What is Financial Management: Functions & Objective

Financial Management: Definition, Objective, and Functions

Definition of Financial Management: Financial management refers to organising, planning, controlling and directing the commercial activities such as utilisation and procurement of funds of the organisation.

Elements and Scope of Financial Management

1) The decisions for the investment includes spending in the fixed securities, also known as budgeting. Expenditures in the present securities are also considered a part of the investment decisions.

2) Financial decisions– They reflect the raising of money from different sources depending on the kind of source, cost of financing, interval of financing and the returns on it.

3) Dividend decision– The finance manager of the firm, decides for the distribution of the aggregate gains. Aggregate profits has two types mentioned below:

  • Dividend for stockholder– Dividend and the related rate has to be decided.
  • Retained Profits– The total volume of the retained gains has to be decided that depends on the diversification and expansion of plans of the organisation.

Objectives of Financial Management

The financial management usually deals with the allocation, control and procurement of the commercial sources taken for consideration. The primary objectives of it are:

  1. To guarantee the adequate and regular supply of monetary funds to the concern.
  2. To guarantee the optimum utilisation of funds. Once obtained should be used in the maximum possible way at least price.
  3. To guarantee safety on fund investment. It means the funds should be spent in reliable ventures so that a satisfactory amount of return is received.
  4. Planning a sound capital model- There should be a fair and sound composition or distribution of capital. It helps in maintaining a balance between equity capital and debt.
  5. To guarantee satisfactory returns to stockholders that will depend on the capacity of earning, price of a stock in the market and expectations of the stockholder.

Financial Management Functions

#1. Measurement of Required Capital:

It is the responsibility of the finance manager to calculate the required caption with regards to the firm. It depends on the expected profits, future programmer, concerning policies and prices. The calculation is done in an adequate manner which surges the capacity of earning of the organisation.

#2. Measurement of Capital Composition:

After this calculation, the next is the determination of the capital structure of the firm. It includes long-term debt and short-term equity debt analysis. It depends on the portion of capital equity a firm holding and the other additional funds that are raised by the outside parties.

#3. Choice of Sources of Funds

For procuring the additional funds, the firm has many options, including:

  1. Issue of debentures and shares
  2. Loan to be taken from different monetary institutions and banks.
  3. Public deposits withdrawals like in the care of bonds.

The choice of resources depends on the associated demerits and metrics of every source and duration of financing.

#4. Investment of funds:

The finance manager carries out the allocation of funds into different successful businesses so that there is security on spending and consistent returns are possible.

#5. Disposal of surplus:

The aggregate gains decision has to be made by the manager of the organisation. There are two ways of deciding the same:

  1. Dividend Declaration: It consists of the identification of dividend rate and other profits such as bonus.
  2. Retained Profits: The quantity has to be determined, which will depend on innovation, diversification, and expansion plans of the firm.

#6. Management of Cash:

The cash or money is needed for different purposes such as payment of electricity, payments of salaries and wages, water bills, payment to the lender, meeting present liabilities, maintenance of stock and buying of the raw material for production etc.

#7. Financial Controls:

The manager not only procure, utilise and plan the funds, but it also has to manage the finances. It can be carried out through various techniques like financial forecasting, profit control, ratio analysis and cost control etc.