Financial Management | What Is The Goal Of Financial Management?
Financial Accounting
Difference Between Financial Accounting And Cost Accounting
May 5, 2014
Executive MBA Programs in UAE
Online or Part-time Executive MBA Programs | EMBA in UAE
May 7, 2014

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 the general management of the organization. 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. The activities of every aspect of a business have an impact on the company’s financial performance and must be evaluated and controlled by the business owner.

MBA Finance or banking administration is an essential part of the economic and non-economic activities which leads to decide the efficient procurement and utilization of finance in a profitable manner. Earlier, Financial administration was a part of accountancy with the traditional approaches. Nowadays it has been enlarged with innovative and multi-dimensional functions in the field of business. With the effect of industrialization, banking administration has become a vital part of the business concern and they are concentrating more in the field of the banking industry. This Management also developed as corporate finance, business finance, financial economics, financial mathematics, and financial engineering.

Financial management is called upon to take three major decisions:

  1. Investment decision; e.g., capital budgeting or financial plan.
  2. Financing decision or formulation of the best financing mix or capital structure of the enterprise; and
  3. 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.

  1. Financial Management Helps Setting Clear Goal

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 among the functional areas of the firm.

  1. Financial Management Helps 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 cause a threat to the survival of the firm. The application of financial management techniques (such as capital budgeting techniques) helps to answer the questions like which asset to buy when to buy 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. Excess holdings of these assets mean inefficient use and inadequate holding exposes the firm to higher risk. Therefore, maintaining the proper balance of these assets and financing them from proper sources is a challenge to a firm. It helps to decide what level of current assets is to be maintained in a firm and how to finance them so that these assets are utilized efficiently.

  1. 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 firm needs to decide the appropriate mix of these sources and the number of long-term funds; otherwise, the firm will have to bear the higher cost and expose to higher risk. Financial management (capital structure theories) guides in selecting these sources of financing.

  1. Financial Management Helps Making Dividend Decision

The dividend is the return to the shareholders. The firm is not legally obliged to pay a dividend to the shareholders. However, how much to pay out of the earning is a vital issue. Financial management (dividend policies and theories) helps a firm to 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) should the dividend be paid?

The goal of financial management is not limited to the managers who make decisions in the firm. Proper finance management will help firms to supply better products to their customers at lower prices, pay a higher salary to its employees, and still provide a greater return to investors.

Role

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 inflow and outflow of funds.

The scope of Financial Management

The scope of financial management includes the following:

Economic concepts (such as macro and microeconomics, economic order quantity, money value discounting factor, and more) are directly applied with the banking administration approaches.

  • 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 requiring 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 resource department, which provides manpower to all the functional areas of management.

The traditional approach to the scope of financial management refers to its subject matter, in academic literature in the initial stages of its evolution, as a separate branch of academic study. The term ‘corporation finance’ was used to describe what is now known in the academic world as ‘financial management’. As the name suggests, the concern of corporation finance was with the financing of corporate enterprises. In other words, the scope of the finance function was treated by the traditional approach in the narrow sense of procurement of funds by the corporate enterprise to meet their financing needs.

The modern approach views the term financial management in a broad sense and provides a conceptual and analytical framework for financial making. According to it, the finance function covers both acquisition of funds as well as 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. Defined in a broad sense, it is viewed as an integral part of overall management. 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 require 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 between them the major financial problems of a firm. In other words, financial administration, according to the new approach, is concerned with the solution of three major problems relating to the financial operations of a firm, corresponding to the three questions of investment, financing, and dividend decisions. Thus, financial management, in the modem 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.

Success Point College
Success Point College
Success Point College has partnered with International Skill Development Corporation (ISDC) to facilitate the campus for ISDC Global Business School in UAE (IGBS).