Financial Management – Meaning, Scope and Importance

What is Financial Management?

Financial management definition involves planning, arranging, managing, and controlling financial activities, such as the acquisition and use of an organization’s funds. Financial management meaning entails applying general management ideas to the company’s financial resources. They concentrate on finding the funds, whether they come from the entrepreneur’s initial investment, loan financing, venture capital, a public offering, or any other source. Professionals in finance management are also in charge of allocating funds in an efficient manner to support the organization’s overall financial stability and expansion.

Let’s delve into the nature and scope of financial management.

We now know what is finance management, so here’s the purpose of it. Finance management is used to advise organizations or individuals on financial choices that may impact their economic security currently and in the future. Effective financial resource planning and financial activity control assist businesses in making sure their financial actions are in sync with their objectives and goals. So, if you are wondering how to become a financial analyst, considering the importance of the role, Hero Vired’s finance management course and certifications can be of great help.

• Maximizing the company’s current value:

Organizations can raise shareholder wealth by using finance management to make decisions that boost the company’s value and produce profits for investors.

• Investment:

Financial managers decide how much of the available cash will be invested over the short- and long-terms. Working capital management decisions have an impact on liquidity and investing when they pertain to short-term investments. Long-term investment decisions, on the other hand, entail capital planning, such as the purchase of real estate or equipment.

• Financing:

It comprises choices that guarantee money will be available as and when it is needed. Also, it aids in selecting external funding sources, share and bond issuance, bank borrowing, and reserves and surplus when deciding on the capital structure.

• Dividend:

It describes how a corporation distributes its profits to its shareholders and then reinvests them in its operations as necessary.

• Maximizing profit:

For businesses trying to grow and extend their operations, finance management is crucial. Organizations can find and seize new growth prospects for increased profits by successfully managing their financial resources.

• Maintaining cash flow:

Through lowering expenses, boosting profitability, and ensuring cash flow, finance management is crucial for enhancing and sustaining their financial efficiency.

• Ensuring a company’s survival:

Importance of financial management is hugely evident in the survival of a company. Because the company relies for success on its funds, it is crucial to streamline the management of these funds in the most optimal way possible.

Being aware of the roles and responsibilities of a financial manager is crucial to executing the right decisions for businesses.

Component of Finance Management

Financial management is also made up of certain elements. These include:

1. Financial Planning

Finance management is required for every business goal, including profit maximization, company expansion, and service expansion, and each goal has a set of processes to get there. This covers funding, setting priorities, assigning responsibilities, conducting user research, and more.

2. Financial Control

The financial manager is responsible for managing finances in addition to planning, obtaining, and using funds. Many methods, including ratio analysis, financial planning, cost and profit control, etc., can be used to achieve this.

3. Financial Decision-making

Decision-makers must select the alternative that is realistic and aligns with goals and objectives after establishing all alternatives and probable plans. Decision-making will really coincide with the other aspects of planning, managing, and organizing because each component must be confirmed before the plan can be carried out.

Importance of Financial Management

There is a huge importance of financial management in any organization or business’s finance management to sets the goals, creates the policies, specifies the processes, puts programmes in place, and allots the budgets for all financial activities. It is feasible to guarantee that the business will always have access to enough cash through efficient finance management procedures. If this interests you, opt for the Hero Vired program for financial technologies. Let’s explain the importance of financial management in below mentioned pointers.

• Financial Planning and Strategizing:

Financial planning is important for finance management. It determines each monetary requirement related to business concerns. In later stages of a company’s finance management life cycle, financial planning colleagues must also act promptly and appropriately rather than worrying. Financial planning appears to be a vital aspect of corporate concern. Normally, a company’s financial planning receives the majority of the credit for its corporate success.

• Safeguarding / Protecting Funds:

Finance management is essential for accomplishing business objectives and safeguarding finances. To ensure that a business runs well, it is important to assess the areas where finances are needed and properly distribute them. Investing too much in one project can harm other corporate activities since they frequently lack funding. Importance of financial management in an organization is to protect money and make good investments.

