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What is financial management? Scope, objective, and importance

Finance is the backbone of any organisation as it is required to carry out all of its activities. Financial management deals with efficient management and utilization of funds in a business. Finance management plans the working operations of a firm in all criteria to attain organizational growth by reaching specific goals. It is the responsibility of a finance manager to decide the firm’s capital structure properly. Read this article to explore more about finance management, its scope, objectives, and importance.

What is Finance Management?

Finance management is the process of managing the financial resources of a firm by applying management principles. This means efficient management of an organization’s finance by planning, organizing, directing, and controlling its financial operations. Businesses implement the methodology of financial management to monitor their assets, revenue, and expenses to ensure sustainability and maximize profitability.

The concept of financial management ensures that there is always an adequate availability of funds in business from various sources and that it earns the best ROI or return on investment.

Scope of Finance Management

The following areas explain the scope of finance management in business:

Investment Decision

Finance management involves managing all the investment decisions of a firm. This includes tasks like measuring the cost of capital, risk evaluation and estimating benefits that are expected from an individual project. Managers should be capable of deciding on different ways the investment available funds in fixed or current assets to earn optimum returns.

Working Capital Decision

Taking proper working capital decisions is another crucial scope of finance management. Here, the decisions are concerned with the investment of funds in current assets or current liabilities. While current assets include cash, short-term securities, inventories, receivables etc., current liabilities involve creditors, bills payable, and bank overdrafts.

Financing Decision

Financing decisions involve figuring out how the required funds can be raised from the available sources, long-term and short-term. It’s the duty of a finance manager to form the optimum capital structure of a firm to raise its value. There should be a proper balance between debt and equity to provide maximum return to the shareholders.

Dividend Decision

Dividend decisions are about building a dividend policy to facilitate the distribution or retainment of business profits. Out of the available profit, an optimum dividend payout ratio should be decided by the finance manager. This decision is to be taken by considering all available growth and expansion opportunities of the organization and should ensure availing them by retaining a proper profit amount.

Ensures Liquidity

This involves ensuring that there is a regular supply of funds in the organization. The finance manager not only monitors all the cash inflows and outflows but also makes sure there is no underflow or overflow-like situation. Ensuring the organization’s optimum level of liquidity is a critical scope of finance management.

Profit Management

The main purpose of finance management is to increase the company’s profits. It ensures a reduction in the cost of different activities through efficient monitoring and setting up proper price policies. The finance manager chooses cheap sources of capital after measuring the cost of capital and analysing the sources available.

Objectives of Finance Management

Financial Management aims to manage and maintain the organization’s finances. It deals with procurement, allocation, and handling of financial resources of a concern. Its objectives include:

  • Ensuring a regular and suitable supply of funds to the concern.
  • Ensuring adequate returns to the shareholders. This is dependent on factors such as the market price of the share, earning capacity and shareholders’ expectations.
  • Ensuring optimum utilisation of funds. Once the procurement of funds is done, it should be utilised at the minimum cost in the best possible way.
  • Developing a sound capital structure and a stable platform for equity and debt.

Importance of Finance Management

Finance management is important in several ways. Apart from the already discussed benefits, let’s look at some of the other advantages of finance management:

  • Helps in improving the organization’s profitability
  • Increases the firm’s overall value
  • Offers economic stability
  • Helps in personal financing as it encourages employees to save money

Learning finance management opens a wide variety of career opportunities. If you are a recent finance graduate trying to land a job, make use of the finance certification courses online to be equipped with the most advanced skill set required for finance management. These courses can be of help to someone who is already working in the finance sector as it provides the tools to get better at your jobs.

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