Finance Management means
planning, organizing, directing and controlling the financial activities such
as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
Scope/Elements
Í Investment decisions includes investment in
fixed assets (called as capital budgeting). Investment in current
assets are also a part of investment decisions called as working capital
decisions.
Í Financial decisions - They relate to
the raising of finance from various resources which will depend upon decision
on type of source, period of financing, cost of financing and the returns
thereby.
Í Dividend decision - The finance manager has to
take decision with regards to the net profit distribution. Net profits are
generally divided into two:
i. Dividend
for shareholders- Dividend and the rate of it has to be decided.
ii. Retained
profits- Amount of retained profits has to be finalized which will depend upon
expansion and diversification plans of the enterprise.
Objectives of Financial
Management
The financial management
is generally concerned with procurement, allocation and control of financial
resources of a concern. The objectives can be-
Ø To ensure regular
and adequate supply of funds to the concern.
Ø To ensure
adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
Ø To ensure optimum
funds utilization. Once the funds are procured, they should be utilized in
maximum possible way at least cost.
Ø To ensure safety
on investment, i.e, funds should be invested in safe ventures so that adequate
rate of return can be achieved.
Ø To plan a sound
capital structure-There should be sound and fair composition of capital so that
a balance is maintained between debt and equity capital.
Functions of Financial
Management
· Estimation
of capital requirements: A finance manager has to make estimation with
regards to capital requirements of the company. This will depend upon expected
costs and profits and future programmes and policies of a concern. Estimations
have to be made in an adequate manner which increases earning capacity of enterprise.
· Determination
of capital composition: Once the estimation have been made, the
capital structure have to be decided. This involves short- term and long- term
debt equity analysis. This will depend upon the proportion of equity capital a
company is possessing and additional funds which have to be raised from outside
parties.
· Choice
of sources of funds: For additional funds to be procured, a company
has many choices like-
a. Issue
of shares and debentures
b. Loans
to be taken from banks and financial institutions
c. Public
deposits to be drawn like in form of bonds.
Choice of factor will
depend on relative merits and demerits of each source and period of financing.
· Investment
of funds: The finance manager has to decide to allocate funds into
profitable ventures so that there is safety on investment and regular returns
is possible.
· Disposal
of surplus: The net profits decision have to be made by the finance
manager. This can be done in two ways:
a. Dividend
declaration - It includes identifying the rate of dividends and other benefits
like bonus.
b. Retained
profits - The volume has to be decided which will depend upon expansional,
innovational, diversification plans of the company.
· Management
of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and
salaries, payment of electricity and water bills, payment to creditors, meeting
current liabilities, maintainance of enough stock, purchase of raw materials,
etc.
· Financial
controls: The finance manager has not only to plan, procure and
utilize the funds but he also has to exercise control over finances. This can
be done through many techniques like ratio analysis, financial forecasting,
cost and profit control, etc.,
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