Financial management manages the financial resources of an organization, which relates to the acquisition and application. It is a subpart of management dealing with managing business assets, procurement, and financing to achieve the concern’s objectives.
For the company’s smooth functioning, efficient acquisition, utilization, and distribution of finance is required, which is impossible without proper financial management.
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Let’s discuss its objectives and the key aspects required for a business organization.
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Objectives of Financial Management
1. Maximize Profit
Business or corporate culture runs on profit. Their motto is to maximize their profit as much as possible. It is the main objective of a business entity that implies the company’s decision taken keeping profit in mind. However, it’s not the business’s sole objective; the next name in this list comes wealth maximization.
2. Maximization of Wealth
Maximization of wealth is another concern for any business entity. It is a relevant objective that raises the market value of the firm. Wealth acts like a backup corpus for a company to face tough times like recession. No matter how much profit you gain, if you don’t have a spare amount with yourself, your business may downfall soon. Hence, give priority to wealth maximization too.
3. Investing in Assets
A business organization must look carefully in selecting assets in which they are investing. Wrong investment decisions might put a lock on your shutters. They must look to maximize their wealth and benefits by selecting appropriate decisions known as investment decisions. One more decision known as capital budgeting decision directs the firm to invest in fixed assets. It directly impacts the company’s future, and it involves a huge amount of funds. Cash flows, return on investment, and capital risk in investment projects are few factors that affect business entities’ investment decisions.
4. Investment in Dividend
When a business entity gain profit, the surplus amount distribution amongst owners means shareholders comes under this category. This decision is based on certain factors like shareholder’s preferences, expansion opportunities, and investment for the business entity. Creditors, lenders, employees, debenture holders also lie under the owner category who get the surplus amount. It is known as dividend decision because the surplus amount is either distributed in the form of dividend or kept aside in retained earnings. Suppose a company has fewer growth plans and willing to satisfy its shareholders, then the amount is given in the form of dividends.
Key Elements of the Financial Management
1. Financial Planning
Planning your finances tops the table of key financial management elements. It ensures that adequate finance is available at the appropriate time to meet the needs of the business. These requirements include short-term requirements such as investment in equipment and stocks, payment of employees, and sale of funds made on credit. On the other hand, long-term needs may require finance, which may arise to increase the productivity of the business significantly.
2. Financial Control
Financial control, another important aspect of financial planning, is to make sure the business reaches its goals. Key questions that are resolved by financial controls:
- Are financial assets being used effectively?
- Are business assets safe to invest in?
- Is financial management the best measure to satisfy the shareholder’s interest, keeping in view the business rules?
3. Making Financial Decisions
This aspect of financial management deals with financing, investment, and dividends. It states that the investment must be funded in one way or another. However, other financing options should also be considered to manage finances. For example, finance can be increased by selling new shares, borrowing from suppliers, or borrowing from banks.
Deciding what to do with the profits the business makes is one of the most important financing decisions – whether to retain them or distribute them as dividends among shareholders. If the dividend is too high, the business may experience a strong financing position to generate revenue and make a profit.
Scope of Financial Management
You must be well-versed with the scope of financial management. As mentioned earlier, it satisfies shareholders’ interest; it is also important to make decisions that favor them. While taking important financial decisions, you must also look over the shareholder’s interests.
Always look for shareholders’ wealth maximization, which is dependent on the net worth increase, capital invested in the entity. It plowed back profits for the organization’s growth. You should be more focused on the investment decisions because if investors are happy your company is sure to grow or else you might face a huge downfall. In the below section we come to the major aspects of financial management to know its importance.
Aspects of Financial Management
Two major aspects of financial management are underlying:
1. Fund Procurement
If any business organization receives funds from sources such as debentures and bonds, owner’s funds, i.e., equity shares and preference shares, commercial banks, venture capital, angel financing, lease purchase, and leasing.
2. Use of Funds
Another important aspect of financial management is the effective execution of funds; that is, the funds must be invested in a way that returns good returns to the business, which poses a threat to its overall privacy. Does not produce
Put, meet the business’s short-term and long-term needs, raise funds, control and balance its use, increasing finance to close the trade between risk and return.
Benefits of Financial Management
For your information, here are some benefits of financial management systems:
1. Automated Economic Activities
Information on Financial management systems helps to streamline the financial operations of your business organization by automation.
It is an automated application that uses software programs, internal policies, and document policies to record, track, and capture an organization’s budget. Additionally, you can also use your financial management information system to generate financial statements, monitor decisions that affect your profits and track the results of your financial decisions.
2. Transparency in the Flow of Information
Another major benefit of financial management information systems is information transparency. In most organizations, the accounting and finance departments’ owners and employees are generally only aware of the company’s financial condition. Using the Financial Management Information System, you can access the system to check various aspects of your company’s financial performance. It allows departments and financial managers to understand better how much they can influence the business through their decisions.
3. Tight Budget Control
As your business entity grows day by day, the budget preparation process also becomes more complex. With a financial management information system, all departments can monitor their spending and make changes as needed, reducing budget preparation complexity. This type of system also allows financial managers to see what they and others in the organization are doing. This allows them to share their ideas and give insights into potential issues affecting their budgets. In a nutshell, it allows them to have trouble setting up meetings to discuss these issues.
4. Strong Financial Control
If you are looking for an effective financial management information system, you must have all the relevant resources like systems, processes, policies, and practices.
The Financial Management Information System may require an accounting software package, a database system, and a resource planning software program to collect financial data from accounting and database systems. Together with these software systems, you can strengthen your company’s internal financial controls.
5. To Analyze the Capital Structure of Organization
Most startups need the capital to grow their business. They borrow from wealthy individuals or venture capital firms to propel the company until it reaches the breakeven point. As the company grows, more amount of funds are required for business expansion.
Financial management determines the best form of capital venture- debt, equity, or a combination of both. Larger your company with a balanced cash flow can borrow funds from various financial institutions like banks or NBFC’s rather than having to give up an equity share to investors.
Management scholars who are studying in colleges or universities must take financial management assignments help to develop the ability to manage finances. It will also help you know how you can grow an entity and maximize their profits as a financial manager.
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Conclusion
After knowing the role of financial management, we can’t ignore its importance. In modern times of corporate culture, if you want to grow your company’s financial assets, you must know about managing finances. The success and failure of any business organization are dependent on how effective their financial management is.
Whether you belong to a small business or corporate conglomerate, financial management ensures your productivity, company growth, and smooth business function. The larger the company is stable, your cash flow and investment decisions should be. If you want to expand your fund for business, always consider financial management.
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