What is financial management and example? Explain its functions and importance?

Financial management is an essential action for any organization to manage financial resources. A financial manager conducts some activity like financial planning, organizing, directing and controlling organizational funds. Financial management is what financial manager do to achieve organizational goals and objectives. It is important to know the financial management functions of a financial manager to manage resources. It helps you to take a decision about financial planning and management using business resources.  A good manager is a good planner, organizer, director and controller of inflow and outflow of funds. The ultimate objectives of a financial manager are to maximize organizational value.

 

What is financial management and example?

 

Financial management definition:

Financial management is the process of planning funds, organizing available funds and controlling financial activities to achieve the goal of an organization. To know more about financial management definition, visit Wikipedia.  It includes three important decisions which are investment decisions, financing decision and dividend decision for a specified period of time. Investment decision includes working capital decision and capital budgeting decision. Financing decision involves identifying sources of financing, determining the duration and cost of financing and managing investment return.

Example:

Company X is willing to introduce a new product. For this, the CEO employs a financial manager to perform all financial activities. Now the manager has to identify the sources of funds needed for producing the new product. Then he should determine and evaluate the cost of financing. He will allocate the fund using financial planning. And after gaining profit he will distribute the profit to the designated stakeholders.

 

Financial management functions:

There are some core functions in the process of financial management which are shown in a diagram below:

 

Financial Management

 

Now we can see the functions in details which will make us able to understand the purpose of these in the process of financial management. Discussion about these functions are given below:

Estimate required capital: Financial managers’ first duty is to forecast the amount of required capital. There are several areas for using financial planning and implementation such as establishment, expansion, and modernization of business, investment in fixed assets and meet daily working capital requirements.

Determine capital structure: After determining the requirement of capital funds, a decision has to be made regarding the type and proportion of different sources of funds. At this stage, the financial manager has to evaluate the appropriate mix of debt and equity capital and various short and long-term debt ratios. The main objective is to maximize shareholders wealth with a minimum cost of capital.

Evaluate and select sources of funds: the Financial manager will have several options from which he can raise capital for the company. He will choose that option which will provide greater earning possibility in less cost. He will compose leverage to maximizing the shareholder’s value.

Allocate and control funds: Financial manager determine the necessary amount of funds in each of financial area and allocate the funds accordingly. Any change in the financial decision that increases or decrease in allocated amount can be implemented at times. The manager always tries to keep the standard of the business firm.

Distribute profits or surplus: After a certain time, the business experience profits. Here management decides whether to distribute the profits or retain it for future use. Business can combine dividend and retain earning to distribute the profits.

Monitoring financial activities: the Financial manager has to be remaining alert all the time about financial activities and business position. Any flaws in the financial aspect can affect the overall business decision. So the manager should continuously monitor the financial activities of the firm.

 

Importance Financial Management:

The importance of financial management is vital to an organization. It is a pathway to attain goals and objectives. The financial manager measures organizational efficiency through proper allocation, acquisition, and management. It improves operational efficiency by providing a timely supply of fund. The following noticeable importance is found from financial management:

  • Provides guidance in financial planning
  • Assist in acquiring funds from different sources
  • Helps in investing the appropriate amount of funds
  • Increase organizational efficiency
  • Reduces delay production
  • Cut down financial costs
  • Reduces cost of fund
  • Ensures proper use of fund
  • Helps business firm to take financial decisions
  • Makes a guideline of earning maximum profits incurring minimum cost
  • Increase shareholder’s wealth
  • Control the financial aspects of the business
  • Provide information through financial reporting
  • Makes the employees aware of saving funds.

 

Besides these, there are some other significant features which will also make sense towards a startup business.

 

Financial Management
Figure: Some significant features of Financial Management

 

Proper financial Management improves the transparency and speediness of payable and receivable management. Hence, a faithful relationship is build up with supplier and customer. It helps to minimize organizational expenses. Financial management doesn’t support maximizing prepaid expenses. It helps you how to reduce prepaid expenses. This management helps you to determine a value of assets and management of those assets. When the procurement of fund reduces costs, the efficiency of production will increase. It will enhance organizational profitability. Timely management of funds helps you to reduce the costs of a fund and increase the value of the organization.

 

Financial management is a process of utilizing resources. This management doesn’t support you to keep excess money on hand. It focuses on the proper uses of funds for reducing the cost of fund. It reduces organizational expenses. Thus it increases organizational value.  Finally, we can say that in a startup business management especially financial managers are very much responsible for the financial strength of the business organization. They prepare all the reports including investment plans and strategies for the long-term achievements of their business organizations. So we can conclude that financial management is very vital for any start-up business to plan, organize, operate, control and monitor financial resources for achieving the ultimate goals as well as objectives.

 

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