Question

Define financial management. Discuss in detail the scope of financial management.

Answer 1

Definition of financial management:

Financial management

is to manage the finances of an organisation ,

including procuring or arrangement for funds at optimal costs,

to ensure adequte availability of these funds ,

so as not to hamper the core operations for which the business was formed

and also to oversee and ensure the effective utilisation of the funds so obtained

all with the aim of shareholder wealth maximisation----which means increase in net worth which includes capital invested plus the ploughed back profits --the latter being the result of efficient financial management.

Scope of financial management:

From the above definition of financial management, we can infer that the scope of the same will be taking a variety of decisions in the areas of

financing

investing and

dividend pay-out

Here, financing decisions relate to raising of long-term finances --these involve analysing and choosing between debt/bonds or new equity or bank borrowings or from retained earnings--- &

short-term finances for working capital ,after assessing/ estimating the operational needs .

Decisions in an investing activity of a company are with respect of long-term investments or short-term investments.

Long-term invetsments involve funds being tied-up for longer periods of time, like buildings or any capital equipment ,that are necessary for carrying on the core operations---these decisions depend on the future cah flows within the company ,and hence need to be carefully weighed & selected.

Short-term invetsment decisions need to be taken regarding efficient deployment/utilisation of surplus funds available temporarily--these affect the liquidity of the company, so need to be carefully analysed before taking a decision.

Dividend decisions mean whether or not & how much ,to distribute surplus profits as dividends --ie how much to distribute and how much to retain in the business .

Money retained in the business will be further used for funding business operations, thereby reducing outside borrowings, atleast to that extent--- which the management will prefer.

Money distributed as dividends will make the shareholders happy.

so, it is always a tricky decision.