NATURE AND NEED OF FINANCIAL MANAGEMENT

NATURE AND NEED OF FINANCIAL MANAGEMENT

Management of finance is a important part of every business. Finance is termed as the backbone of every business and is required for carrying out each and every activity of an organisation. Financial management is concerned with efficiently planning the procurement of funds and the utilization of these funds in the business. The finance manager is required to decide the proper capital structure of an organization deciding the optimum mix of debt and equity for raising required funds, depending on company's ability. Financial management ensures that an adequate amount of funds is always available in business from different sources and also it earns the best return on its investments. 

Nature of financial management

1. Financial management as a general management

 Financial management is the specialised branch of general management, in the present. Long back, in traditional times, the finance function was coupled, either with production or with marketing; without being assigned a separate status but now it is treated as the specialised cluster of general management.

2. Financial management as a profession

Financial management is growing as a profession. Young educated persons, aspiring for a career in Management, undergo specialised courses in financial management, offered by universities, management institutes etc., and take up the profession of a financial management. Like law and medical, finance management is considered as the Profession.

3. Financial management is interdisciplinary

Despite a separate status, financial management is intermingled with other aspects of Management. To some extent, Financial Management is the responsibility of every functional manager. For eg: The production manager proposing the installation of a new plant to be operated with modern technology, is also involved in a financial decision.

4. Financial management is multidisciplinary in approach

This is multidisciplinary in approach. It depends on other disciplines, like economics, accounting etc., for a better procurement and utilisation of resources. For example, Macro economics guides financial management as to banking and financial institutions, capital market, monetary and fiscal policies to enable the finance manager decide about the best source of finances, under the economic conditions, the economy is passing through. Micro economy points out the finance manager techniques for profit maximization, with the limited finances at the disposable of the enterprise.

5. Financial management is controllership in function

Finance manager is often called the controller, and the financial management function is given name of controllership function; in as much as the basic guide line for the formulation and implementation of plan throughout the enterprise.

6. Financial management is centralized

Despite a hue and cry about decentralisation of authority; finance is a matter to be found skill centralised, even in enterprises which are so called highly decentralised. The reason for authority being centralised in financial matters is simple; not every manager is allowed to play with finances, the way he/she likes. Finances is both a crucial and limited asset of any enterprise.

7. Financial management as a backbone of Commerce and Industry

Financial management is not simply a basic business function along with production and marketing; it is more significantly, the backbone of commerce and industry. It turns the sand of dreams into the gold of reality. No production, purchases (or) marketing are possible without being supported by requisite finances. Hence, financial management commands a higher status vis-a-vis all other functional areas of general management.

Need of Financial Management

 1. Financial Planning

Financial management plays an important role in Financial planning. It decides the requirement of finance with business needs. Also financial planning associates need to follow different strategies and correct measures instead of worrying about it in later stage of financial management life cycle of an organisation. Financial planning looks a crucial area associated with business activities. Normally, all the credit for business success is measured in terms of company's ability to plan it's finances.

 2. Procurement of finance

The procurement of fund involves two sources debt resources and equity resources. The debt and equity ratio plays an crucial role, this ratio varies depending upon the companies abilities and credit worthiness. The procurement of finance should be done at the low cost of capital.

 3. Proper utilisation of finance

The finance should be utilised properly for the growth of the company. The procured funds should be allocated as per the requirement of the project. The over financing and even under financing will not result in effective and efficient results.

 4. Decision making

Financial management helps financial manager to take good decision. It enables financial manager to differentiate between acceptable project and rejectable project.

 5. Increase in profit

Every business can improve its profitability. Sometimes a single factor can significantly increase profitability of an organisation. In simple words, all the decisions whether investment or financing etc. are focused on maximizing the profits to optimal levels. 

 6. Increase in value of firm

Importance of financial management in an organization in diversification and expansion of an business is very extreme. The main point concerning of any business is that they will achieve maximum gain with greater efficiency. It may be related to increasing sales or expansion of business to other countries. The primary objective of any firm is to maximize the wealth of the shareholders. A great management and financial specialists can assist in improving valuation of any company.

 7. Capital Reserves

Capital reserves is must in every business organisation. A capital reserve is an account in the equity section of the balance sheet that can be used for contingencies or to offset capital losses. It is derived from the accumulated capital surplus of a company, created out of capital profit. As business is unpredictable, to mitigate the losses or for the diversification and expansion of business capital reserves are maintained.

 8. Managing working capital

Organization need liquidity and cash flow in the short term in order to meet their daily operational costs, expenses and emergencies, this is termed as the working capital. The cash flow and liquidity of the firm have impact on determining company's credit worth.

 9. Formation of Capital Structure

Financial management is essentially concerned with how the firm decides to divide its cash flows into two broad components, a fixed component that is earmarked to meet the obligations toward debt capital and a residual component that belongs to equity shareholders.