DEFINITION AND FUNCTIONS OF FINANCIAL MANAGEMENT

Financial management is concerned with planning and controlling of resources of Firms. According to Paul. G. Hasings, “Finance is the management of the monetary affairs of a company. It includes determining what has to be paid for raising the money on the best terms available and devoting the available resources to best uses.”




Kenneth Midgley and Ronald Burns stated that “Financing is the process of organising the flow of funds so that a business can carry out its objectives in the most efficient manner and meet its obligations as they fall due.”

From the above definitions of finance, it can be concluded that the term business finance mainly involves : raising of funds and their effective utilisation keeping in view the overall objectives of the firm. The management makes use of the various financial techniques and  devices for the most effective and efficient way of financing.  Let us now discuss the various functions and objectives of Financial Management.

 

Functions of Financial Management

The functions of financial management are as follows :

 

1)    Estimation of capital requirements: An estimation regarding the capital requirements of the company has to be made in the most appropriate way. The estimation depends on costs and profits as well as future programmes and policies of the organisation. Estimations have to be made in an adequate manner to facilitate  earning capacity of the organisation.

 

2)    Determination of capital composition: The capital structure has  to be decided after making estimation of capital. Short- term and long- term debt equity analysis may be done for this purpose. This depends on the proportion of equity capital and the additional fund to be raised.

 

3)    Choice of sources of funds: The company has many sources for raising funds. These sources are :

a)    Issue of shares and debentures

b)    Loans to be taken from banks and financial institutions

c)    Public deposits to be drawn in the form of bonds.

 

4)    Investment of funds: The finance manager has to decide to allocate funds into profitable ventures.  This facilitates safety and regular returns on investment.

 

5)    Disposal of surplus: The finance manager has to decide about the disposal of surplus. The disposal of surplus may be decided in the following ways :

a)     Dividend declaration – The manager may decide about the rate of dividends and other benefits like bonus.

b)    Retained profits - The amount of retained profit may be decided by the manager. The decision may depend on the expansional, innervational diversification etc., as well as the plans of the company.

 

6)    Management of Cash: The cash management may be decided by the finance manager. Cash may be required for payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc.

 

7)    Financial controls: In addition to planning, procuring and utilisation of funds, the finance manager has to exercise control over finances. The financial control may be done through  ratio analysis, financial forecasting, cost and profit control, etc.

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