Barquin, Dana Janine Y.

114 FINAMA1

Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement
and utilization of funds of the enterprise. It means applying general management principles to financial resources of the
enterprise.

Scope/Elements
1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current
assets are also a part of investment decisions called as working capital decisions.
2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision
on type of source, period of financing, cost of financing and the returns thereby.
3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits
are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and
diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of financial resources of a
concern. The objectives can be-

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the
share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible
way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can
be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is
maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital
requirements of the company. This will depend upon expected costs and profits and future programmes and
policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of
enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital structure have to be
decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of
equity capital a company is possessing and additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of financing.

4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there
is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two
ways:
a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.

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 b. Retained profits - The volume has to be decided which will depend upon expansional, innovational,
diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is
required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to
creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to
exercise control over finances. This can be done through many techniques like ratio analysis, financial
forecasting, cost and profit control, etc.

http://www.managementstudyguide.com/financial-management.htm

Why Is Financial Management So Important in Business?

by Kevin Johnston
Financial management of your small business encompasses more than keeping an accurate set of books and balancing your business
checking account. You must manage your finances so you don’t overspend and so you remain prepared for all expenditures, as well as
profit distributions. Your financial management responsibilities affect all aspects of your business. A company that sells well but has
poor financial management can fail.

Capital Expenditures

You purchase assets to create income. All your financial considerations of capital expenditures must balance the amount of income the
asset will produce with the amount it will cost. If you manage your capital expenditures effectively, you will not overextend your
company by borrowing too much for assets that don’t provide enough income to justify the expense.

Operating Cash

You must manage your cash flow so you always have enough on hand to pay for rent, utilities, telephone, insurance, payroll and
supplies. This means you must look ahead and see when your accounts receivable are due and compare that to the due dates for your
outstanding bills. You can manage your cash flow by shortening the amount of time you give customers to pay and by renegotiating
due dates with vendors. If you fail to manage cash flow effectively, you may not be able to pay expenses and keep your company
operating.

Lowering Expenses

One of your financial management responsibilities is to keep costs as low as possible. You can ask vendors for lower prices, reduce
the number of employees you use, reduce energy use and purchase supplies in bulk. If you do not monitor and manage costs, your
company will always have to increase sales dramatically to pay rising expenses.

Tax Planning

Your financial management duties include planning for taxes. This involves making sure you have cash on hand to pay estimated tax
payments each quarter and also timing your purchases of major assets to get the maximum benefit. For example, if you know your
current tax year will not require a heavy tax payment but next year will, you can postpone buying major assets until next year when
you will need the tax write-off more. Failure to plan for taxes and maximize deductions can cause your company to spend more than it
has to on taxes.
http://smallbusiness.chron.com/financial-management-important-business-57073.html

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The Controllers Institute changed its name to Financial Executives Institute in 1962 and developed the following list of
functions for controllers and treasurers. The controllership functions are accounting functions while the treasurership
functions are finance functions. According to the FEI, the combination of these functions defines financial management.

______________________________________________________

*Controllers Institute. 1962. CIA becomes FEI. The Controller (May): 228.

http://maaw.info/ControllershipTreasurership.htm

A treasurer can be one who does couple of things. A treasurer may be the official formally
in charge of receiving and disbursing funds in a company’s name. He or she would be
appointed by and answerable to the board of directors.

A treasurer might also be, like a controller, someone who reports to the CFO. According
to the business-education site The Working Manager:
“Typically, the CFO will have two important people reporting to him or her – the Treasurer
and the (Financial) Controller. Broadly speaking, the former is more concerned with formal
accounting and in particular the management of loans and their repayment, while the
latter is more concerned with management accounting – budgeting, financial and activity
reporting (often with IT) and financial planning.”

http://www.winstudent.com/difference-between-controller-and-treasurer/

Functional Areas of Financial Management

Some of the functional areas covered in financial management are discussed as such:

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1. Determining Financial Needs:
A finance manager is supposed to meet financial needs of the enterprise. For this purpose, he should
determine financial needs of the concern. Funds are needed to meet promotional expenses, fixed and working
capital needs. The requirement of fixed assets is related to the type of industry. A manufacturing concern will
require more investments in fixed assets than a trading concern. The working capital needs depend upon the
scale of operations, larger the scale of operations, the higher will be the needs for working capital. A wrong
assessment of financial needs may jeopardies the survival of a concern.

2. Selecting the Sources of Funds:

A number of sources may be available for raising funds. A concern may resort to issue of share capital and
debentures. Financial institutions may be requested to provide long-term funds. The working capital needs may
be met by getting cash credit or overdraft facilities from commercial banks. A finance manager has to be very
careful and cautious in approaching different sources. The terms and conditions of banks may not be
favourable to the concern. A small concern may find difficulties in raising funds for want of adequate securities
or due to its reputation. The selection of a suitable source of funds will influence the profitability of the concern.
This selection should be made with great caution.

