Financial management refers to the strategic planning, planning, directing, and controlling of the financial undertakings in an organization or institution. It also involves applying management principles to the financial assets of an organization, playing an essential role in financial management.
What is Finance Management?
Finance management is the process of planning, organizing, and controlling the financial resources of an organization. Finance management includes the development and implementation of financial plans, the management of financial risks, and the acquisition and use of financial resources.
Finance management is an important function in any organization, as it determines the resources available to the organization and how those resources are used. Proper financial management can help an organization achieve its financial goals and objectives and avoid financial difficulties.
Why is Financial Management Important?
Financial management is important due to following reasons:-
- It Provides economic stability.
- Financial management helps organizations in financial planning and acquisition of funds.
- Gives the organization a way to use and allocate the funds received or earned effectively.
- Support the organization in making important financial decisions and
- Helps in improving the profitability of organizations.
- Financial management enhances the overall value of organizations.
Types of Financial Management
Financial management can be of three types:
1. Capital Budgeting
Capital budgeting refers to identifying what the company needs to be financial to achieve its short- and long-term goals. Where should capital funds be spent to support growth?
Capital budgeting is the process of planning and allocating capital (funds) for major projects or investments. It is a key component of financial planning.
Capital budgeting is used to decide which projects or investments to pursue. It involves analyzing the expected costs and benefits of a project or investment and then deciding whether to go ahead.
Several methods can be used in capital budgeting, such as net present value (NPV) and internal rate of return (IRR). NPV considers money’s time value, while IRR does not.
Making decisions about which projects or investments to pursue is difficult, and capital budgeting can be a helpful tool in making these decisions.
2. Capital Structure
Determine how to pay for operations or development. A company may solicit funds from a private equity firm, consider selling assets such as real estate, or, where applicable, sell equity. If interest rates are low, taking out a loan may be the best answer.
There are two types of capital structure: equity and debt.
- Equity is the portion of the capital structure funded by the company’s owners, typically through the sale of stock.
- Debt is the portion of the capital structure that creditors fund, typically through the issuance of bonds.
The optimal capital structure is the one that minimizes the company’s cost of capital. The cost of capital is the weighted average of the cost of equity and the cost of debt. The weighting is based on the proportion of each type of capital in the capital structure.
3. Working Capital Management
As discussed above, ensure there is enough cash for day-to-day operations, such as paying workers and buying raw materials for production.
Importance of Financial Management
Financial Planning is the process of formulating objectives, policies, procedures, programs, and budgets for the financial activities of an institution. It ensures that financial and investment policies are effective and adequate. The importance is as follows-
- By planning for the future, we can ensure a reasonable balance between the outflows and inflows of funds, thereby maintaining stability.
- Investing in companies with financial Planning makes it easier for the financiers to secure funds.
- An organization’s financial Planning helps develop expansion and growth programs that ensure long-term survival.
- The financial planning process reduces uncertainties regarding changing market trends, which can be coped with easily if you have enough money.
- Financial Planning helps reduce uncertainties, which can be an obstacle to the company’s growth. It helps in ensuring stability and profitability in concern.
Objectives of Financial Management
An organization’s financial management involves procuring, allocating, and controlling its financial resources. Objectives can be-
- To ensure a regular and adequate supply of funds to the institution.
- To ensure good returns to the shareholders depending on the earning potential, the share market value, and the shareholders’ expectations.
- Provides optimum utilization of funds. Once the funds are received, You should use them in the maximum possible manner at the least cost.
- To ensure safety on investment, i.e., the funds should be invested in safe ventures to get adequate returns.
- Planning a sound capital structure – There should be a sound and proper combination of capital to balance debt and equity capital.