Financial Management – Meanings, Objectives, and Functions

The Meaning of Financial Management

Financial Management in the Management of financial resources. It is the application of general management principles to the financial resources of an enterprise. This includes planning, organizing, managing, and controlling them.

Scope/Elements

1. Capital budgeting is the investment of fixed assets as part of an investment decision. Working capital decisions also include investments in current assets.
2. Financial decisions – These are financial decisions that involve raising finance from different resources. They will depend on the type of source, the duration of financing, and the returns.
   1. 1. Dividend decision – The finance manager must decide the distribution of net profits. Generally, net profits are divided into two parts: Dividend for shareholders – Dividend, and its rate must be determined.
   2. Retained profits – The amount of retained profits must be determined. This will depend on expansion and diversification plans.

Financial Management Objectives

1. Financial Management is the general area of control and procurement of financial resources for a concern. These objectives may include:
   1. To ensure a regular and adequate supply to the concern.
   2. To provide adequate returns for shareholders. This will depend on the earning potential, market price, and shareholders’ expectations.
   3. To ensure optimum funds utilization. After funds have been obtained, they should be used in the most efficient way possible at the lowest cost.
   4. Investment safety is achieved by investing in safe ventures that offer a high rate of return.
   5. A sound capital structure is essential to ensure a fair and sound mix of capital. This will allow for a healthy balance between equity and debt capital.

Functions of Financial Management

1. 1. Calculation of capital requirements The finance manager must estimate the company’s capital requirements. The expected costs, profits, and future programs and policies of the concern will all play a role in this calculation. It is important to make estimates to increase the enterprise’s earning potential.
   2. Capital composition determination: After the estimate has been done, the capital structure must be determined. This includes both short-term and long-term debt-equity analysis. It will be determined by the company’s equity capital and any additional funds that need to be raised from external parties.
2. There are many funding sources available: A company has many options for additional funds.
   1. 1. Issue of shares or debentures
      2. Banks and financial institutions can provide loans.
      3. Public deposits can be drawn in the same way as bonds.
   2. The relative merits of each source of funding and the length of the financing will determine which factor you choose.
   3. Funds investment: Finance managers must decide whether to invest funds in profitable ventures to ensure that investors are safe and receive regular returns.
3. Recycle surplus Finance managers must make the net profit decision. There are two options:
   1. 1. Dividend declaration includes identifying the dividend rate and other benefits, such as bonuses.
   2. Retained profits – The amount of profit that is retained depends on the company’s expansion, innovation, and diversification plans.
   3. Cash management: The finance manager must make cash management decisions. Cash is needed for many purposes, including wages, salaries, water bills and electricity bills. It can also be used to pay creditors and meet current liabilities.
      1. Financial controls: Finance managers must plan, procure, and use the funds and have control over finances. You can do this by using many methods such as ratio analysis, financial forecasting and cost and profit control.