Financial Management-Meaning

 

What is Financial Accounting?

Financial accounting is a specific branch of accounting involving a process of recording, summarizing, and reporting the myriad of transactions resulting from business operations over a period of time. 

Objectives of Financial Management
  • Profit Maximization.
  • Wealth Maximization.
  • Maintenance of Liquidity.
  • Proper Estimation of Financial Requirements.
  • Proper Mobilization.
  • Proper Utilization of Financial Resources. 
  • Improved Efficiency.
  • Meeting Financial Commitments with Creditors.

Functions of Financial Management

  1. 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.

  2. 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.

  3. Choice of sources of funds: For additional funds to be procured, a company has many choices like-

    1. Issue of shares and debentures
    2. Loans to be taken from banks and financial institutions
    3. 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.

  4. 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.

  5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways:
    1. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
    2. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company.

  6. 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.

  7. 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. 

Financial Planning - Definition, Objectives and Importance

Definition of Financial Planning

Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to:

  1. Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.

  2. Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term.

  3. Framing financial policies with regards to cash control, lending, borrowings, etc.

  4. A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as-

  1. Adequate funds have to be ensured.

  2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.

  3. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.

  4. Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.

  5. Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.

  6. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern.

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