Financial Management

It includes each and every aspect of financial activity in the business. Financial Management has been defined differently by different scholars. A few of the definitions are being reproduced below:-

“Financial Management is an area of financial decision making harmonizing individual motives and enterprise goals.”- Weston and Brigam.

“Financial Management is the application of the planning and control functions to the finance function.”- Howard and Upton.

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

From the above definitions, it is clear that financial management is that specialised activity which is responsible for obtaining and affectively utilizing the funds for the efficient functioning of the business and, therefor, it includes financial planning, financial administration and financial control.

 

Financial planning

It is primary functions and achieves primacy over other functions. It is a continuous and never ending process. Planning is a preparatory step for action to be followed. According to Kontz O'Donnel planning is “an intellectual process, the conscious determination of courses of action, the basis of decisions on purpose, facts and considered estimates.”

Planning is done for each functional area of management. Each functional manger plans for his area of management and acts accordingly. The planning of each area should be linked to the objectives of the organisation.

Financial management, being one of the branches of the management also needs planning. Financial planning is necessary for the control of inflow and outflow of cash so that necessary funds may be made available as and when they are required. The highest earnings can be assured only through sound financial plans. A faulty financial plan may ruin the business completely. So, sound financial planning is necessary to achieve the long term and the short-term objectives of the firm and to protect the interest of all parties concerned, i.e., firm, creditors, shareholders and public.

 

Executive Finance Functions

The executive finance function is so termed because it requires some administrative skill in planning, execution and control. On the other hand incidental finance function is so called because it does not require any specialized administrative skill and for the most part it covers routine work, mainly clerical that is necessary to carry into effect the executive decisions. We shall discuss hereunder both the finance functions of finical management in detail.

Some of the executive functions are given below:-

(i)                Financial Forecasting. The first and foremost functions of financial management is to forecast the financial needs of the concern. In the initial stage, it is done by promoters but in a going concern, it is generally performed by the executive chief or by the officers of the finance-department in a large scale enterprise. In estimating the financial requirements of the concern, help of various budgets i.e., sales budget, production budget etc., profit and loss account and Balance Sheet is sought.

(ii) Establishing Asset-Management Policies. In order to estimate and arrange for cash requirements of an enterprise, it is very necessary to decide how much cash will be invested in non-cash assets, i.e., fixed assets, and also the kind and coverage of insurance that a company will carry. Establishing a sound asset management policy is a pre-requisite to successful financial Management. No doubt the financial manager in deciding about the asset-management policies seeks cooperation of marketing executive in making decisions involving the carrying of inventories of finished goods and credit policy etc. and that of the production manager in making decision concerned with the carrying of inventories of raw materials and factory supplies, purchases etc.

(ii)              (iii) Allocation of Net Profit. How to allocate the net profits of the concern is the another problem before the financial manager. After paying all taxes, the available net profits of the concern can be allocated for three purposes- (a) For paying dividends to the shareholders of the comp nay as a return upon this investment. (b) for distributing bonus to the employees and company's contribution tooth profit sharing plans, and (c) retention of profits for the expansion of business. As far as, the second alternative is concerned, the amount to be paid to employees is generally fixed by statutes or on contractual basis and therefore, there is no problem in allocating profits for that purpose. But a considerably attention is to be paid in so far as first and third alternatives are concerned namely the dividends to be distributed to the shareholders and the amount to be retained for future expansion plans.

(iv) Cash Flows and Requirements. It is the prime responsibility of the financial manager to see that an adequate supply of cash is available at proper time for the smooth running of the business. A good financial executive should ensure that cash inflow and outflow must be continuous and uninterrupted. Inflow of cash originates in sales and cash outflows or cash requirements are closely related to volume of sales. Here the financial manger is to decided how much cash e must retain to meet the current obligations so that there would be no idle cash balance earning nothing for the company. But there is a dilemma because inflow of cash is not precisely predictable and seldom offset one another. Therefore, the financial manager must maintain a balance between inflow of cash and outflow of cash.

(v) Deciding Upon Borrowing Policy. Every organisation plans for the expansion of the business for which he requires additional resources. Personal resources being limited the case must be arranged by borrowing money either from commercial bank, and other financial institutions or by floating new debentures or by issuing new shares. The financial manger, at this juncture, will take a decision about the time when the funds from outside sources are needed, the source from which they are to be received, how log they will be needed an from what source they will be repaid. Obviously, it is a very important function of financial manager.

(iii)             (vi) Negotiations For New outside Financing. Finance function does not stop with the decision to undertake outside financing; it extends towards carrying on negotiations from the outside financing agencies to arrange for it. Finances are needed by an establishment to meet its short-term and long-term requirements. The financial manger must assess short and long term financial requirements of the organisation an start negotiations for raising these funds. It requires considerable planning because the sources are to be tackled in advance keeping in view the alternative sources and sounded in a manner that in case one fails, the other should be available. He must keep open the credit lines.

(iv)              (vii) Checking upon Financial Performance. The Financial manager is under an obligation to check the financial performance of the funds invested in the business. It requires retrospective analysis of the operating period to evaluate the efficiency of financial planning. An unbiased assessment of financial performance shall be great value to the business in improving the standards, techniques, and procedures of financial control.

 

Main Aspects of Financial Planning

  (1) Determining Financial Objectives. The main aspect of financial planning is to determine the long-term ad the short-term    financial objectives. Determining of financial objectives is necessary to achieve the basic objectives of the firm. Financial objectives guide the financial authorities in performing their duties well. Financial objectives may be long-term and short-term. The long-term financial objective of the firm should be to utilise the productive resources of the firm effectively and economically. The effective utilisation of all other productive factors is possible only if there is a regular supply of funds at minimum cost. Thus long therm financial objectives include (a) proper capitalisation, i.e., to estimate the amount of capital to be raised and (b) determining the capital structure, i.e, the form, relationship and proportionate amount of securities to be issued.

(2) Formulating Financial Policies. The second aspect of financial planning is to formulate certain policies to be followed by the financial authorities with regard to the administration of capital to achieve the long-term and the short-term financial objectives of the firm. The following financial policies maybe important in regard to-

 

                                                         i.            Policies regarding estimation of capital requirements.

                                                       ii.            Policies regarding relationship between the company and creditors.

                                                     iii.            Policies regarding the form and proportionate amount of securities to be issued.

                                                     iv.            Policies and guidelines regarding sources of raising capital.

                                                       v.            Policies regarding distribution of earnings.

(3) Developing Financial Procedures. The third aspect of financial planning is to develop the procedure for performing the financial activities. For this purpose, financial activities should be sub-divided into smaller activities and powers, duties and responsibilities be delegated to the sub-ordinate officers. Proper control on financial performance should also be administered. Financial control is possible by establishing standards for evaluating the performance and comparing the actual performance with the standard so established. Stern steps should be taken to control any deviations from or inconsistencies in predetermined objectives, policies and programmes. Various methods are used for this purpose such as budgetary control, cost-control, analysis and interpretation of financial accounts etc.