Financial management refers to efficient acquisition, allocation and usage of funds by a company for its smooth working.
The main objectives of financial management are to reduce the expenses involved in procuring funds, to control risk and to achieve effective deployment of funds.
Importance of Financial Management
The role of financial management is as such that it has a direct impact on all the financial aspects/activities of a company. Certain aspects affected by financial management decisions are
1. Size and composition of fixed assets: The amount of money invested in fixed assets is an outcome of investment decisions. So, if more amount of capital is decided to be invested in fixed assets, then it will increase the value of the total share of fixed assets by the amount invested.
2. Amount and composition of current assets: The quantum of current assets and its constituents like cash, bills receivable, inventory etc. is also influenced by management decisions. It is also dependent on the amount invested in fixed assets, decisions about credit and inventory management etc.
3. Amount of long-term and short-term funds to be used: Financial management determines the quantum of funds to be raised for the short term and long term. In case a firm requires more liquid assets, then it will prefer to have more long-term finance even when their profits will decrease due to payment of more interest in comparison to shortterm debts.
4. Proportion of debt and equity in capital: Financial management also takes decisions regarding the proportion of debt and/or equity.
5. All items in profit and loss account: All items in the profit and loss account are affected by financial management decisions. For example, higher amount of debt will lead to increase in the expense in the form of interest payment in the future.
1. The basic objective of financial management is to maximise the wealth of shareholders.
2. It aims at taking financial decisions which prove beneficial for shareholders. Such financial decisions are taken wherein the anticipated benefits exceed the cost incurred. This in turn implies an improvement in the market value of shares.
3. An increase in the market value of shares is gainful for shareholders.
4. It focusses on taking those financial decisions which lead to value addition for the company, so the price of the equity share rises.
5. As this basic objective gets fulfilled, other objectives such as optimum utilisation of funds, maintenance of liquidity etc. are also fulfilled automatically.
6. It involves choosing the best alternative which will prove to be beneficial.