Financial management deals with the ways in which an organization can raise funds for the various projects, allocation of those funds in the most productive and efficient way, how to exercise control over those funds, and how to distribute the returns of those funds to the various stakeholders.
It generally deals with planning, controlling, organizing, and directing the financial activities of a firm.
Financial Management ensures that the organization meets its primary objectives such as maximizing the shareholders’ wealth, cutting down the finance cost, and other non-financial objectives which are to other stakeholders such as the government, employees, and suppliers.
Scope of financial management
Financial Management compromise of the following key areas
1) Financial functions
This function deals with decisions on how to raise funds to finance the activities of the organization
The short-term sources of funds include; bank overdrafts, factoring, commercial papers, account payable delays, sale and leaseback, and account receivables collections.
The long-term sources of funds include; ordinary share capital, preference share capital, long-term loans (debt capital), and leases.
Before choosing the source of funds, a financial manager must consider factors such as cost, tax effects, dilution of ownership and control, financial risks, collateral securities, access to capital markets, nature of the project to be financed, and other conditions and restrictive covenants.
2) Investment function
This function involves decisions concerning the allocation of funds to various projects. A financial manager needs to evaluate the various projects to venture into considering both their returns and the level of risk.
Investment decisions are difficult to make as they involve an assessment of the future which is difficult to predict with precision and most the investments are irreversible
3) Liquidity function
Current assets are those assets that can easily be converted into cash within a year. Current liabilities t mature for payment within a financial year.
This involves decisions on how much of the total earnings of the organization should be paid out as dividends to the shareholders and how much should be retained by the organization for re-investment.
The dividend decision should be in line with the dividend policy of the organization, which is contained in the article of association. The finance manager should ensure that the organization has an optimal dividend payout ratio.
Goals or objectives of a firm
The main goal of any firm is to maximize the well-being of owners or shareholders. This is indicated using the following parameters
- Profit maximization means maximizing the income of a firm either by increasing sales volume or increasing the price in return the business maximizes profit which leads to an increase in the dividends paid to shareholders
- The capital gain or wealth maximization. Capital gain is represented by the market value of shares where wealth is said to be maximized when there is an increase in the value of those market shares.
The secondary objectives of the firms are those responsibilities owed to other parties required by the firm in the pursuit of its main objective.
For example, the responsibilities owed to employees are; providing them with reasonable remuneration, providing medical facilities, and providing transport, pension, and training facilities.
Responsibilities owed to customers are; providing them with high-quality goods and services at reasonable prices.
Responsibilities owed to society are participating in charitable organizations and ensuring that the activities of the firm are environmentally friendly.
Role of financial managers
- Accounting and bookkeeping. A financial manager prepares or supervises the preparation of the various financial statements, activity reports, and forecasts. He should also ensure that there is an effective accounting system in the organization.
- Estimating the amount of capital required for the purchase of assets, growth, and expansion of the business, and meeting working capital requirements
- Ensures that debt and equity ratios are maintained and balanced when raising funds from various sources.
- Analyze the market trends to identify available opportunities for both investment and expansion of the business
- Financial control. A financial manager exercises financial control through the use of techniques like an internal audit.
- Forecasts cash flowing into the business and cash flowing out of the business to ensure that there is no shortage of funds or even surplus cash within the firm. Funds must be available to meet the day-to-day expenses of the firm, such as wages to employees.
Importance of financial management to organizations
- Financial management ensures that a firm is able to meet its day-to-day expenses such as wages to workers, maintain enough products to meet customer demands, and maintain enough funds for investment and expansion of the business.
- Budgeting, a tool of financial management, ensures a business makes outstanding decisions using the information and resources available.
- Bookkeeping. This helps track the daily financial activities of the organization, such as sales.
- Through financial management, a firm is able to allocate funds appropriately. Proper use of allocated funds for assets enhances the operational proficiency of the business concern.
- Growth and stability: financial management ensures business plans for its resources for both investment and growth purposes.
Limitations of financial management
The precarious limitation of financial management is rigidity. Financial management follows set standards, for example, the formats of the financial statements to present to the government.
Financial management also comes with the cost of installation of both hardware and software required. the employees also need training so as to adapt to the software and hardware installed.