Explain the scope and significance of financial management.
Scope and Significance of Financial Management.
By Financial Management we mean efficient use of economic resources namely capital funds. Financial management is concerned with the managerial decisions that result in the acquisition and financing of short-term and long-term credits for the firm. Here it deals with the situation’s that require selection of specific assets, or a combination of assets and the selection of specific problem of size and growth of an enterprise. Herein the analysis deals with the expected inflows and outflows of funds and their effect on managerial objectives. In short, Financial Management deals with procurement of funds and their effective utilization in the business.
So the analysis simply states two main aspects of financial management like procurement of funds and an effective use of funds to achieve business objectives.
Procurement of Funds.
As funds can be procured from multiple sources so procurement of funds is considered an important problem of business concerns. Funds obtained from different sources have different characteristics in terms of potential risk, cost and control. Funds issued by the issue of equity shares are the best from risk point of view for the company as there is no question of repayment of equity capital except when the company is liquidated.
From the cost point of view equity capital is the most expensive source of funds as dividend expectations of shareholders are normally higher than that of prevailing interest rates. Financial management constitutes risk, cost and control. The cost of funds should be at minimum for a proper balancing of risk and control.
In the globalized competitive scenario, mobilization of funds plays a very significant role. Funds can be raised either through the domestic market or from abroad. Foreign Direct Investment (FDI) as well as Foreign Institutional Investors (FII) are two major sources of raising funds. The mechanism of procurement of funds has to be modified in the light of requirements of foreign investors.
Effective use of funds.
Effective utilization of funds as an important aspect of financial management avoids the situations where funds are either kept idle or proper uses are not being made. Funds procured involve a certain cost and risk. If the funds are not used properly then running business will be too difficult. In case of dividend decisions we also consider this. So it is crucial to employ the funds properly and profitably.
Scope of Financial Management.
Sound financial management is essential in all types of organizations whether it be profit or non-profit. Financial management is essential in a planned economy as well as in a capitalist set up as it involves efficient use of the resources.
From time to time it is observed that many firms have been liquidated not because their technology was obsolete or because their products were not in demand or their labor was not skilled and motivated, but that there was a mismanagement of financial affairs. Even in a boom period, when a company make high profits there is also a fear of liquidation because of bad financial management.
Financial management optimizes the output from the given input of funds. In a country like India where resources are scarce and the demand for funds are many, the need of proper financial management is required. In case of newly started companies with a high growth rate it is more important to have sound financial management since finance alone guarantees their survival.
Financial management is very important in case of non-profit organizations, which do not pay adequate attentions to financial management. However a sound system of financial management has to be cultivated among bureaucrats, administrators, engineers, educationists and public at a large.
The Significance of Financial Administration:
The significance of financial administration can be discussed under the following heads:
Success of Promotion Depends on Financial Administration: One of the most important reasons of failures of business promotions is a defective financial plan. If the plan adopted fails to provide sufficient capital to meet the requirement of fixed and fluctuating capital an particularly, the latter, or it fails to assume the obligations by the corporations without establishing earning power, the business cannot be carried on successfully. Hence sound financial plan is very necessary for the success of business enterprise.
Smooth Running of an Enterprise: Sound financial planning is necessary for the smooth running of an enterprise. Money is to an enterprise, what oil is to an engine. As finance is required at each stage of an enterprise, i.e. promotion, incorporation, development, expansion and administration of day-to-day working etc., proper administration of finance is very necessary.
Proper financial administration means the study, analysis and evaluation of all financial problems to be faced by the management and to take proper decision with reference to the present circumstances in regard to the procurement and utilization of funds.
Financial Administration Coordinates Various Functional Activities: Financial administration provides complete coordination between various functional areas such as marketing, production etc. to achieve the organizational goals. If financial management is defective, the efficiency of all other departments can, in no way, be maintained.
For example, it is very necessary for the finance department to provide finance for the purchase of raw materials and meeting the other day-to-day expenses for the smooth running of the production unit. If financial department fails in its obligations, the production and the sales will suffer and consequently, the income of the concern and the rate of profit on investment will also suffer.
Thus financial administration occupies a central place in the business organization which controls and coordinates all other activities in the concern.
Focal Point of Decision-Making: Almost, every decision in the business is taken in the light of its profitability. Financial administration provides scientific analysis of all facts and figures through various financial tools, such as different financial statements, budgets etc., which help in evaluating the profitability of the plan in the given circumstances, so that a proper decision can be taken to minimize the risk involved in the plan.
Determinant of Business Success: It has been recognized, even in India that the financial manger splay a very important role in the success of business organization by advising the top management the solutions of the various financial problems as experts.
They present important facts and figures regarding financial position an the performance of various functions of the company in a given period before the top management in such a way so as to make it easier for the top management to evaluate the progress of the company to amend suitably the principles and policies of the company.
The financial management assist the top management in its decision-making process by suggesting the best possible alternative out of the various alternatives of the problem available. Hence, financial management helps the management at different level in taking financial decisions.
Measure of Performance: The performance of the firm can be measured by its financial results, i.e. by its size of earnings riskiness and profitability are two major factors which jointly determine the value of the concern. Financial decisions which increase risks will decrease the value of the firm and on the to the hand, financial decisions which increase the profitability will increase value of the firm. Risk an profitability are two essential ingredients of a business concern.