Research Paper

Domain – Finance

By :- Gauri Gupta(JIM)
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 Topic
The essence and
importance of
financial
management

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 Index
Sr. No. Topics Page No.
1 Introduction 4
2 Literature Review 5-12
3 Purpose of Financial 13
Management
4 Types of Financial Management 14-15
5 Elements of Financial 16
Management
6 Importance of Financial 17
Management
7 Objectives of Financial 18-19
Management
8 Functions of Financial 20-21
Management
9 Why is Financial Management 22
so important in business?
10 Life Cycle of Business 23-24
11 The role of the Financial 25-26
Manager

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 Financial Management
Introduction
Finance management is the strategic planning and managing of an
individual or organization’s finances to better align their financial status
to their goals and objectives. Depending on the size of a company,
finance management seeks to optimize shareholder value, generate profit,
mitigate risk, and safeguard the company's financial health in the short
and long term. When working with individuals, finance management
may entail planning for retirement, college savings, and other personal
investments. 

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 Literature Review
2.1. Existing corporate sustainable reporting disclosures and firms’
value. Habek and Wolniak (2015) state that corporate sustainability
reporting and disclosure is based on the principles of evaluating
company performance in present time and in the future. There has been
an increased need for the formation of better more agile and
environmentally considerate methods of evaluating companies’
performance. The ideal situation has been the creation of a way in
which company success can be determined as a matter of financial
performance and social or environmental performance. Corporate
disclosures that are pegged on sustainability reporting are largely
based on the voluntary approach and legitimacy approach. Corporate
firms in most jurisdictions globally have no mandatory requirement to
have a corporate sustainable disclosure made therefore making the
decision by specific companies to adopt sustainability reporting
voluntary (Gnanaweea & Kunori, 2018). The legitimacy theory is based
on the decision by firms to adopt corporate sustainability reporting is
propelled by the intention of the firms to appear legitimate or credible
to the stakeholders and shareholders. There has been an increasing need
for companies to upgrade their reporting from a financial model to an
integrated financial and environmental reporting model. This approach
has been observed and experimented on and found to have a positive
impact on the company as a function of increased shareholder and
stakeholder value. Some of the values that have been attached to the
legitimacy theory include social values, community service, legislative
compliance, environmental advocacy, environmental audits, and related
conservation efforts (Patten, 1992). Corporate sustainable disclosures
can be based on the following: Environmental conservation efforts
and the related areas worked on Efforts towards the reduction of the

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carbon emissions Adoption of renewable sources of energy Investment
in environmental research programs. More conformity and adoption of
environmental accounting or reporting . The illustration of the inherent
links between environmental reporting or disclosure and financial
management (Tuwaijri et al., 2004). Ellili and Nobanee,( 2016);
(Alshehhi et al., 2018) examined the impact of sustainability
practices on corporate financial performance. The study conducted by
Graham et.al ,2005 identifies that efforts by corporate firms towards
corporate financial reporting not only create individual firm value but
shared value across industries. More companies become acquainted
with different environmental aspects and incorporate these aspects
into their reporting frameworks. The aggregation of sustainable
approaches by different entities and companies across various industries
in a country for instance results to an overall reduced carbon footprint.
The essence of such a corporate effort is the creation of more
shareholder and stakeholder value. More specifically companies’
adoption of sustainable approaches ensures that despite the traditional
financial performance focuses on by different company stakeholders,
there is also more value creation through the more protected
environment. Technically more environmental consciousness enables the
continual positive health of people and a conducive environment
within which to work thus the development of the term’s
sustainability (Pablo et al., 2019). Over the years people have become
more knowledgeable and acquainted with sustainable concepts through
published research. Therefore, there has been an increasing trend or rate
of attaching value to sustainable measures by various stakeholders and
shareholders to various companies. The element of actualization of
sustainable approaches being adopted by firms and the subsequent
disclosure of the sustainable efforts and results to shareholders elicits
approval which translates to value from shareholders and stakeholders.