3. Financial Analysis and Interpretation:

The analysis and interpretation of financial statements is an important task of a finance manager. He is
expected to know about the profitability, liquidity position, short-term and long-term financial position of the
concern. For this purpose, a number of ratios have to be calculated. The interpretation of various ratios is also
essential to reach certain conclusions. Financial analysis and interpretation has become an important area of
financial management.

4. Cost-Volume-Profit Analysis:
Cost-volume-profit analysis is an important tool of profit planning. It answers questions like, what is the
behaviour of cost and volume? At what point of production a firm will be able to recover its costs? How much a
firm should produce to earn a desired profit? To understand cost-volume-profit relationship, one should know
the behaviour of costs. The costs may be subdivided as: fixed costs, variable costs and semi-variable costs.
Fixed costs remain constant irrespective of changes in production.

An increase or decrease in volume of production will not influence fixed costs. Variable costs, on the other
hand, vary in direct proportion to change in production. Semi-variable costs remain constant for a period and
then become variable for a short period. These costs change with the change in output but not in the same
proportion.

The first concern of a finance manager will be to recover all costs. He will aspire to achieve break-even point at
the earliest. It is a point of no-profit no-loss. Any production beyond break-even point will bring profits to the
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concern. The volume of sales, to earn a desired profit, can also be ascertained. This analysis is very helpful in
deciding the volume of output or sales. The knowledge of cost-volume profit analysis is essential for taking
important decisions about production and profits.

5. Capital Budgeting:
Capital budgeting is the process of making investment decisions in capital expenditures. It is an expenditure
the benefits of which are expected to be received over a period of time exceeding one year. It is an
expenditure incurred for acquiring or improving the fixed assets, the benefits of which are expected to be
received over a number of years in future. Capital budgeting decisions are vital to any organization. An
unsound investment decision may prove to be fatal for the very existence of the concern.

The crux of capital budgeting is the allocation of available resources to various proposals. The crucial factor
which influences the capital budgeting decision is the profitability of the prospective investment. For making
correct capital budgeting decisions, the knowledge of its techniques is essential. A number of methods like
payback period method, rate of return method, net present value method, internal rate of return method and
profitability index method may be used for making capital budgeting decisions.

6. Working Capital Management:

Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the
human body for maintaining life, working capital is essential to maintain the smooth running of business. No
business can run successfully without an adequate amount of working capital. Working capital refers to that
part of the firm’s capital which is required for financing short-term or current assets such as cash, receivables
and inventories. It is essential to maintain a proper level of these assets. Finance manager is required to
determine the quantum of such assets. Cash is required to meet day-to-day needs and purchase inventories
etc.

The scarcity of cash may adversely affect the reputation of a concern. The receivables management is related
to the volume of production and sales. For increasing sales, there may be a need to give more credit facilities.
Though sales may go up but the risk of bad debts and cost involved in it may have to be weighed against the
benefits. Inventory control is also an important factor in working capital management. The inadequacy of
inventory may cause delays or stoppages of work. Excess inventory, on the other hand, may result in blocking
of money in stocks, more costs in stock maintaining etc. Proper management of working capital is an important
area of financial management.

7. Profit Planning and Control:

Profit planning and control is an important responsibility of the financial manager. Profit maximization is,
generally, considered to be an important objective of a business. Profit is also used as a tool for evaluating the
performance of management. Profit is determined by the volume of revenue and expenditure. Revenue may
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accrue from sales, investments in outside securities or income from other sources. The expenditures may
include manufacturing costs, trading expenses, office and administrative expenses, selling and distribution
expenses and financial costs.

The excess of revenue over expenditure determines the amount of profit. Profit planning and control directly
influence the declaration of dividend creation of surpluses, taxation etc. Break even analysis and cost-volume
profit relationship are some of the tools used in profit planning and control.

8. Dividend Policy:
Dividend is the reward of the shareholders for investments made by them in the shares of the company. The
investors are interested in earning the maximum return on their investments whereas management wants to
retain profits for further financing. These contradictory aims will have to be reconciled and in the interests of
shareholders and the company. The company should distribute a reasonable amount as dividends to its
members and retain the rest for its growth and survival.

A dividend policy is influenced by number of factors such as magnitude and trend of earnings, desire and type
of shareholders, future requirements of the company, government’s economic policy, taxation policy, etc.
Dividend policy is an important area of financial management because the interests of the shareholders and
the needs of the company are directly related to it.