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Financial Management: Meaning, aspects, scope & objectives. | by Sayandev Dehadray | May, 2024

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Hello readers, here in this article we will be trying to get more crystal clear idea about financial management. So without wasting any time let’s move ahead to meaning of financial management.

Meaning:

Financial management is an activity of management and those charged with governance of an entity which is concerned with planning and controlling the entity’s financial resources. in short it is concerned with acquiring , financing and managing the assets of an entity with a prospect of achieving entity’s overall business objectives. Hence, if you observe a bit the meaning of financial management is self explanatory of its aspects so lets move ahead to the aspects of financial management.

Aspects of Financial Management:

There are basically 2 prima facie aspects of financial management and they are as follows-

  1. Procurement of Funds.
  2. Utilization of Funds.

Let us understand these aspects in brief.

Procurement of Funds:

Procurement is considered as one of the complex problems for a business entities as funds can be obtained from various sources. These sources have various characteristics in terms of control, risk, cost etc. The cost of the funds should be at lowest possible level to ensure profitability and seamless running of business operations; for this entity is required to carry out the proper balance of risks and control factors. some examples of sources of funds are-

  1. Equity
  2. Debentures
  3. Lending by Banks
  4. Preference Shares
  5. Angel financing
  6. Foreign markets etc.

Utilization of Funds:

An entity is required to ensure the effective utilization of funds that are procured from various sources of finance. Since funds are procured at a cost and risk factors are entailed with these funds effective utilization of these funds is must and this must be monitored by a competent and responsible authority of the entity. The effectiveness of utilization depends upon whether the funds procured are able to generate returns at a higher rate than its procurement costs. If the returns generated are lower than the procurement costs then there is no point in continuing the business operations.

Scope of Financial management:

Financial management is an integral part of the overall managerial activities which is concerned about procurement and utilization of funds. After studying these aspects let us dive deep in the ocean of financial management and try to understand its scope. The Scope of financial management includes:

  1. Determining the size of the organization
  2. Determination of composition of an entity’s assets
  3. Determination of Structure of the capital of an entity i.e. determining the level of debt to equity etc.
  4. Analysing, planning and controlling the financial operations of the entity.

Objectives of Financial management:

There are primarily 2 objectives of financial management and they are as follows:

  1. Profit maximization &
  2. Wealth maximization.

Let us try to understand these objectives one by one in brief.

Profit Maximization:

Traditionally it is believed that primary objective of an organization is to earn profits hence the financial management is also concerned about maximizing the profits of the organization. According to this objective a finance manager is required to take his decisions which are based on the answer of this question: “ whether the decision goes in the favour of letting my organization earn maximum amount of profit or not?” However profit maximization cannot be the only objective of financial management as it is a narrow objective. The more wider objective of financial management is wealth maximization or value creation.

Wealth Maximization or Value Creation:

Wealth maximization approach considers the wealth of shareholders of the company. Wealth of shareholders is a result of cost and returns analysis adjusted with time value of money.

Hence W= PV of Returns (-) PV of Costs

In wealth maximization approach, finance manager is required to emphasize of the cash flows for the purpose of investing of financing decisions instead of mere book profits. As per this approach primary goal of an organization should be maximizing market value of its shares which impliedly seeks to increase the net present value(NPV) of its economic profits. For achieving this primary objective finance manager of an organization is required to consider:

  1. Cash flows and not book profits.
  2. Cost and benefit analysis.
  3. Time value of money.

Now many of you must be wondering how do we measure the value of firm in order to determine whether it is maximized or not? Do not worry at all, here’s the simple answer,

As per Van Horne author of book “Fundamentals of Financial management” says, “ value of the firm is represented by the market price of company’s common stock

Therefore we can say that,

Value of Firm(V)= No. of Shares(N) X Current Market price of shares(CMP)

OR,

Value of the Firm= Value of Equity(Ve) (+) Value of Debt( Vd).

Wealth maximization is most commonly followed approach in financial management. Now you must be wondering why is that so? Here’s the answer:

There can be various goals and objectives of an organization. However the goal which is on priority is wealth maximization as it directly impacts the existence of the business organization. If this goal is not met on a priority then general public or institutions may loose the confidence in business organization and they may not invest further in order to finance the growth of the organization. This will also impact the ability of business organization to achieve its other goals and objectives such as maximizing profitability, improving market positions and market share etc.

That’s it for now. I hope this was helpful for igniting your curiosity about financial management Dont forget to share this with you friends. Happy learning! 🙂



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