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As time moves more company financial performance reported shall be
expected to be backed by commensurate sustainable approached by
firms reported concurrently (Graham et.al ,2005).

2.2 Conceptual Building

Sustainability and related key financial decisions Financial decisions
are crucial and are the main results of financial management.
Effective and efficient financial management is normally manifested by
successful financial outcomes. The main determinants for
sustainable outcomes can be linked to financial management
decisions. Financial management is based on concepts that seek to
optimize the shareholder returns or maximize both shareholder and
stakeholder returns through strategic decisions made by managers. In
terms of capital budgeting sustainability considerations can be
incorporated in financial decisions made through the selection and
approval of projects that have environmental aspects or efforts as a
means of achieving sustainability in light of the sustainability goals set.
A good example can be the selection and approval of a project that
seeks to change the main sources of energy of a firm from emissive
traditional sources of energy such as coal power plants to renewable
energy sources. Renewable energy sources can refer to the use of solar
power energy being harnessed, the use of wind power or even the use of
hydropower (tidal or ocean power). The capital budgeting process
involves the matrix process of selection of the best projects with the
most plausible and viable investment returns. The capital budgeting
process in financial management enables the cost versus returns
comparison which then allows for the selection of the project with the
highest positive returns (Yilmaz & Flouris,2010). Brewer, Garrison and
Noreen (2005) further define the capital budgeting process is composed
of the superior financial indices of the net present value (NPV) and the
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internal rate of return (IRR) as some examples. The net present value is
a function of the total returns minus the initial cost of capital and the
higher and positive the net present value the more likely for project
selection (Arslan & Zama, 2015). The net present value returns are
discounted and summed up as functions of expected future returns
discounted to present value terms using conventional standard
discounting factors to have a more realistic analysis of projected
outcomes. The internal rate of return using the same concepts as the net
present value method of calculation except for the condition of net cash
flows used. The internal rate of return uses undiscounted projected cash
flows minus the initial costs of capital to get the final value. The
internal rate of return is indicative of project selection if the calculated
value is higher than the project rate of return. However, the net present
value model is more superior than the internal rate of return in project
determination and project selection. In order to link the financial
methods for project selection with sustainability aspects, an
additional project evaluation metric can be included in the financial
evaluation to represent environmental conservation concurrently with
the financial viability of projects. An alternative approach can also
include the appropriation of part of the initial costs of capital to budget
for sustainability initiatives in the event of one project, therefore,
ensuring that the environmental aspects are considered in the project
(Arslan & Zama, 2015). The cost of capital is the return rate which shall
be obtained by a firm. Therefore, under capital budgeting financial
decisions, corporate companies can select a project which requisite
sustainability approaches in line with the present demands from
company shareholders and stakeholders. Therefore, the selection of an
intended project can be based on the projects that have one;
environmental sustainability approaches in their implementation model
and two; the project that has the highest return. Therefore, the financial

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decision process is improved as a result of prioritizing the sustainability
aspect or plans in companies before the financial return objectives.
Previous research on sustainability reporting has linked corporate social
responsibility with company financial performance. The main aim
of the study was to determine the correlation between financial
performance as the dependent variable and corporate social
responsibility as one of the independent variables Boston College
Centre study results showed that the incorporation of sustainability
aspects improved the reputation of companies as the first effect. The
second effect or impact was increased employee loyalty which means
firms had better higher chances for the retention of the labor force, a
positive outlook. Thirdly, there was increased consumer loyalty which
meant that there was a higher chance for the return of clients which
meant that the firm had a better position in the market when
sustainability approaches were adopted. The fifth observation was
that there was an increase in waste reduction which can be linked to
recycling efforts, re-use steps and even the creation of more
employment opportunities. On the flip side, the study also contained
observed results on the reduction of accuracy of the sustainability
reports for corporate companies as the requirement for sustainability
reporting was not mandatory. This observation makes sense in terms of
companies wanting to obtain consumer confidence and commitment as
proof of stakeholder value through creative environmental reporting
(Schaltegger & Wagner, 2006). In terms of profitability, prior
research has shown that firms that have actual sustainability
approaches have higher profitability and have a larger firm size
compared to firms that have not adopted these approaches. The
sustainability approaches, in this case, are Electronic copy available at:
https://ssrn.com/abstract=3472415

