What is the importance of Financial Management?

Financial management is one of the most important aspects in business. In order to start up or
even run a successful business, you will need excellent knowledge in financial management. So
what exactly is this form of management and why is it important? Read on to find out more.

What is financial management?

Financial management refers to the strategic planning, organizing, directing, and controlling of
financial undertakings in an organization or an institute. It also includes applying management
principles to the financial assets of an organization, while also playing an important part in fiscal
management. Take a look at the objectives involved:

 Maintaining enough supply of funds for the organization;

 Ensuring shareholders of the organization to get good returns on their investment;
 Optimum and efficient utilization of funds;
 Creating real and safe investment opportunities to invest in.

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

 Financial planning: This is the process of calculating the amount of capital that is
required by an organization and then determining its allocation. A financial plan includes
certain key objectives, which are:
o Determining the amount of capital required;
o Determining the capital organization and structure;
o Framing of the organization’s financial policies and regulations.
o Financial control: This is one of the key activities in financial management. Its
main role is to assess whether an organization is meeting its objectives or not.
Financial control answers the following questions:
 Are the organization’s assets being used competently?
 Are the organization’s assets secured?
 Is the management acting in the best financial interests of the organization
and the key stakeholders?
 Financial decision-making: This involves investment and financing with
regards to the organization. This department takes decisions about how the
organization should raise finance, whether they should sell new shares, or
how the profit should be distributed.

The financial management department of any firm 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
funds an organization requires. This depends upon the policies of the firm with regards to
expected expenses and profits. The amount required has to be estimated in such a way
that the earning capability of the organization increases.
  Formation of capital structure: Once the amount of capital the firm requires has been
estimated, a capital structure needs to be formed. This involves debt equity analysis in the
short-term and the long-term. This depends upon the amount of the capital the firm owns,
and the amount that needs to be raised via external sources.
 Investing the capital: Every organization or firm needs to invest money in order to raise
more capital and gain regular returns. Hence, the financial manager needs to invest the
organization's funds in safe and profitable ventures.
 Allocation of profits: Once the organization has earned a good amount of 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: This department is also responsible for effectively
managing the firm’s money. Money is required for various purposes in the firm such as
payment of salaries and bills, maintaining stock, meeting liabilities, and the purchase of
any materials or equipment.
 Financial control: Not only does the financial manager have to plan, organize, and
obtain funds, but he also has to control and analyse the firm’s finances in the short-term
and the long-term. This can be done using financial tools such as financial forecasting,
ratio analysis, risk management, and profit and cost control.

Why is Financial Management important?

This form of management is important for various reasons. Take a look at some of these reasons:

 Helps organizations in financial planning;

 Assists organizations in the planning and acquisition of funds;
 Helps organizations in effectively utilizing and allocating the funds received or acquired;
 Assists organizations in making critical financial decisions;
 Helps in improving the profitability of organizations;
 Increases the overall value of the firms or organizations;
 Provides economic stability;
 Encourages employees to save money, which helps them in personal financial planning.

Why study financial management?

 Diverse career opportunities: Studying financial management opens up a lot of diverse

career opportunities. It could be in the private or public sector. Some of the career options
include investment banking, entrepreneurship, financial analysis, financial and
managerial accounting, and strategic financial management. It is also beneficial for those
people who are interested in starting their own business. Doing a financial management
course or obtaining a finance degree can help people get promotions or better accounting
jobs.

 Improve interpersonal skills: Doing a course in this field will allow you to build better
communication and teamwork skills through developing relationships with your
colleagues. 
  Builds personality: Doing a course in this field also helps in improving your soft skills.
This is because people who wish to work in this sector must be extroverts, and should be
able to talk about finance for hours altogether. This helps in improving their personality,
knowledge, and communication.

 Greater job prospects: According the USA’s Bureau of Labour Statistics (BLS), there
has been a spike in demand for finance manager jobs in US due to a “growing range of
financial products and the need for in-depth knowledge of geographic regions”. This is
further proven by the fact that the demand for careers in financial management has
increased by 14%, careers in financial advising by 32%, and careers in financial analysis
by 23%.

 Higher salary packages: People working in this sector are usually paid very well,
whether it is at the entry level or at the management level. Additionally, this is a highly
skilled job role that is always in demand, even during recessions.

 Career growth: There is always an opportunity to develop your professional skills and
climb the career ladder. You can quickly acquire in-depth knowledge of financial
management systems and financial management software once in this field. If you
possess this knowledge and great aptitude skills, this field is perfect for you.

Scope of studying Financial Management

Doing a management course related to finance or gaining a finance degree offers excellent career
opportunities. Take a look at some of these diverse career options:

 Corporate manager;
 Investment banker;
 Financial advisor;
 Financial analyst;
 Financial examiners;
 Financial managers;
 Personal financial planners;
 Budget analysts;
 Investor relations associate or executive;
 Credit analyst.

Finance Management is designed to expose the student to the financial issues of determining the
monetary resources needed by a business, the mix of these resources, the sources and uses of funds,
the benefits, risks and costs associated with different types of resources and financing.

What are the core concepts of financial management?

Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
Financial Management - Meaning, Scope, Objectives & Functions

Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.

Scope/Elements of Financial Management

1. Investment decisions includes investment in fixed assets (called as capital budgeting).

Investment in current assets are also a part of investment decisions called as working
capital decisions.
2. Financial decisions- They relate to the raising of finance from various resources which
will depend upon decision on type of source, period of financing, cost of financing and
the returns thereby.
3. Dividend decision- The finance manager has to take decision with regards to the net
profit distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will depend
upon expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern. The objectives can be-

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of capital
so that a balance is maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the company. This will depend upon expected costs
and profits and future programmes and policies of a concern. Estimations have to be
made in an adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity
analysis. This will depend upon the proportion of equity capital a company is possessing
and additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many
choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of
financing.

4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the finance manager.
This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other
benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon
expansional, innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current liabilities,
maintenance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances. This can be done through many
techniques like ratio analysis, financial forecasting, cost and profit control, etc.
Financial Planning - Definition, Objectives and Importance

Definition of Financial Planning

Financial Planning is the process of estimating the capital required and determining it’s
competition. It is the process of framing financial policies in relation to procurement, investment
and administration of funds of an enterprise.

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to:

a. Determining capital requirements- This will depend upon factors like cost of current
and fixed assets, promotional expenses and long- range planning. Capital requirements
have to be looked with both aspects: short- term and long- term requirements.
b. Determining capital structure- The capital structure is the composition of capital, i.e.,
the relative kind and proportion of capital required in the business. This includes
decisions of debt- equity ratio- both short-term and long- term.
c. Framing financial policies with regards to cash control, lending, borrowings, etc.
d. A finance manager ensures that the scarce financial resources are maximally utilized
in the best possible manner at least cost in order to get maximum returns on investment.

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programmes and

budgets regarding the financial activities of a concern. This ensures effective and adequate
financial and investment policies. The importance can be outlined as-

1. Adequate funds have to be ensured.

2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of
funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily investing in companies
which exercise financial planning.
4. Financial Planning helps in making growth and expansion programmes which helps in
long-run survival of the company.
5. Financial Planning reduces uncertainties with regards to changing market trends which
can be faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a hindrance to
growth of the company. This helps in ensuring stability an d profitability in concern.