Introduction to Financial Management:
Financial management is as emerged as an interesting and stimulating area for academic studies as well as for the real-world finance managers. Financial management covers all decisions, taken by an individual or a company, which have financial implications. In our simple understanding finance perceives as Money. But in real finance is study of money and its flow.
Meaning of Financial Management:
The word “Financial Management” is the grouping of two words i.e. ‘Finance’ and ‘Management’.
Finance means the study of money and its supply. It is the acquiring or raising of money supply (funds) and allocating (assigning) those resources (funds) based on monetary requirements of the business. Finance is called science of money. It is not only act of making money available, but its administration and control so that it could be properly utilized.
The term ‘Management’ means planning, organizing, coordinating and controlling human activities regarding finance function for achieving goals/objectives of business firm. Thus, financial management is defined as the overall administration and management of money and its flow.
Definition of Financial management:
Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the organization. It means applying general management principles to financial resources of the enterprise.
Roles or Key areas of finance:
1. Raising of funds
Based on the total requirements of capital/funds for use in fixed assets, current assets as well as intangible assets like goodwill, patent, trade mark, brand etc.
Crucial decisions are:
- When to raise (time)
- Sources from which to raise
- How much (quantum of money)
- In which form (debt or equity)
- Cost of raising funds
2. Investment of funds
Funds raised need to be allocated/ invested in:
2.1. Fixed assets
Fixed assets also known as capital assets or capital budgeting decision. These decisions are based upon cost and return analysis through various techniques
2.2. Current assets
Current assets also known as working capital management. These are assets for day today running the business-like cash, receivables, inventory, short form investments etc. Decision about investment of funds is taken keeping in view two important aspects i.e. Profitability and Liquidity.
3. Distribution of funds
Profit earned need to be distributed in the form of dividend. Higher the rates of dividend, higher world is the price of shares in market. Another crucial decision under it would be the quantum of profit to be retained. The retained profit is cost free money to the organization.
August 26, 2017