SCOPE OF FINANCIAL MANAGEMENT

 

Meaning of Financial Management

In the organisation,we have many departments. The key department is the finance department. Because finance is the blood of the organisation.

Financial management is the strategic planning, organizing, and controlling of an organization's or individual's financial resources. Its core purpose is to efficiently allocate funds to achieve strategic goals, maximize profitability, and ensure long-term sustainability while managing risk.

Financial Management is all about planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

Definition

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

“ FM deals with procurement of funds and their effective utilization in the business” - S C Kuchal

“Financial Management is concerned with the efficient use an important economic resources, namely capital funds” Solomon

 Importance of financial Management

a.       Financial management plays a crucial role in the success and sustainability of individuals, organizations, and businesses. It serves as the backbone for prudent decision-making and effective resource allocation. The importance of financial management can be understood through the following key points:

b.      Strategic Decision-making: Financial management provides critical financial information and analysis that aids in making informed and strategic decisions, ensuring alignment with organizational objectives.

c.       Resource Allocation: Efficient financial management ensures optimal allocation of financial resources, maximizing returns and minimizing wastage.

d.      Profitability and Growth: By focusing on profit maximization and sustainable growth, financial management contributes to the long-term financial health and prosperity of the entity.

e.       Risk Mitigation: Financial management assesses and manages financial risks, safeguarding the organization from potential economic downturns and uncertainties.

f.       Liquidity Management: Proper financial management ensures sufficient liquidity to meet short-term obligations, avoiding cash flow problems.

g.      Capital Investment: Through capital budgeting, financial management facilitates wise investment decisions, leading to the growth and expansion of the organization.

h.      Stakeholder Confidence: Transparent financial management practices instill confidence in stakeholders, including investors, creditors, and employees.

i.        Compliance and Governance: Financial management ensures adherence to financial regulations and accounting standards, promoting ethical practices and good governance.

j.        Cost Optimization: Effective financial management helps control costs, leading to improved operational efficiency and competitiveness.

k.      Long-term Sustainability: By integrating financial planning and risk management, financial management contributes to the organization's long-term sustainability and resilience.

 Scope of Financial Management

To understand the financial management scope, first, it is essential to understand the approaches that are divided into two sections.

 1.        Traditional Approach

2.      2    Modern Approach

Approach 1: Traditional Approach to Finance Function

During the 20th century, the traditional approach was also known as corporate finance. This approach was initiated to procure and manage funds for the company. For studying financial management, the following three points were used

 (i) Institutional sources of finance.

 (ii) Issue of financial devices to collect refunds from the capital market.

 (iii) Accounting and legal relationship l between the source of finance and business.

     In this approach, finance was required not for regular business operations but occasional events like reorganization, promotion, liquidation, expansion, etc. It was considered essential to have funds for such events and regarded as one of the crucial functions of a financial manager.

hough he was not accountable for the effective utilization of funds, however, his responsibility was to get the required funds from external partners on a fair term. The traditional approach of finance management stayed until the 5th decade of the 20th century. The traditional approach only emphasized on the fund’s procurement only by corporations. Hence, this approach is regarded as narrow and defective.

Limitations of Traditional Approach

One-sided approach- It is more considerate towards the fund procurement and the issues related to their administration, however, it pays no attention to the effective utilization of funds.

Gives importance to the Financial Problems of Corporations- It only focuses on the financial problems of corporate enterprises, so it narrows the opportunity of the finance function.

Attention to Irregular Events- It provides funds to irregular events like consolidation, incorporation, reorganization, and mergers, etc. and does not give attention to everyday business operations.

More Emphasis on Long Term Funds- It deals with the issues of long-term financing.

 Approach 2: Modern Approach to Finance Function

With technological improvement, increase competition, and the development of strong corporate, it was important for Management to use the available financial resources in its best possible way. Therefore, the traditional approach became inefficient in a growing business environment.

The modern approach had a more comprehensive analytical viewpoint with a focus on the procurement of funds and its active and optimum use. The fund arrangement is an essential feature of the entire finance function.

The main elements of this approach are an evaluation of alternative utilisation of funds, capital budgeting, financial planning, ascertainment of financial standards for the business success, determination of cost of capital, working capital management, Management of income, etc. The three critical decisions taken under this approach are.

 (i) Investment Decision

 (ii) Financing Decision

 (iii) Dividend Decision

 Features of Modern Approach

The following are the main features of a modern approach.

 

1.        More Emphasis on Financial Decisions- This approach is more analytic and less descriptive as the right decisions for a business can be taken only on the base of accounting and statistical data.

2.        Continuous Function- The modern approach is a constant activity where the financial manager makes different financing decisions unlike the traditional method,

3.        Broader View- It gives importance not only to optimum use of finance also abut the fund’s procurement. Similarly, it also incorporates features relating to the cost of capital, capital budgeting, and financial planning, etc.

4.        The measure of Performance- Performance of a firm is also affected by the financial decision taken by the Management or finance manager. Therefore, to maximize revenue, the modern approach keeps a balance between liquidity and profitability.