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 7 firms with well-developed models for corporate social responsibility.
Firm size specifics refer to the market capitalization or share capital, the
value of total assets or the value of total annual turnover. These results,
therefore, add relevance to the hypothesis that there are more effective
financial decisions that lead to higher successful company outcomes in
companies that are sensitive to sustainability aspects in their annual
performance reporting. (Cheng et al., 2014) 2.3 Islamic finance:
Sustainability Islamic banking has been analyzed in Malaysia and there
has been a proposed method through which sustainability can be
integrated as per a study was done on the Islamic banking model on
sustainability (Chong & Liu 2009). Environmental sustainability is
consistent with Islamic religion which therefore forms part of Sharia
law and is culturally appropriate for incorporation within the confines
of Islamic banking. The study analyzed proposes the Islamic banking
conservation can be done at the banking level through compliance
with all environmental regulations, awareness campaigns and at the
operational level. The second point where sustainability initiatives can
be forged within the Islamic financial system is at the national level
through appropriate guidelines and policies. The third point is at the
international level through compliance with international provisions on
sustainability as well as voluntary approaches adopted towards
sustainable growth (Aliyu et al.,2017). As per the information provided
by a research conducted by Deloitte Inc on Islamic financing funding for
social aspects and governance which encompasses sustainability was an
issue at some point due to the tight capital markets. However, the case
for South East Asia in Malaysia, for instance, there has been a positive
reception of sustainability under Islamic finance as a function of the
increased demand from conventional market investors and the demand
for green assets as well (Hisham et al., 2019). Moreover, studies
conducted by (Nobanee and Ellili, 2017) results show that there is also

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insignificant effect of the degree of Electronic copy available at:
https://ssrn.com/abstract=3472415
8 the overall corporate risk disclosure on performance of all UAE
banks, conventional and Islamic banks. Also substantial disparities in the
total corporate risk disclosure, as appropriately as all the sub-risks
disclosure between conventional and Islamic banks (Nobanee and Ellili,
2017). The correlation between sustainability and Islamic finance, for
instance, has been demonstrated through the issue of Sukuk bonds worth
$282 Million in 2015 for the Sukuk Ihsan program. Therefore, there
have been calls for more green and sustainable initiatives within Islamic
finance as the international finance industry changes dynamically over
time (Mensi, 2017). 2.4 Financial distress prediction and sustainable
growth Corporate bankruptcy or financial distress of a firm can be
predicted through the analysis of the financial variables, the non-
financial variables, and the macroeconomic factors. A study done and
published in the sustainability journal provides information on the
accuracy of financial distress prediction based on firm-specific variables
study provides that the financial distress can be more accurately
predicted based on firm-specific aspects of financial, non-financial and
macroeconomic variables. The study also further postulates that
predictability of bankruptcy in firms also more precise based on
consideration of the macroeconomic aspects and the non-financial
aspects compared to the financial variables only. The study is case-
specific for the Hong Kong Growth Enterprise Market (GEM) and
provides the above information as useful to regulators within the Hong
Kong capital markets as well as investors or analysts who are potential
investors in the Hong Kong Capital markets. By extrapolation, the study
results and findings can be applied in other capital markets with more
emphasis or focus is placed on all three variables of financial, non-

