepts of financial management, obtaining funds and utilising these funds.
1. Obtaining Funds
One of the basic concepts of financial management is obtaining funds. As finances for a company come from various sources, procuring them can pose a challenge for businesses. These funds have varying risks, costs, and control that the company’s management should look into while obtaining funds. The fund’s manager should obtain these funds at the lowest cost, balanced risk, and control factors.
Funds raised through equity shares are expected to be the least risky, as there is no liability in terms of repayment. But there is one shortcoming of the funds obtained through equity; they are expensive because dividends that the shareholders expect are way higher than the interest rates. Existing shareholders’ shares may be diluted if new shares are issued.
Banks and educational institutions can also provide funds. These funds are subject to some restrictive covenants. These debt covenants limit the borrower’s ability to obtain funds from other sources.
The reform process is heading to a thorough examination of the end-use of resources, another limitation. Such limits are necessary to ensure the safety of funds given by institutions.
2. Utilizing Obtained Funds Effectively
Another concept of financial management is using the funds effectively. A financial manager should ensure the proper usage of these funds. They are also responsible for closely monitoring instances where these funds are idle or misused.
Among basic concepts of financial management, using obtained funds is the most necessary one. Because it can be a complete waste of time and money if the funds obtained are not used to generate higher amounts of funds compared to purchasing costs. The funds should be used so that the firm receives significant profits without jeopardising the firm’s financial stability.
Capital Structure
Capital structure is also an essential part of the concept of financial management. The capital structure refers to the different types of securities and the proportionate amounts that comprise capitalisation. It is one of the essential concepts of financial management. It combines various long-term sources such as equity shares, preferred stock, debentures, long-term loans, and retained earnings.
When determining the firm’s capital structure, the following factors are considered.
1. Leverage
It is the most fundamental and significant factor influencing capital structure. Leverage makes use of fixed-cost financing methods such as debt, equity, and preferred share capital. It is linked to the overall cost of capital.
The cost of capital is the essential factor in determining a firm’s capital structure. Long-term finance(shares and borrowing) typically has fixed costs during mobilisation. When the cost of capital rises, the firm’s value falls.
2. Government policy
According to government policy, the Company Act sets the promoter contribution. It limits the ability to raise significant, long-term funds from outside sources. Financial managers are responsible for forming policies that comply with government policies and stabilise their firms. Government policy is an important topic to learn as a part of the concept of financial management.
Conclusion
Financial management is the implementation of general management principles to an enterprise’s financial assets. Rightly managing and following the concept of financial management in an organisation offers quality fuel and consistent service to ensure efficient operation. Suppose finances haven’t been handled thoroughly by an organisation. It will face roadblocks that may have consequences for its growth and progress.
