Financial management refers to the efficient and effective management of money (funds) in such a manner as to accomplish the objectives of the organization. It is the specialized function directly associated with the top management. The significance of this function is not seen in the
'Line' but also in the capacity of 'Staff' in overall of a company. It has been defined differently by different experts in the field. It includes how to raise the capital, how to allocate it i.e. capital budgeting. Not only about long term budgeting but also how to allocate the short term resources like current liabilities. It also deals with the dividend policies of the share holders.
Definitions of Financial Management
“Financial Management is the Operational Activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.” by Joseph Massie
“Business finance deals primarily with rising administering and disbursing funds by privately owned business units operating in non-financial fields of industry.” – by Kuldeep Roy
“Financial Management is an area of financial decision making, harmonizing individual motives and enterprise goals.” By Weston and Brigham
“Financial management is the area of business management devoted to a judicious use of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals.” – by J.F.Bradlery
“Financial management is the application of the planning and control function to the finance function.” – by K.D. Willson
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-
1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.
5. 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.
Goals Of Financial Management
All businesses aim to maximize their profits, minimize their expenses and maximize their market share. Here is a look at each of these goals.
Maximize Profits A company's most important goal is to make money and keep it. Profit- margin ratios are one way to measure how much money a company squeezes from its total revenue or total sales.
There are three key profit-margin ratios: gross profit margin, operating profit margin and net profit margin.
1. Gross Profit Margin
The gross profit margin tells us the profit a company makes on its cost of sales or cost of goods sold. In other words, it indicates how efficiently management uses labor and supplies in the production process.
Maximize Market Share
Market share is calculated by taking a company's sales over a given period and dividing it by the total sales of its industry over the same period. This metric provides a general idea of a company's size relative to its market and its competitors. Companies are always looking to expand their share of the market, in addition to trying to grow the size of the total market by appealing to larger demographics, lowering prices or through advertising. Market share increases can allow a company to achieve greater scale in its operations and improve profitability.