Financial Management Summary
Financial management is referred to as the science of money management. The management of funds is a critical aspect of financial management. Financial management is simply concerned with managing an entity’s money. It is also about the management of the finances of a firm in order to achieve financial objectives. In the business world this would mean monitoring expected inflows and outflows of fund while observing their effect on the managerial objectives.
Procurement of funds and an effective use of funds to achieve business objectives are two main aspects of financial management. Although, funds obtained from different sources have different characteristics in terms of potential risk, cost and control, financial management constitutes them. Therefore, in order for an appropriate balancing of risk and control, the cost of funds should be at minimum. In addition, to reduce these risks and costs, it is crucial to utilize the funds effectively and profitably which is also an important aspect of financial management as it avoids the situations where the funds are kept idle. Financial management is essential even in a planned economy, a capitalist set-up as well as in all profit and non-profit organizations as it involves efficient use of resources. Mismanagement of financial affairs can lead to a company’s liquidation even through high profits. And these liquidation does not happen due to obsolete technology or because their products were not in demand or their labor was not skilled and motivated, but due to the problem of bad financial management. Financial management optimizes the output from the given inputs, so having sound financial management guarantees a company’s survival.
The key objectives of financial management would be profit maximization and wealth maximization. Although profit maximization is a common goal in all companies it cannot be the one and only objective. This is due to the fact that profit and risks are directly proportional. Therefore, while maximizing profits these risks such as negligence of social considerations and the time pattern of returns should be taken into account. As for wealth maximization, it commonly understood that the objective of a firm is to maximize value and wealth. The market price of the company’s stock represents the value of the firm. Moreover, this market price acts as a performance index which shows the firm’s progress and potential. Normally, the prices in the share markets are a function of two factors. Firstly, the anticipated rate of earnings per share which depends upon the assessment of how profitable a company may be in the future. Secondly, capitalization rate which reflects the liking of the investors for the company.
In the financing field, there are multiple ways in which a company can procure funds which can either be from long term or short term sources. Financial leverage or trading on equity is an important method by which a finance manager may increase the return to common shareholders. Furthermore, a firm can increase its profitability without adversely affecting its liquidity by an efficient utilization of the current resources at the disposal of the firm or by efficient management of working capital. Ratio analysis can be used to evaluate a company’s performance, profitability, solvency, and liquidity and growth aspect of the firm. Therefore, in short, financial management deals with procurement of funds and their effective utilization in the business. The process of financial management is important at all levels of human existence, because every entity needs to look after its finances.