Define financial management

-Managerial activities which deals with planning and controlling of firms and financial
sources.
-The planning, directing, monitoring, organizing, and controlling of the monetary
resources of an organization.
What are the goals of financial management?
-Disseminating
Timely dissemination of monthly, quarterly and annual financial information to internal and
external stakeholders is a significant goal of financial management. It ensures that financial
information is prepared in accordance with accounting principles and International Financial
Reporting Standards. This provides internal stakeholders -- that is, owners and employees --
with reliable information on the performance and profitability of the business. The financial
reports furnish suppliers with the information they require to determine the stability of the
business, and enable the government to examine the tax obligations of the business.
-Planning
Financial plans and forecasts aim at facilitating efficiency in the current and future activities of
the business. The planning process seeks to match the organization’s operational and
investment activities to its overall cash flow capabilities. Current and future cash flow projections
determine the scope of short-term and long-term plans of the business. This goal ensures
sufficient funds are sourced in good time and allocated to different business activities. Financial
planning also ensures the business engages in profitable long-term investments. For example,
capital budgeting analyzes the financial viability and profitability of long-term assets prior to
procuring such assets.
-Managing Risks
Risk management is a very important goal because it touches on one of the soft underbellies of
the business enterprise. Financial management prescribes the appropriate contingency
measures for both operational and strategic risks. Insurance and automated financial
management systems help business owners and employees to prevent or reduce the risks from
theft, fraud and embezzlement. Internal and external auditing processes also enhance the
detection of fraud and other forms of financial malpractices.
-Exerting Controls
The financial management function exerts internal controls over financial resources with the
objective of ensuring efficient resource utilization. These controls enhance scrutiny of financial
transactions to prevent business owners or employees from violating financial principles or
undermining transparency. The goal of enhancing internal financial controls is pursued through
oversight by the senior financial management staff and internal auditors. Failure to exert internal
financial controls could spell unprecedented consequences for the business, as was the case of
financial reporting scandals by Enron, Tyco and WorldCom in the early 2000s.
What is the scope of financial management?
 -1. Financial Planning-

This is the primary scope of financial management and it means planning is the process of
determining the objectives, goals, and ideas for the business in previously (Thinking in
advance). It is also the estimation of identifying the goals, initial policies, and programmes to
achieve the predetermined goals. Financial Planning includes various points like:-

Deciding Financial Objectives-

Deciding the financial objective is the major factor to determine the basic goals of profit and
wealth maximization.
Establishment of Policies and Procedures-
Policies and Procedures are the main character to define the code of conduct of any enterprise
or business i.e., Policies indicates the guidelines and procedures formulates the rules and
regulations of the whole company.
Arrangement of Financial Plan-
In this, financial plan helps to prepare the planning strategy and design a suitable format of
capital structure, which includes:
-It helps to estimate the size of the capital structure,
-It helps to design the capital structure with various sources of funds. Those sources of funds
may be owned or borrowed.
-Accommodate in the process of financial planning for future development and helps to keep
pace with the innovative or technological changes.
2. Securing Capital Funds-

This is the secondary scope of financial management and it means when the quantum of the
capital structure has been designed, and after that, the next step is to arrange the necessary
funds from various sources like individuals and various institutions.

In this function, capital is the biggest source for running a specific business because it arrange
the selling and marketing concepts of corporate business.
3. Financial Supervision-
This is the third scope of financial management and it means to supervise the collection of
funds for doing a proper job. Once the source of capital will be carefully selected and the funds
 of capital have been received, then after, the company or organization work for the welfare of
the particular company. It includes various steps for defining the supervisionaspects:
 Establish Effective Assets Management-
It helps to establish a proper fixed assets management and formulating the new capital-
budgeting techniques. Once the assets are properly established, then the responsibility of the
company is to utilize fixed assets in a proper manner and do proper maintenance with the
production department.

 Maintaining Optimum Level of Liquidity-

In every organization, the finance department always keep our eye constant for watching a
cash-in-flows and cash-outflows for assuming and determining the “Surplus-Cash“ and “Deficit
Cash” and make the proper arrangements for reducing the overflows and underflows and make
try to maintain the optimum level of liquidity or cash.
4. Financial Control-
This is a fourth scope of financial management which includes proper utilization of investment
in miscellaneous assets like manpower. Financial control is formulated through a budgetary
control system through which the actual cost of the company will be kept within limits and
targeted profits earned by the company. It includes various process like:
1. It helps to fix the standards of the company in advance,
2. It helps to build the sustained comparison between actual cost and pre-determined
standards,
3. It helps to outlin the remedial action,
4. It helps to establish the follow-up system,
5. It helps to modify the standards and norms.
5. Financial Decisions-
This is the fifth scope of financial management and it means to taking financial decisions are
very helpful to maximize the growth and potential of the business. It includes various types like-
(i) Investment Decisions, (ii) Financing Decisions, and (iii) Dividend Decisions.
 Investment Decisions-
The investment decisions are the part of the financial decisions made by the investors and
top-level management for the purpose of establishing the investment opportunities.
 Financing Decisions-
The financial decision is also the main decision which is made by the financial manager
related to the financial-mix of the company. It is formulated with the allocation of funds and
borrowing for investment decisions.
 Dividend Decisions-
The dividend decision is also the main decision which is taken by the financial manager for
distributing the dividend in the group of shareholders. Thus, the dividend is also known as the
profit of the company.
6. Preparation of Annual Financial Statements-
This is the sixth scope of financial management and it means, financial statements includes
Profit & Loss A/C and Balance Sheet. These two main aspects are shows the financial
reputation or condition of the company during a working period usually a financial year. It shows
the income and expenditure of the company also.
Financial Statements are designed by always keeps finance manager and its started from 1st
April to 31st March (1 Year).
7. Estimation of Financial Performance-
This is the seventh scope of financial management and it means an annually and time-to-time
evaluation of performance is the very crucial task for financial management and financial
manager. For doing the evaluation, there are various turnover variables like ratio analysis,
trend analysis, net profit, cost per unit, and Return on Investment plays a very crucial role
to judge the performance of a firm of past and current years.
8. Evaluating the Impact of New Financing-
This is the eighth scope of financial management and it means, nature of modern
management is becoming future-oriented and follow the objectivity. In this case, time-to-time
growth and development are very important for doing a specific business because it helps the
business to build a huge empire.
Now it’s the turn of finance, in this function finance plays an essential role to make a successful
business for the purpose of development and growth.

