NATURE AND SCOPE OF FINANCIAL MANAGEMENT

 Financial management is the activity concerned with planning, raising, controlling and administering of funds used in the business.” – Guthman and Dougal

Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations.”- Massie 

Financial management is an organic function of any business. Any organization needs finances to obtain physical resources, carry out the production activities and other business operations, pay compensation to the suppliers, etc. There are many theories around financial management:

Some experts believe that financial management is all about providing funds needed by a business on terms that are most favorable, keeping its objectives in mind. Therefore, this approach concerns primarily with the procurement of funds which may include instruments, institutions, and practices to raise funds. It also takes care of the legal and accounting relationship between an enterprise and its source of funds.

Another set of experts believe that finance is all about cash. Since all business transactions involve cash, directly or indirectly, finance is concerned with everything done by the business.

The third and more widely accepted point of view is that financial management includes the procurement of funds and their effective utilization. For example, in the case of a manufacturing company, financial management must ensure that funds are available for installing the production plant and machinery. Further, it must also ensure that the profits adequately compensate the costs and risks borne by the business.

In a developed market, most businesses can raise capital easily. However, the real problem is the efficient utilization of the capital through effective financial planning and control.

Nature of financial management

The nature of financial management includes the following −

Estimates capital requirements

Financial management helps in anticipation of funds by estimating working capital and fixed capital requirements for carrying business activities.

Decides capital structure

Proper balance between debt and equity should be attained, which minimizes the cost of capital.

Financial management decides proper portion of different securities (common equity, preferred equity and debt).

Select source of fun

Source of fund is one crucial decision in every organisation. Every organisation should properly analyse various source of funds (shares, bonds, debentures etc.) and must select appropriate funds which involves minimal risk.

Selects investment pattern

Before investing the amount, the investment proposal should be analysed and properly evaluates its risk and returns.

Raises shareholders value

It aims to increase the amount of return to its shareholders by decreasing its cost of operations and increase in profits.

Finance manager should focus on raising the funds from different sources and invest them in profitable avenues.

Management of cash

Finance manager observes all cash movements (inflow and outflow) and ensures they should face any deficiency or surplus of cash.

Apply financial controls −

Implying financial controls helps in keeping the company actual cost of operation within limits and earning the expected profits.

Scope of financial management

Financial management covers wide area with multidimensional approaches. It plays an important role in overall management by dealing with various functional departments like personnel, marketing and production.

The scope of financial management is explained below −

Financial management and economics

Financial economics is one of the emerging area, which provides immense opportunities to finance and economical areas.

Using macro and micro economics concepts for financial management approach.

Financial managers use investment decisions, micro and macro environmental factors, money value discount factor, economic order quantity etc.

Financial management and accounting

In olden days, both financial management and accounting treated as same and merged, but now-a-days, both are separated and interrelated.

Financial management and mathematics

Latest approach of the financial management applied large number of mathematical and statistical tools and techniques called econometrics.

Financial management and production management

Production performances need finance, because the expenses of production (raw material, machinery wages, operating expenses etc.) are carried out by finance department and appropriate funds are allotted to each stage of production.

Financial management and marketing

The finance manager or department is responsible to allocate the adequate funds to marketing department by which goods will be sold by innovative and modern approaches.

Financial management and human resources −

Financial manager should carefully evaluate the requirement of manpower in respective departments and allocates finance to human resource department in the form of wages, salary, bonus and other monetary benefits.