Financial management is the department inside an organization or a business that is concerned with cash flow, profitability, credits, costs, etc. in order to ensure that the company has the resources necessary to achieve its business objectives and goals. In other words, it is the application of general management concepts to the financial resources of a company.
Generally speaking, financial management is the process of managing a company’s finances in a way that allows the firm to be profitable while still being compliant with applicable rules. That need both a high-level strategy and hands-on implementation on the ground. Investing funds in such a way that the returns on the investment exceed the cost of borrowing is critical for any firm seeking to grow.
Financial Management Definition
In words of Solomon, “Financial management aims to effectively use the capital funds which also happens to be a significant economic resource.” Financial management definition by different author – Phillippatus has given a more amplified meaning of financial management. According to him “Financial Management is concerned with the managerial decisions that results in the acquisition and financing of short and long term credits for the organizations.”
In views of Howard and Upton, “Financial management should be considered as an application of general managerial principles to the area of financial decision-making.” According to Weston and Brigham, “Financial management is province of financial decision-making, harmonizing individual motives and enterprise goals”.
Financial management is the core of entire finance study. The term financial management also has lots of definitions. Out of all the definitions most popular and widely accepted definition of financial management is delivered by S.C. Kuchhal. According to him, “Financial Management deals with procurement of funds and their effective utilization in the business.”
Financial Management in Procurement Definition
According to the Financial Management Institute, financial management in procurement means management of all procedures involved with the effective acquisition and deployment of both short and long-term financial resources, as they pertain to the purchase of products and services.
In simple words, financial management in procurement refers to the source-to-pay procedure is also known as the source-to-settle process. Among its responsibilities are the selection, appraisal, and development of formal contractual agreements. In addition to the management of the company’s ongoing supplier relationships, relationship between procurement and finance department.
Procurement is a complicated subject that encompasses a wide range of interconnected operations along with relationship between purchasing and other departments. Financial management is more than procurement of funds.
Basic Concept of Financial Management
In simple concept financial management means, if you save me today – I will save you tomorrow. In this competitive era, funds are acquired from several sources. The procurement of these funds has always been reckoned as a stumbling block.
The characterization of funds procured from different sources varies in terms of cost, risk, management and control. A smart manager will know that the funds should be procured at minimum cost, at a balanced risk and control factors.
In order to meet the needs of investors, often organizations and firm sign multiple option convertible bonds. For example, funds can be generated from abroad as well. The two prominent sources of capital from abroad are – Foreign Direct Investment (FDI) and Foreign Institutional Investors (FII). Other contributors amongst foreign based investors are American Depository Receipts (ADR’s) and Global Depository Receipts (GDR’s).
Proper analysis of utilization of those procured funds is the job of a financial manager. He is responsible for informing the firm or an individual that whether or not their funds are optimally allocated.
To accomplish this task, the financial manager is expected to be knowledgeable, tactful and witty. He should understand the demands and requirement of the individual or the firm and should come up with some strategically rationalized plan so that the latter one can enjoy optimally.
Example of Financial Management
Finance management is classified based on business activities or company’s accounts or personal account. Financial management example for business or company includes managing telephone cost, hiring a new employee, purchasing of facilities, project budgets, etc. Financial management example for individuals includes managing monthly budgets, expenses, shopping, etc.
Financial Management Example-1
You are planning to take a business loan to purchase a new space for your business office. – Here it is advisable to take a real estate advisor and you need to check whether the valuation after 20 years or more will be higher than renting it or not. Also you need to consult financial department whether investing 20% of funds in down payment and taking 80% business loan will give good returns on investment or not.
Many times there are cases where, renting can be more economical than purchasing, regardless of whether you’re leasing a property, software or renting a vehicle.
Financial Management Example-2
Assume that you are planning to buy a new house on mortgage loan where you will be contributing around 80% of your salary in EMI (equated monthly installment) payments to achieve your financial goals. – Here it is advisable to follow 50/30/20 planning strategy which offers an great result in financial management. It is briefly explained as:
- 50% of your salary or total in-hand compensation goes toward basic necessity of life. For example, groceries, utilities, rent, transport, etc.
- 30% goes to the way of lifestyle expenses. For example, shopping, dining, and so on.
- 20% is towards the future: debt repayment, retirement planning, emergencies, etc.
So according to this rule, if 80% of your salary goes in mortgage repayment then such financial plans need to be revisited and optimized it much better.
Questions and Answers
Lets take some of the question and answers to better understand it. You need to fill in the blanks to guess the correct answer. Which of the following is an example of financial management is from the following.
Question-1) The idea of financial leverage is directly related to the concept of _______.
Answer: The idea of financial leverage is directly related to the concept of capital structure management. Financial leverage is typically employed by businesses that have debt as part of their capital structure. The term “leverage” refers to the way in which the performance of a corporation is influenced by the use of indebtedness in the capital structure, which in turn impacts the amount of return that a company can provide to its owners. As a result, the idea of financial leverage has a direct link with the financial management of the capital structure.
Question-2) Generally speaking, permanent working capital is funded by _______.
Answer: Generally speaking, permanent working capital is funded by long term capital funds. Every firm need cash in order to finance its assets and activities. Fixed assets and current assets are both required to be invested in order to achieve the desired results. It is necessary to fund it with long-term sources of capital, such as stock or preference shares, debentures, long-term loans, and retained earnings from the company. Fixed assets should never be financed using short-term borrowings or equity.
Moreover you can take the basics of financial management quiz to get more learning on which of the following is an example of financial management.
After going through the financial management definition and examples of financial management, it is understood that financial management is a crucial part for all. Financial management is a necessary learning and task that every individual, business or an organization needs to consider. Do leave your feedback in below comment section, as your suggestions and advices would help others to achieve their life goals.
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