What is financial management

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What is financial management? Take a look at the objectives involved: Maintaining enough supply of funds for the organisation; Ensuring shareholders of the organisation to get good returns on their investment; Optimum and efficient utilization of funds; Creating real and safe investment opportunities to invest in.

Financial management is also made up of certain elements. These include: Financial planning: This is the process of calculating the amount of capital that is required by an organisation and then determining its allocation.

Financial control: This is one of the key activities in financial management. Its main role is to assess whether an organisation is meeting its objectives or not. Is the management acting in the best financial interests of the organisation and the key stakeholders? Financial decision-making: This involves investment and financing with regards to the organisation. This department takes decisions about how the organisation should raise finance, whether they should sell new shares, or how the profit should be distributed.

This department has numerous functions such as: Calculating the capital required: The financial manager has to calculate the amount of funds an organisation requires. This depends upon the policies of the firm with regards to expected expenses and profits. The amount required has to be estimated in such a way that the earning capability of the organisation increases. Formation of capital structure: Once the amount of capital the firm requires has been estimated, a capital structure needs to be formed.

This involves debt equity analysis in the short-term and the long-term. This depends upon the amount of the capital the firm owns, and the amount that needs to be raised via external sources. Investing the capital: Every organisation or firm needs to invest money in order to raise more capital and gain regular returns.

This could involve keeping a part of the net profit for contingency, innovation, or expansion purposes, while another part of the profit can be used to provide dividends to the shareholders. Money is required for various purposes in the firm such as payment of salaries and bills, maintaining stock, meeting liabilities, and the purchase of any materials or equipment. This can be done using financial tools such as financial forecasting, ratio analysis, risk management, and profit and cost control.

Why is Financial Management important? This form of management is important for various reasons. Taking such steps may result in restructuring costs or other one-time items that negatively affect the company's finances further in the short term, but which position the company better to succeed in the long term. These short-term versus long-term tradeoffs often need to be made with various stakeholders in mind. For instance, shareholders of public companies may discipline management for decisions that negatively affect a company's share price in the short term, even though the long-term health of the company becomes more solid by the same decisions.

A company will apply strategic financial management throughout its organizational operations, which involves designing elements that will maximize the firm's financial resources and using them efficiently.

Here a firm needs to be creative, as there is no one-size-fits-all approach to strategic management, and each company will devise elements that reflect its own particular needs and goals. However, some of the more common elements of strategic financial management could include the following. Just as financial management strategies will vary from company to company, they also can differ according to industry and sector. Firms that operate in fast-growing industries—like information technology or technical services—would want to choose strategies that cite their goals for growth and specify movement in a positive direction.

Their objectives, for example, might include launching a new product or increasing gross revenue within the next 12 months. On the other hand, companies in slow-growing industries—like sugar manufacturing or coal-power production—could choose objectives that focus on protecting their assets and managing expenses, such as reducing administrative costs by a certain percentage.

Lifestyle Advice. Automated Investing. Business Essentials. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Although it is in principle different from managerial finance, which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to financial problems of all kinds of firms.

The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, short-term decisions deal with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, short-term borrowing, and lending such as the terms on credit extended to customers.

The terms corporate finance and corporate financier are also associated with investment banking. Wall St. Financial managers ensure the financial health of an organization through investment activities and long-term financing strategies.

Financial managers perform data analysis and advise senior managers on profit-maximizing ideas. Financial managers are responsible for the financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization. Financial managers typically:. The role of the financial manager, particularly in business, is changing in response to technological advances that have significantly reduced the amount of time it takes to produce financial reports.

They often work on teams, acting as business advisors to top executives. Financial Statements : This is an example of a financial statement that financial managers are responsible for preparing and interpreting.

Financial managers also do tasks that are specific to their organization or industry. For example, government financial managers must be experts on government appropriations and budgeting processes, and healthcare financial managers must know about issues in healthcare finance. Moreover, financial managers must be aware of special tax laws and regulations that affect their industry. Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure.

Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk.

These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that management must return excess cash to shareholders i. Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision. Management must allocate limited resources between competing opportunities projects in a process known as capital budgeting.