What is the goal of Financial Management?September 8, 2023 2023-11-02 14:01
What is the goal of Financial Management?
What is the goal of Financial Management?
The Goal of Financial Management
Financial management plays a critical role in the financial success of a business. Therefore, an organization should consider financial management as a key component of its general management. The goal of financial management includes the tactical and strategic goals related to the financial resources of the business. Some of the specific roles included in banking administration systems include accounting, bookkeeping, accounts payable and receivable, investment opportunities, and risk.
The goal of financial management is one of the most important responsibilities of owners and business leaders. They must consider the potential consequences of their management decisions on profits, cash flow, and the financial condition of the company. Every aspect of a business has an impact on the financial performance of the company, so the owner must assess and manage these activities.
MBA Finance or banking administration is an essential part of economic and non-economic activities, which leads to the efficient procurement and utilization of finance in a profitable manner. Earlier, financial administration was part of accounting with traditional approaches. These days, it has expanded to include cutting-edge, multifaceted corporate activities. With the effect of industrialization, banking administration has become a vital business concern, and they are concentrating more on the banking industry. This management also developed into corporate finance, business finance, financial economics, financial mathematics, and financial engineering.
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Financial management is called upon to make three major decisions:
- Investment decisions, e.g., capital budgeting or financial plan.
- Financing decision or formulation of the best financing mix or capital structure of the enterprise; and
- Dividend decision or dividend policy
Financial management involves the implementation of these three major decisions. The decisions are interrelated and should be implemented jointly. Together, these vital decisions determine the value of the enterprise to its shareholders and investors. It makes use of analytical tools in the analysis, planning, and control of the enterprise involving funds.
Importance of Financial Management
It is an integral part of overall management rather than merely a staff activity concerned with money-managing operations.
Financial Management Helps Set Clear Goals
The clarity of the goal is important for any firm. Financial management defines the goal of the firm in clear terms (maximization of the shareholder’s wealth). The setting goal helps to judge whether the decisions taken are in the best interest of the shareholders or not. It also directs the efforts of all functional areas of business towards achieving the goal and facilitates communication among the functional areas of the firm.
Financial management helps with the efficient utilization of resources.
Firms use fixed as well as current assets, which involve a huge investment. Acquiring and holding assets that do not earn a minimum return do not add value to the shareholders. Moreover, the wrong decision regarding the purchase and disposal of fixed assets can pose a threat to the survival of the firm. The application of financial management techniques (such as capital budgeting techniques) helps to answer questions like which asset to buy, when to buy it, and whether to replace the existing asset with a new one or not.
The firm also requires current assets for its operation. They absorb a significant amount of a firm’s resources. Inadequate holdings put the company at greater risk, while excessive holdings result in inefficient use of these assets. Therefore, maintaining the proper balance of these assets and financing them from the proper sources is a challenge for a firm. It helps determine how many current assets to keep in a company and how to finance them to guarantee effective use.
Financial Management Helps Deciding Sources Of Financing
Firms collect long-term funds mainly for purchasing permanent assets. The sources of long-term finance may be equity shares, preference shares, bonds, term loans, etc. The organization must select the appropriate mix of these funding sources and the amount of long-term capital; failure to do so will result in higher expenses and more risk. Financial management (capital structure theories) guides the selection of these sources of financing.
Financial Management Helps Make Dividend Decisions
The dividend is the return to shareholders. The firm is not legally obliged to pay a dividend to the shareholders. However, how much to pay out of the earnings is a vital issue. Financial management (dividend policies and theories) helps a firm decide how much to pay a dividend and how much to retain in the firm. It also suggests answering questions such as when and in what form (cash dividend or stock dividend) the dividend should be paid.
The goal of financial management is not limited to the managers who make firm decisions. Proper finance management will help firms supply better products to their customers at lower prices, pay a higher salary to their employees, and still provide a greater return to investors.
A business enterprise as a system has a dynamic flow of funds represented by the funds-flow cycle. Financial management is in charge of efficient planning and control of the cycle of the flow of funds, including the inflow and outflow of funds.
The scope of Financial Management
The scope of financial management includes the following:
The financial administration techniques directly apply economic ideas (including the money value discounting factor, economic order quantity, macro- and microeconomics, and more).
- Accounting plays a critical role in management decision-making and in ‘financial management’.
- It applies a large number of mathematical and statistical tools and concepts (also known as econometrics).
- Production management is the operational aspect of decision-making that requires the support of financial management.
- The finance department allocates resources for marketing and related activities that play a crucial role in a firm’s marketing budget.
- It is related to the human resources department, which provides manpower to all the functional areas of management.
In the traditional view of what financial management is, it refers to the subject matter in academic literature when it was just starting to grow into its own field of study. The word ‘corporate finance’ refers to the field of study presently known as ‘financial management’ in academic circles. As the name suggests, the concern of corporation finance was with the financing of corporate enterprises. This definition states that the traditional view of the finance function limited itself to the particular responsibility of raising funds in order to satisfy the funding needs of the business.
The Modern Approach to FM and Its Key Components
The modern approach views financial management in a broad sense and provides a conceptual and analytical framework for financial decision-making. According to it, the finance function covers both the acquisition of funds and their allocations. Thus, apart from the issues involved in acquiring external funds, the main concern of banking and finance management is the efficient and wise allocation of funds to various uses. When viewed in a wide context, people view it as a crucial part of management overall.
The new approach is an analytical way of viewing the financial problems of a firm. The main contents of this approach are: What is the total volume of funds an enterprise should commit? What specific assets should an enterprise acquire? How should the funds be required to be financed? Alternatively, the principal contents of the modern approach to financial management can be said to be: (i) How large should an enterprise be, and how fast should it grow? (ii) In what form should it hold assets? and (iii) What should be the composition of its liabilities? The three questions posed above cover the major financial problems of a firm. This indicates that the three primary problems that emerge in a business’s financial operations are the focus of the new approach to financial administration. These issues are investment, financing, and dividend decisions. Thus, financial management, in the modern sense of the term, can be broken down into three major decisions as functions of finance: (i) the investment decision, (ii) the financing decision, and (iii) the dividend policy decision.