Financial management is a cornerstone of any organization’s success, playing a pivotal role in steering its economic activities towards achieving long-term sustainability and growth. It encompasses a wide array of strategies, practices, and decisions that revolve around effectively managing an organization’s financial resources. The nature of financial management is inherently dynamic, requiring astute planning, precise execution, and continuous monitoring to navigate the complexities of today’s business landscape. Here we will list out some of the major scope of financial management notes and nature of financial management which will help you in your decision making process.
Financial management is one of the important aspects in finance. Nobody can ever think to start a business or a company without financial knowledge and management strategies.
Nature of Financial Management
Finance management is a long term decision making process which involves lot of planning, allocation of funds, discipline and much more. Let us understand the nature of financial management with reference of this discipline.
Risk and Returns Evaluation
The nature of financial management primarily revolves around making decisions that connect risk and return to investments. This link between risk and return plays a crucial role in shaping the choices made in financial management.
Generally high risk investment yield high returns on investments. So, role of financial manager is to effectively calculate the level of risk company is involve and take the appropriate decision which can satisfy shareholders, investors or founder of the company.
Capital Requirement Estimation
Using financial management to forecast working capital and fixed capital requirements for conducting business operations, it is possible to plan ahead of time for money.
It is necessary to have a proper balance between debt and equity in order to keep the cost of capital as low as possible. Financial management determines the appropriate allocation of various securities (common equity, preferred equity and debt).
The finance manager keeps track of all cash movements (both inflow and outflow) and guarantees that the company does not experience a cash shortage or surplus.
Valuation of Company
The primary focus of financial management is on company valuation. As a result, all financial decisions are directly related to the goal of optimizing or maximizing the value of a company. The goal of increasing the company’s value is the driving force behind these financial decisions. Management activities include finance functionality such as investment, distribution of profit earnings, capital raising, and so on.
Improve Company’s Stock
The company’s dual strategy of reducing operational costs and increasing earnings achieves its mission statement, which places a strong emphasis on increasing shareholder returns. Increasing revenue should be the finance manager’s top priority. This objective is accomplished by raising money from a number of sources and carefully allocating it to investments.
Source of Funds
In every organization, the source of funding is a critical decision to make. There are long-term, medium-term and short-term source of funds. Every organization should thoroughly research and evaluate various sources of money (e.g., stocks, bonds, debentures, and so on) before selecting the most appropriate sources of funds with the least amount of risk.
Before committing the funds, it is necessary to thoroughly examine and assess the investment proposal’s risk and return characteristics. Appropriate decision need to be made for selecting right type of investment options.
The implementation of financial controls assists the firm in maintaining its real costs of operation within reasonable bounds and generating the projected profits.
Scope of Financial Management
Financial management encompasses several key scopes, which can be categorize into four distinct groups. These categories cover different facets of financial management. Now, let’s delve into comprehending the nature and scope of financial management through the following detailed notes.
Evaluating the risk involved, measuring the cost of fund and estimating expected benefits from a project comes under investment decision. It is one of the important scope of financial management. The two major components of investment decision are – Capital budgeting and liquidity.
Capital budgeting is commonly refer as the investment appraisal. It deals with the allocation of capital and funds in such a manner that they will yield earnings in future. Capital budgeting determines the long term investment which includes replacement and renovation of old assets. It is all about maintaining an appropriate balance between fixed and current assets in order to maximize profitability and to maintain desired liquidity in the firm for its smooth functioning.
Working Capital Decision
Working capital decisions are a crucial aspect of financial management. These decisions revolve around working capital and short-term financing, and they are refer to as working capital decisions. Working capital decisions also handle the relationship between short-term assets and their liabilities.
Short-term assets encompass cash in hand, receivables, inventory, and short-term securities. A firm’s short-term liabilities consist of creditors, bills payable, outstanding expenses, and bank overdrafts. Short-term assets have the potential to be converted into cash within a single calendar year. Similarly, liabilities must be settled within an accounting year.