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financial and macroeconomic factors that determine more accurate
bankruptcy prediction (Opler & Titman, 1994). Electronic copy
Results From the previous studies, it shows that percent distribution of
periodicals across the time periods demonstrations a stable and steady
increase in the research on sustainability impact on corporate financial
performance. However, sustainable reporting creates much individual
firm value and shared value across industries as more accountability is
attached to companies’ operations, more ethical compliance, more risk
management is factored thus leading to high company performance. As
per the research conducted the conceptual financial management
constructs of sustainable based actions and subsequent risk management
propel a firm to higher success levels. 4. Conclusion In conclusion, the
relationship between financial growth and sustainability is provided as
well as a case analysis of the Islamic and Western financial model
systems broken down for analysis of the relevance of the concepts in the
real world. Finally, the research elaborates a predictive model guideline
for distress identification and evaluation in various firms for various
interest parties as a function of non-financial and macroeconomic
elements. a proper comprehension of the relationship between
sustainability and financial growth has been well represented in the case
studies of the Western financial systems and the Islamic financial
models under the sustainability heading. As a function of sustainability
bankruptcy prediction has also been observed to be fundamental to
investors, analysts and the regulators in capital markets given the
financial, on financial and macroeconomic variables that underscore the
principles of financial management in sustainability measurement

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 Purpose of financial management
The purpose of financial management is to guide businesses or
individuals on financial decisions that affect financial stability both now
and in the future. To provide good guidance, financial management
professionals will analyze finances and investments along with many
other forms of financial data to help clients make decisions that align
with goals. 
Financial management can also offer clients increased financial stability
and profitability when there’s a strategic plan for where, why, and how
finances are allocated and used. How financial management
professionals help clients reach goals will depend on whether the client is
a company or an individual.

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 Types of Financial Management
Finance management professionals handle three main types of financial
management for companies. These types involve various aspects of the
internal decisions a company will likely need to make about cash flow,
profits, investments, and holding debt. Many of these decisions will
depend significantly on factors like company size, industry, and financial
goals. Financial management professionals help companies reach
financial goals by guiding in these areas of financing, investment, and
dividends. 

1. Financial
Financial management professionals assist companies in major decisions
that involve acquiring funds, managing debt, and assessing risk when
borrowing money for purchases or to build the company. Financing is
also required when raising capital. Companies can make better, more
strategic financing decisions to raise capital or obtain funds when they
have information on cash flow, market trends, and other financial stats on
the health of a company. 

2. Investment
Financial management professionals can help companies choose where
to invest, what to invest in, and how to invest. The financial
professional’s job is to determine the number of assets (both fixed and
long term) a company will need to hold and where cash flow goes based
on current working capital. In essence, this type of financial management
is about assessing assets for risk and return ratios. Financial managers
will consider a company’s profits, rate of return, cash flow, and other
criteria to assist companies in making investment decisions. 

3. Dividend

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Companies should have a dividend disbursement plan and policy in
place, with guidance from a financial management professional who can
create and implement that plan, suggest modifications when needed, and
monitor payouts if and when they occur. Any time a financial decision is
made, it’s essential to consider dividend payments since you may hold
dividends to fund certain financial decisions within the company. 

It’s also important to have a flexible long-term plan that can grow with
the company. Some more mature companies may pay out dividends at
certain times or once a year; the payout schedule depends on many
factors. Other companies may retain or reinvest dividend payments back
into the company if the company is in a growth phase.

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 Elements of Financial Management
Financial Management is made of the following key elements. These
are:

1. Financial Planning
Financial Planning is a way of calculating the capital required by an
organization and adequately allocating resources accordingly. To do this
effectively, one needs to have answers to the following questions:
Do you have well-established business goals and objectives?
What is your long-term plan as a brand?
What is the capital required for the organization to sustain itself?
What are the different policies and regulations involved in your
business?
Answers to each of these questions and many more are all related to
Financial Management. So, it is crucial to plan things properly that help
you achieve your business goals.

2. Financial Control
It is a pivotal activity to ensure the business is working to meet its
objectives. It is more about setting proper KIPs rather than reducing
costs. It is essential to ensure everyone in the team is aware of both
financial and business goals.

3. Financial Decision-making

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Once you have a proper plan and understanding of all the financial
aspects, decision-makers should access and decide on fundings, resource
allocations, profit distributions, and many more.