9. Miscellaneous Functions-
This is the ninth scope of financial management and it means, the finance area is a very
broad concept and it includes a bulk amount of scope or functions for determining the financial
management. The number of functions includes tax-planning, management of the provident
fund, gratuity, safety of securities, social insurance funds and so on.

1. Investment Decisions:
Investment Decision relates to the determination of total amount of assets to hold in the firm, the
composition of these assets and the business risk complexions of the firm as perceived by its
investors. It is the most important financial decision. Since funds involve cost and are available
in a limited quantity, its proper utilization is very necessary to achieve the goal of wealth
maximization.

The investment decisions can classify into two broad groups:

(i) Long-term investment decision and

(ii) Short-term investment decision.

The long-term investment decision is referring to as the capital budgeting and the short-term
investment decision as working capital management.

Capital budgeting is the process of making investment decisions in capital expenditure. These
are expenditures, the benefits of which are expecting to receive over a long period of time
exceeding one year. The finance manager has to assess the profitability of various projects
before committing the funds.
The investment proposals should evaluate in terms of expecting profitability, costs involving and
the risks associated with the projects.

The investment decision is important not only for the setting up of new units but also for the
expansion of present units, replacement of permanent assets, research and development
project costs, and reallocation of funds, in case, investments made earlier do not fetch result as
anticipated earlier.

Short-term investment decision, on the other hand, relates to the allocation of funds as among
cash and equivalents, receivables and inventories. Such a decision is influencing the tradeoff
between liquidity and profitability.

The reason is that the more liquid the asset, the less it is likely to yield and the more profitable
an asset, the more illiquid it is. A sound short-term investment decision or working capital
management policy is one which ensures higher profitability, proper liquidity and sound
structural health of the organization.

2. Financing Decisions:
Once the firm has taken the investment decision and committed itself to new investment, it must
decide the best means of financing these commitments. Since firms regularly make new
investments; the needs for financing and financial decisions are ongoing.

Hence, a firm will be continuously planning for new financial needs. The financing decision is
not only concerned with how best to finance new assets but also concerned with the best overall
mix of financing for the firm.

A finance manager has to select such sources of funds which will make the optimum capital
structure. The important thing to decide here is the proportion of various sources in the overall
capital mix of the firm. The debt-equity ratio should fix in such a way that it helps in maximizing
the profitability of the concern.

The raising of more debts will involve fixed interest liability and dependence upon outsiders. It
may help in increasing the return on equity but will also enhance the risk.
The raising of funds through equity will bring permanent funds to the business but the
shareholders will expect higher rates of earnings. The financial manager has to strike a balance
between various sources so that the overall profitability of the concern improves.

If the capital structure is able to minimize the risk and raise the profitability then the market
prices of the shares will go up maximizing the wealth of shareholders. Also learn, What is the
Definition of Price Perception?

3. Dividend Decisions:
The third major financial decision relates to the disbursement of profits back to investors who
supplied capital to the firm. The term dividend refers to that part of profits of a company which is
distributing it among its shareholders.

It is the reward of shareholders for investments made by them in the share capital of the
company. The dividend decision is concerning with the quantum of profits to distribute among
shareholders.

A decision has to take whether all the profits are to distribute, to retain all the profits in business
or to keep a part of profits in the business and distribute others among shareholders. The higher
rate of the dividend may raise the market price of shares and thus, maximize the wealth of
shareholders. The firm should also consider the question of dividend stability, stock dividend
(bonus shares) and cash dividend.

4. Liquidity Decisions:
It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s
profitability, liquidity, and risk all are associating with the investment in current assets. In order
to maintain a tradeoff between profitability and liquidity, it is important to invest sufficient funds
in current assets. But since current assets do not earn anything for business, therefore, a proper
calculation must do before investing in current assets.

Current assets should properly value dispose of from time to time once they become not
profitable. Currents assets must use in times of liquidity problems and times of insolvency.