This implies that assets held for a brief period can quickly transform into cash, all within one calendar year. Similarly, responsibilities or debts are also expected to be managed within the same accounting year.
The Dividend Decision plays a crucial role in today’s corporate era. It determines the amount of taxation that stockholders pay. A good dividend policy helps to achieve the objective of wealth maximization. The dividend policy determines whether to distribute all profits as dividends or distribute only a specific percentage. This decision revolves around the optimal dividend payout ratio, which indicates the portion of net profits to pay to shareholders.
Stability of cash dividends and stock sets the parameter which determines the number of investment opportunities. Expansion of an economic activity depends on effectiveness of dividend decisions and scope of financial management.
Financing Decisions focuses on the accountabilities and stockholders’ equity side of the firm’s balance sheet, for example decision to issue bonds is a kind of financing decision. The main aim of financing decision is to cover expenses and investments. The decision involves generating capitals by various methods, from different sources, in relative proportion and considering opportunity costs, with respect to time of flotation of securities, etc.
The scope of financial management involves meeting the firm’s expenses. To achieve this, the finance manager must create a suitable capital structure for the enterprise.
This capital structure aims to ensure that the necessary funds are available to cover the company’s expenses effectively. Only an optimum finance mix can maximize the market price of the company’s shares in the long run. To decrease the risk, a stable equilibrium is required between debt and equity.
The equity shareholders’ return and risk depend on how effectively they use debts and financial leverage. When risk and return are aligned, the market value per share is optimized. The financial manager needs to decide the right time to raise funds.
Few Additional Nature and Scope of Financial Management
One technique involves setting specific standards for the company beforehand. Firstly, we compare the actual cost or performance with the pre-established criteria. If we find any discrepancies, we put all the necessary corrective actions into action. We also list a few other aspects of the scope and nature of financial management below.
- Finance is a foundation of economic activities. The individual responsible for managing finances is refer as a financial manager. Important role of financial manager is to control finance and implement the plans. For any company financial manager plays a crucial role in it. Many times it happens that lack of skills or wrong decisions can lead to heavy losses to an organization.
- The company’s management includes an important function known as Financial Management. This function considers financial factors in all decisions made by the company and across all its departments.
- Financial management is recognized worldwide as one of the crucial areas of education. Now a day’s people are undergoing through various specialization courses of financial management. Many people have chosen financial management as their profession.
- The nature of financial management is never a separate entity. Even as an operational manager or functional manager one has to take responsibility of financial management.
- Nature of financial management is multi-disciplinary. Financial management depends upon various other factors like: accounting, banking, inflation, economy, etc. for the better utilization of finances.
- Financial management’s approach extends beyond business functions; it serves as the backbone of commerce, economics, and industry.
Nature and Scope of Financial Management PDF
This is just a high level overview of nature and scope of financial management. There is always a source for those who want to get in-depth knowledge on it. You can download free for “Nature and Scope of Financial Management pdf” from the below link. Click on Nature and Scope of Financial Management PDF to download PDF file for free.
“Financial management involves providing money as needed on a regular basis.” In this tutorial, we’ve grasped the concept of financial management’s nature and its scope. Additionally, for more comprehensive understanding, you can access the free PDF provided in this article. This information will help you make stronger decisions in managing your finances.
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Financial Management Basics For Beginners
- Chapter 1: What is Financial Management with Examples
- Chapter 2: Importance of Financial Management
- Chapter 3: Objectives of Financial Management
- Chapter 4: Functions of Financial Management
- Chapter 5: Types of Financial Management
- Currently Reading: Nature and Scope of Financial Management
- Chapter 7: Investment Valuation and Project Valuation Methods and Techniques
- Chapter 8: Goals of Financial Management
- Chapter 9: Financial Management Process
- Chapter 10: Financial Management Notes
- Chapter 11: Financial Management for Startups
- Chapter 12: Financial Management for IT Services
- Chapter 13: Financial Management Quiz - Question and Answers
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