Importance of Financial Management

The importance of financial management is explained below −

 It provides guidance in financial planning.
 It assists in acquiring funds from different sources.
 It helps in investing an appropriate amount of funds.
 It increases organizational efficiency.
 It reduces delay production.
 It cut down financial costs.
 It reduces cost of fund.
 It ensures proper use of fund.
 It helps business firm to take financial decisions.
 It prepares guideline for earning maximum profits with minimum
cost.
 It increases shareholders’ wealth.
 It can control the financial aspects of the business.
 It provides information through financial reporting.
 It makes the employees aware of saving funds.

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 Objectives of Financial Management
Just like we all used to save money during our student life and be
mindful about it while spending, organisations need to manage the
finances effectively to scale and be successful. Here are some crucial
objectives that organisations need to be kept in mind:

1. Profit Maximization
One of the most critical objectives is to ensure maximum profits in both
the short and long run. A finance manager should consider this on top of
his priority list and ensure that outcomes related to business performance
are profitable.

2. Proper Mobilization
Just like you do not waste your savings all in one go to buy something
and have nothing in hand, managing funds is crucial for any business.
Financial managers need to evaluate and make vital decisions on the
allocation and utilization of various funds. Whether it is shares,
products, or investing in small companies, all the critical factors must be
considered before investing.

3. High Efficiency
Financial Management tries to increase the efficiency of all the
departments of the company. Proper distribution of finances or funds to
all the departments considering the resources and work involved
increases the organization’s efficiency as a whole.
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4. Reduce Risks
There are always risks involved in running a business, especially with
the uncertainties that come along. Financial managers need to avoid
high-risk situations/opportunities and take calculated risks under the
consultation of experienced leaders and subject matter experts.

5. Business Survival
Amidst the competitive world, the survival of the business is a primary
goal. Darwin said, “Survival of the fittest” in Biology, which is
applicable for companies. Companies need to make decisions intuitively.
They can always take the help of expert consultants if needed.

6. Balanced Structure
Like they say – Balance is key to everything. This applies not just in life
but to businesses too. Financial managers need to prepare a robust
capital structure considering all capital sources. This balance is vital for
liquidity, flexibility, economy, and stability.

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 Functions of Financial Management
The financial management team in any organization is led mainly by the
Finance Manager or someone from the Core Leadership team. Here are a
few functions which the team generally is responsible for:

1. Capital Estimation
A finance manager has to estimate the capital required for the company.
This will include expected costs, profits, future programs, and expected
losses, if any. The estimate had to be made in such a way that the
earning capability of the company increases steadily.

2. Deciding Capital Structure

Once the estimate has been made, it is now time to form the capital
structure. This includes debt analysis in both the short and long term and
is dependent on the capital the firm owns and raised external fundings(if
any).

3. Choice of Funds
When significant funds are required, the capital structure needs to be
expanded. The organization can take options like Bank Loans and Issues
of Share and Debentures. It is essential to evaluate these options
considering the interest rates, returns and risk involved. A pro and con
list of each of these options will be helpful.

4. Investments

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The organization cannot just sit on funds or profits. Growing money is
more important than saving money for sustainable growth. The finance
Manager needs to allocate funds into profitable ventures or make
investments that give reasonable returns with safety on the investment
made.

5. Profit Allocation
Profit allocation plays an important role. Once the business makes
profits, it is essential to allot them properly. Various factors to be
considered here are – employee bonuses, dividends, returns to investors,
funds for future growth, and other basic cash flows. It is essential to plan
and allocate profits to achieve business objectives.

6. Money Management
The team is also responsible for money or cash management. Cash is
required for various purposes such as salaries, electricity and water bills,
real estate bills, buying raw materials, storage costs, etc.

7. Financial controls
The finance manager has to plan and utilize the funds and needs to have
complete control over the finances considering both short term and long
term. This can be achieved using risk analysis and mitigation tools,
financial forecasting, ratio analysis, cost reduction, and profit control.

