Financial Management infers forecasting, forming, coordinating and controlling the financial activities, for example, acquisition and use of capitals of the company.
It infers applying general administration standards to the financial assets of the company.
What are the Goals of Financial Management?
The financial management is normally concerned about the acquisition, distribution, and control of the financial assets of a company.
The goals of financial management are:
- Make sure the usual and sufficient supply of capital to the company.
- Make sure sufficient returns to the investors which will rely on the earning ability, market value of the share, confidence of the investors.
- Make sure of ideal capital usage. When the capitals are secured, they ought to be used in maximum potential method at the lowest cost.
- Make sure security over investment, it means, investing in a safe enterprise so that sufficient returns can be made.
- Make a strategy a stable capital structure. There ought to be a stable and reasonable structure of capital with the goal that equity is kept up among debt and equity capital.
What About Financial Planning?
Financial Planning is the procedure of estimating the required capital and determining its competitiveness.
It is a process of fundraising, investing and administering financial policies in the administration.
Goals of Financial Planning
Financial planning has many goals:
- Defining capital necessities: It will depend on current and fixed assets expenditures, promotional expenditures and long-range formation. Capital necessities should be viewed in both directions: short-term and long-term necessities.
- Defining capital structure: The capital structure is the arrangement of capital, which means, the ratio and proportion of capital required in the business. These include debt-to-equity ratio decisions – mutually short-term and long-term.
- Formulate financial policies for cash control, loaning, borrowings, and so on.
A finance manager assures that the limited financial resources are maximally used in the best way at the lowest cost to get the highest quantifiable profits.
Functions of Finance
The following breakdown will help to understand each function of finance.
1. Investment Decision
One of the most significant finance functions is to skillfully allot funding to long term resources. This act is also called capital budgeting.
It is essential to allot capital in the long term resources to get ultimate revenue in the future. Beneath are the two features of investment decisions.
- Assessment of new investment regarding profit.
- Comparability of cut off rate between new investment and existing investment.
Since what’s to come is suspicious so it is difficult to calculate about the expected return. The risk issue should be considered along with the uncertainty.
This risk issue shows an important role to calculate the estimated return on a potential investment.
Therefore, it is important to take into concentration both the expected return and the risk involved when considering an investment proposal.
Investment decision not just includes distributing money to long term resources yet additionally includes choices of utilizing funds that are acquired by selling those assets which come to be less productive and less profitable.
It is smart to decline devalued resources which are not adding worth and use those assets in securing other valuable resources. An opportunity cost of capital should be computing while at the same time dissolving such resources.
The right cut off rate is determined by utilizing this op opportunity cost of the necessary ratio of return.
2. Financial Decision
Financial decision is one more major purpose which a financial manager should act. It is essential to settle on savvy decisions about when, where and how business gets capital.
Capitals can be gained in numerous ways and channels. Comprehensively the right proportion of equity and debt must be kept up. This blend of equity capital and debt is known as a company’s capital structure.
A firm is most likely to benefit once the market worth of an organization’s share expands this not exclusively is an indication of development for the firm yet as well expands shareholder’s resources.
Then again the usage of debt influences the risk and return of a shareholder. It is progressively unsafe however it might raise the return on equity funds.
What is called a complete financial structure is one which targets amplifying shareholder’s return with minimal risk.
In such a situation the market estimation of the firm will expand and thus an ideal capital structure would be accomplished.
Other than equity and debt there are a few different apparatuses that are utilized in choosing a firm capital structure.
3. Dividend Decision
Acquiring benefits or a positive return is a typical point of a considerable number of organizations.
However, in the case of profitability, a financial manager performs the key function: it is decided that all profits will be distributed to the shareholder or all profits will be retained or part the profit will be distributed to the shareholder and the other half of the business should be retained.
It is the financial manager’s obligation to make an ideal dividend policy decision that maximizes the firm’s market value. Thus the ratio of paying an optimal dividend is calculated.
It is a general process to pay regular dividends on profit. One more way is to give bonus shares to existing shareholders.
4. Liquidity Decision
Maintaining a firm’s liquidity position is very important to avoid insolvency. The company’s productivity, liquidity, and risk all are related to the investment in current resources.
It is important to invest sufficient funds in current assets to maintain a tradeoff between profitability and liquidity.
However, since current resources don’t acquire anything for business subsequently an appropriate computation must be done before investing in current resources.
Current resources ought to appropriately be valued and disposed of from time to time as they become reasonably profitable.
Common resources must be utilized in the period of liquidity issues and periods of breakdown.
Roles of a Financial Manager
Financial activities are one of the most significant and complex workouts of a firm. So a financial manager performs all the financial activities necessary to take care of these activities.
A financial manager deals with all the significant financial functions of a company. The person in charge should keep a close eye on the funds to ensure that the funds are being used most effectively.
Its actions directly influence the firm’s profitability, growth, and well-being.
Following are the main functions of a Financial Manager:
1. Raising of Funds
To meet the commitment of the business it is imperative to have enough money and liquidity. A firm can raise assets by the method of equity and debt.
A financial manager must choose the proportion of debt and equity. It is imperative to keep up a decent balance between equity and debt.
2. Allotment of Funds
Once the fundraising is done through various channels, the next imperative task is to assign the funds. The funds ought to be allotted in such a way, that they are ideally utilized.
The following points should be considered for the allocation of funds in the best possible way:
- The size of the firm and its development capacity.
- Long-term or short-term assets status.
- The mode by which funds are collected.
The above-mentioned financial decisions affect other management activities directly and indirectly. So forming a good asset mix and proper allotment of funds is one of the most vital activities.
3. Profit Planning
Profitability is one of the main tasks of any business association. Profitable earnings are vital for any company to survive and thrive.
The profit plan refers to the appropriate use of the profits generated by the firm.
Profit rises due to many components, for example, pricing, industrial rivalry, condition of the economy, demand and supply process, cost and output.
A strong combination of variable and fixed factors in production leads to increased firm profitability. Fixed costs are spent using fixed factors of production such as land and machinery.
To keep up tandem it is imperative to continue to value the depreciation of fixed production costs.
An opportunity cost ought to be determined to replace the factors that have caused the product to wear and tear. If it doesn’t get noticed, these fixed costs can cause vast fluctuations in profits.
4. Understanding Capital Markets
A company’s shares are traded on the stock exchange and the securities are constantly sold and purchased. So a strong idea about the capital market is a vital task of a financial manager.
There is a massive risk involved when securities are traded on the stock market. So a financial manager comprehends and computes the risk related to this business of shares and debentures.
It is the financial manager’s decision on how to distribute the profits. Many investors prefer not to distribute profits among shareholders as dividends to the firm, instead of investing the business themselves to boost growth.
The financial manager’s observation directly affects the operation of the capital market.
So in summary, the financial decision is one more major purpose which a financial manager should act.
Then again the usage of debt influences the risk and return of a shareholder. It is progressively unsafe however it might raise the return on equity funds.
What is called a complete financial structure is one which targets amplifying shareholder’s return with minimal risk.
Financial activities are one of the most significant and complex workouts of a firm. A financial manager deals with all the significant financial functions of a company.