“Financial Management” is a field that is primarily concerned with the managing of funds. Proficient use of capital funds can be termed as “Financial Management”.
Phillippatus famously stated, “Financial management is concerned with the managerial decisions that results in the acquisition and financing of short term and long term credits for the firm”. It can be concluded from the above statement that the two main areas concerning financial management are:
· Procurement of funds
· Effectual usage of funds to fulfill the business goals
Procurement of funds is mainly concerned with obtaining finance from various sources which can be the first step towards starting a business. There are three major factors that come into the picture while obtaining finance namely, risk, cost and control. Funds procured from the equity shares are ideal from a company’s perspective since repayment of equity capital can arise only when the company is under liquidation. The most expensive source to procure funds is equity capital since the shareholders expect greater dividend as compared to the current interest rates. To keep risk and control balanced the cost of the funds must be at a minimum. Both domestic markets and markets of abroad can be prospective sources for raising funds.
Raising the funds is one thing but if the raised funds are either kept idle or are used in a wrong manner, then the business is going to procure losses. So effective usage of the funds raised is also a major area of concern. Thus it becomes of extreme importance to make sure that funds raised are employed properly and profitably. If there is money, there will always be an urgent need to manage it and so financial management is a field which will never face a downfall. It is essential for both profiting and non-profiting firms. There are instances where organizations have been liquidated for sheer mismanagement of finances.
The two main objectives of finance management are not two of the most difficult to guess every firm wants the same:
1) Maximizing Profit- is to be attempted only after realizing the probability if the risks involved. So it is necessary to balance both of them. One more thing is that it never takes in to account the social aspects.
2) Maximizing Wealth- Wealth of a firm is the market price of the firm’s common stock. This market price can be the progress chart to a firm’s progress. This price is a function of two values:
· Expected rate of earnings per share(EPS)
· Capitalization rate
Funds can be procured from long term sources like owners that are shareholders, financial institutions like banks etc. while short term sources are commercial banks, public deposits etc. Performance of a firm is evaluated on the basis of a technique called Ratio analysis which enables an investor to take the various ratios into account which helps him to decide whether to invest in a firm or not.
The above mentioned aspects make “Financial Management” extremely important for a firm’s progress, more so for developing nations for the scarcity of resources and greater demand of funds.
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August 12th, 2007 at 3:37 pm
<p>“Financial Management” is a field that is primarily concerned with the managing of funds. Proficient use of capital funds can be termed as “Financial Management”.</p>
August 28th, 2007 at 10:57 am
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