• Economic Growth and Stability:

The economy’s growth will be ensured by prudent financial planning. You will gradually increase the amount of wealth you create, which will aid in your financial development. Importance of financial management include protecting finance towards achieving business goals. Economic growth is the only way to guarantee your financial stability, and the only way to do so is through sound finance management.

• Decision-making:

Once a financial decision has been taken in accordance with a company concern, it cannot be changed. So, money that has already been spent cannot be recovered for bad decisions. The entire business activity may be impacted by a financial decision due to the fact that it instantly interacts with all corporate departments.

• Controlling:

A financial manager can ensure that every department is working within the budget and the finances are well managed for intended purchases.

• Increases organizational efficiency:

While the importance of finance management is seen through various functions in assisting companies in planning and effectively using finances, how to manage financial risk management is something that is crucial as well to prevent unwarranted losses.

Type of financial Management

It is significant to understand the financial management meaning in order to succeed in your business, and so are the types of financial management. Know the types of financial management to pick the right one for your business.

1. Strategic Finance Management

The process of managing a company’s finances to achieve the objectives of the organisation is known as strategic finance management. It’s a management strategy that develops a strategic plan using a variety of strategies and financial tools. Additionally, it guarantees that the strategy is carried out as intended and is long-term realizable.

2. Tactical Finance Management

When the original strategic plan has been presented, tactical finance management planning takes place and focuses on the immediate tasks that must be completed to reach the larger objectives. Also, tactical finance management is analysed or reviewed more frequently to determine if any actions need to be adjusted.

Factors Affecting Financial Decisions

Financial decisions are important for an organization’s health because they affect the firm’s capacity to acquire plant and machinery when required, carry the necessary number of receivables and inventories, avoid onerous fixed expenses when revenues and sales fall off, and maintain control of the business. Every organisation makes financial decisions in a different way. Over time, it might also change within the same organisation. It is true that several internal and external factors have an impact on the character of financial decisions.

• Cost:

The expense of raising money from various sources differs. A finance manager typically picks the least expensive source of funding.

• Risk:

A unique borrowed fund has a higher degree of risk than its owners, as compared to other sources of funding. When making a financing decision, the finance department takes the risk associated with each source into account. Debt carries a higher risk than equity, which carries a lower one.

• Floatation Fees:

The cost associated with the issuance of securities is referred to as the flotation cost. Equities have a low flotation cost, whereas debt has a high flotation cost. Securities with the lowest flotation costs are preferred by the company.

• Market Condition:

The state of the stock market also contributes to the creation of a source of funding. While the stock market is growing, it is also easy to raise money for the issuance of shares during this time since investors are eager to purchase equity shares. Nonetheless, a corporation may have trouble issuing equity shares in a down market.

• Tax Rate:

The cost of debt is influenced by the tax rate because interest is a taxable item. A higher tax rate makes debt financing more appealing.

• Capital budgeting:

This comprises assessing the viability of suggested long-term investments and figuring out how to allocate money most effectively.

• Capital structure:

Finding the ideal balance between equity financing and debt is necessary to reduce capital costs and increase shareholder value.

• Working capital management:

This entails overseeing the organization’s short-term financial resources, including revenue, accounts receivable, and inventories.

How, when, and where money will be acquired to meet investment needs are all factors in this financial decision. It has to do with capital structure or financial leverage. The debt-to-equity ratio is what is used to describe this. If more loan money is utilised, shareholders’ risk is reduced and their likelihood of obtaining returns is decreased. As a result, while choosing a financing option, the exchange between returned risks is crucial, and so a financial manager must be well aware of financial risk management.

Conclusion

Thus, we have seen what is finance management, the importance of financial management in today’s world, and the nature and scope of financial management. It forms the backbone of any business, making the foundation for a robust system where the acquisition, management, and spending of funds are done in a very systematic manner. The significance of financial management is what makes it a great career option today.