Funds are obtained from a variety of sources in this competitive period. The acquisition of these monies has always been seen as a roadblock. In terms of cost, risk, management, and control, monies obtained from various sources are classified differently. A wise manager will recognise that the money should be obtained at the lowest possible cost, with a balanced risk and control element. This ability to acquire funds at a low cost and invest them in getting better returns requires certain skills, which you can get by joining one of the various management courses.
Meaning of financial management
The strategic planning, organising, directing, and managing financial endeavours in an organisation or institute is referred to as financial management. It also entails applying management principles to an organization’s financial assets and playing a significant role in fiscal management. Take a look at the following goals:
- Ensuring that the organisation has a sufficient source of funds;
- Assuring that the organization’s shareholders get a good return on their investment;
- Optimal and efficient use of resources;
- Creating genuine and secure investment possibilities.
Example of financial management
You want to take out a business loan to buy new office space for your company. – It is essential to consult a real estate professional in this case, and you must determine whether the value of the property after 20 years or longer will be higher than the cost of renting it. You should also contact your financial department to see whether putting 20% of your assets in down payment and taking out an 80 per cent company loan will provide a reasonable return on investment. Whether you’re leasing a residence, software, or a vehicle, there are many instances where renting is more cost-effective than purchasing.
Types of financial management
The aforementioned functions can be classified into three types of financial management:
- Capital budgeting is the process of determining what financial events must occur for a corporation to meet its short- and long-term objectives. What should be done with capital funds to boost growth?
- The capital structure of a company determines how it will fund operations and/or expansion. Taking on debt may be the best option if interest rates are low. A company may also seek finance from a private equity firm, sell assets such as real estate, or sell equity, if applicable.
- Working capital management ensures that there is enough cash on hand for day-to-day operations, such as paying employees and purchasing raw materials for production.
Financial Management’s Functions
- Estimation of capital requirements: A finance manager is responsible for estimating the company’s capital requirements. This will be determined by a company’s predicted costs and profits and its future programmes and policies. Estimations must be made in a way that increases the enterprise’s earning capacity.
- Capital composition determination: Following the estimation, the capital structure must be determined. This entails a debt-equity analysis for both the short and long term. This will be determined by the amount of equity capital a company has and any additional funds raised from outside sources.
- Sources of additional cash: A corporation has various options for obtaining more funds, including
- The issuance of shares and debentures
- Bank and financial institution loans are to be obtained.
- Deposits from the general public are to be drawn in the form of bonds.
The choice of factor will be based on the relative strengths and drawbacks of each source and the duration of funding.
- Investment of funds: The finance manager must decide whether or not to invest funds in successful ventures to ensure that the investment is safe and that regular returns are attainable.
- Surplus disposal: The finance manager is responsible for deciding on net earnings. This can be accomplished in one of two ways:
- Dividend declaration includes determining the dividend rate as well as other advantages such as bonuses.
- Retained earnings – A volume must be determined, which will be determined by the company’s expansion, innovation, and diversification objectives.
- Cash management: The finance manager is responsible for making cash management decisions. Wages and salaries must be paid, electricity and water bills must be paid, creditors must be paid, current liabilities must be met, an adequate stock must be maintained, and raw materials must be purchased, among other things.
- Financial controls: The finance manager is responsible for planning, procuring, and utilising funds and maintaining financial control. Many strategies, such as ratio analysis, financial forecasting, cost and profit control, and so on, can be used to accomplish this.
Importance of financial management
This type of management is crucial for a variety of reasons. Take a look at a few of the reasons for this:
- Aids in the financial planning of organisations;
- Aids in the planning and procurement of money for organisations;
- Aids organisations in making the best use of and allocating cash obtained or gained;
- Aids businesses in making important financial decisions;
- Aids in increasing the profitability of businesses;
- Increases the firm’s or organization’s total value;
- Ensures economic security;
- Employees are encouraged to save money, which aids in personal financial planning.
Therefore companies are increasingly looking for potential employees with an Executive MBA who can understand and handle these domains for better management of their resources.
Financial Management’s Purpose
Financial management is divided into four categories:
- Planning: The financial manager forecasts how much money the company will require to sustain positive cash flow, allocate funds for growth or the addition of new products or services, and deal with unforeseen events, and distributes this information with colleagues. Capital expenses, T&E and workforce, and indirect and operational expenses can all be split into planning categories.
- Budgeting: The company’s available money are allocated by the financial manager to cover costs such as mortgages or rents, salaries, raw supplies, employee T&E, and other obligations. There will be enough money left over to save for emergencies and fund new company ventures in an ideal world. Companies usually have a master budget and may have sub-budgets for cash flow and operations. For example, budgets can be static or variable.
- Risk management and assessment: Financial managers are trusted by line-of-business executives to assess and offer compensating measures for several risks, including:
- Market risk has an impact on a company’s investments, as well as its reporting and stock performance if it is a public company. Financial risk specific to the industry, such as a pandemic affecting restaurants or the move in retail to a direct-to-consumer model, may also be reflected.
- Credit risk: The consequences of customers not paying their invoices on time, resulting in the business’s inability to meet obligations, which can harm creditworthiness and valuation, which determines the ability to borrow at favourable rates.
- Liquidity risk: Finance departments must keep track of current cash flow, forecast future cash requirements, and be ready to free up working capital as needed.
- Operational risk is a catch-all term that several financial departments are unfamiliar with. It could address topics such as the danger of a cyber-attack and whether or not to obtain cybersecurity insurance and what disaster recovery and business continuity strategies are in place, and what crisis management procedures are in place if a senior executive is accused of fraud or misbehaviour.
Procedures: The financial manager establishes protocols for how the finance team will securely and accurately collect and communicate financial data such as invoices, payments, and reports. These written processes also spell out who is in charge of making financial decisions within the organisation and who approves those decisions. Therefore organisations hire financial managers with a business management degree to manage their finances. Companies don’t have to start from scratch; policy and procedure templates, are available for various organisations.
The Bottom Line
After reading the definition and examples of financial management, it is clear that financial management is an important element of an organisation. As every business or organisation sees financial management as essential, the scope for such professionals is wide.