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Why Is Financial Management So Important
in Business?
Financial management is one of the most important responsibilities of
owners and business managers. They must consider the potential
consequences of their management decisions on profits, cash flow and
on the financial condition of the company. The activities of every aspect
of a business have an impact on the company's financial performance
and must be evaluated and controlled by the business owner.

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 Life Cycle of a Business
Most companies experience losses and negative cash flows during their
startup period. Financial management is extremely important during this
time. Managers must make sure that they have enough cash on hand to
pay employees and suppliers even though they have more money going
out than coming in during the early months of the business. This means
the owner must make financial projections of these negative cash flows
so he has some idea how much capital will be needed to fund the
business until it becomes profitable.
As a business grows and matures, it will need more cash to finance its
growth. Planning and budgeting for these financial needs is crucial.
Deciding whether to fund expansion internally or borrow from outside
lenders is a decision made by financial managers. Financial management
is finding the proper source of funds at the lowest cost, controlling the
company's cost of capital and not letting the balance sheet become too
highly leveraged with debt with an adverse effect of its credit rating.

Financial Management in Normal Operations

In its normal operations, a company provides a product or service,
makes a sale to its customer, collects the money and starts the process
over again. Financial management is moving cash efficiently through
this cycle. This means that managing the turnover ratios of raw materials
and finished goods inventories, selling to customers and collecting the
receivables on a timely basis and starting over by purchasing more raw
materials.
In the meantime, the business must pay its bills, its suppliers and
employees. All of this must be done with cash, and it takes astute
financial management to make sure that these funds flow efficiently.

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Even though economies have a long-term history of going up,
occasionally they will also experience sharp declines. Businesses must
plan to have enough liquidity to weather these economic downturns,
otherwise they may need to close their doors for lack of cash.

Reporting on Business Operations

Every business is responsible for providing reports of its operations.
Shareholders want regular information about the return and security of
their investments. State and local governments need reports so that they
can collect sales tax. Business managers need other types of reports,
with key performance indicators, which measure the activities of
different parts of their businesses.
As well, a comprehensive financial management system is able to
produce the various types of reports needed by all of these different
entities.

Filing and Paying Taxes

The government is always around to collect taxes. Financial
management must plan to pay its taxes on a timely basis.
Financial management is an important skill of every small business
owner or manager. Every decision that an owner makes has a financial
impact on the company, and he has to make these decisions within the
total context of the company's operations.

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 The role of the Financial Manager
The financial management department of any company is handled by a
financial manager.
This department has numerous functions, such as:
Calculating the capital required. The financial manager has to calculate
the amount of capital an organisation requires. This depends on the
policies of the company with regards to expected expenses and profits.
The amount required has to be estimated in such a way that the earnings
in the company increase.
Formation of capital structure. Once the amount of capital has been
estimated, a capital structure needs to be formed. This involves a debt-
equity analysis, both short-term and long-term. The outlook of the
structure depends on the amount of capital the company owns, and the
amount that needs to be raised via external sources.
Investing the capital. Every organization or company needs to invest
money in order to raise more capital and gain regular returns. This
means the financial manager needs to invest funds in safe and profitable
ventures.
Allocation of profits. Once the organization has a solid net profit, it is
the financial manager’s duty to efficiently allocate it. This could involve
keeping a part of the net profit for contingency, innovation, or expansion
purposes, while another part of the profit can be used to provide
dividends to the shareholders.
Effective management of money. The financial manager is also
responsible for effectively managing the company’s money. Money is
required for various purposes in the company such as payment of

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salaries and bills, maintaining stock, meeting liabilities, and the purchase
of any materials and/or equipment.
Financial control. Not only does the financial manager have to plan,
organize, and obtain funds, but he/she also has to control and analyse the
company’s finances. This can be done using tools such as financial
forecasting, ratio analysis, risk management, and profit and cost control.

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