Strategic planning, organizing, leading, and controlling of financial undertakings within an institution or organization include financial management. Financial management not only plays a critical role in fiscal management, but it also involves the application of management principles to an organization's financial assets.
Financial management typically focuses on short-term working capital management, current assets, and current liabilities, as well as managing foreign exchange and product cycle changes, frequently through hedging. The role also involves managing money effectively and efficiently on a daily basis, which overlaps with treasury management.
The objectives involved in financial management include:
- Keeping the organization's financial resources in a sufficient amount
- Ensuring that investors receive favorable returns
- Optimal and effective use of resources
- Establishing trustworthy and meaningful investment opportunities
Why is Financial Management Important?
There are several reasons why this type of management is crucial.
- Aids groups in financial planning and fund acquisition;
- Helps organizations make the best use of and distribution of the money they receive or acquire;
- Helps firms make important financial decisions; contributes to increasing their profitability;
- Raises their overall value;
- Offers economic stability.
Core Financial Management Decisions
In organizations, managers make the following choices in an effort to reduce the expenses of obtaining financing and use it in the most lucrative way:
Managers must choose how much investment is feasible given the current funding, both in the long and near terms.
They are of two types:
- Long-term investment decisions, also known as capital budgeting, involve committing financial resources for an extended period. This includes investments in fixed assets like property, buildings, and land, as well as upgrading outdated equipment. Such decisions are significant and have a lasting impact on a business's financial performance and objectives.
- In the world of finance, working capital management is the art of making short-term investment decisions that involve committing funds for a brief period, much like the current assets. This includes various choices such as investing in cash, bank deposits, short-term investments, and inventory, all of which directly impact the company's liquidity and overall success.
Additionally, managers decide whether to raise money from short-term and long-term sources (referred to as the capital structure) (called Working Capital).
They are of two types:
- Financial planning involves making decisions related to estimating the sources and uses of finances, which includes anticipating an organization's financial requirements to ensure that sufficient funding is available when needed. The primary objective of financial planning is to ensure that the required funds are readily available as and when needed.
- Choosing a capital structure requires knowing where to get the money. Choosing external sources, such as issuing shares or bonds or borrowing from banks, or internal sources, such as retained earnings, for raising money, are other considerations that must be made.
These decisions concern how much of the profits will be paid as dividends. A greater dividend is always requested by shareholders, but management prefers to keep profits on hand for operational purposes. Consequently, this is a difficult managerial choice.