Money may not bring happiness and it may be the root of evils, but it is what keeps the businesses around the world running. Whether a business works for profit or non-profit, finances are important. Business needs money like well needs water. Both require staying full. Hence financial management gains importance over all other functions in organizations.
What do you mean by financial management?
Financial Management is one of the critical aspects of any organization. It is a process of planning, organizing & monitoring financial resources with the aim to achieve organizational goals and objectives.
What are the basics of financial management?
Financial management basics include managing the routine-wise operations by keeping them within the budget of business with long-term investments in equipment, also obtaining the financial support for all your operations.
If you are an aspiring finance professional, a financial analytics course can help you will all basics. The ultimate goal of any business is wealth maximization, which can be achieved through the following 5 activities of financial management:
- Estimation of Capital Requirement
How much money is required? The answer to this question lies in how financial managers estimate the capital requirement. It is arrived upon after estimating the company’s present and future costs and profits, purchase of fixed assets, working capital requirement, and business plans for expansion.
- Procurement and Allocation of Funds
Where will the money come from? Financial management ensures a regular and adequate supply of funds by identifying sources of funds and procuring them at the lowest cost. After the funds are pooled, the next objective is to prudently invest them in different assets for profitability, liquidity and safety.
- Determining the Structure of Capital
What proportion of capital should be invested and how? This is where financial management comes into the picture. The primary aim of sourcing capital is to grow it to earn returns and maximise shareholder wealth. This is done by determining whether the entire capital should be invested in the business or the market. There is also a decision to be taken regarding short-term and long-term investment as well as debt-equity mix.
- Distributing the Surplus
Where to dispose of the surplus? Here, the surplus refers to profits. The company can either retain the profits entirely to re-invest in the business to expand or diversify. However, if there are shareholders, it makes more sense to distribute this profit by declaring dividends and bonus. All these decisions fall under the scope of financial management.
- Maintaining Financial Control
How much return have the capital earned? Financial management is also responsible for exercising control over money through financial performance evaluation at regular intervals. This is done through financial forecasting, ratio analysis, audits and analysis of accounting/bookkeeping reports. All these techniques will give results on Return on Investment (ROI). The overall control of where the money comes from and where it goes lies solely with financial managers.
Want to get more insight into the scope of financial management activities? You can consider applying for finance management certification to dig deeper into this area of business.