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Financial Management Report: Scope, Objectives and Advantages

1189 words (5 pages) Business Assignment

23rd Oct 2020 Business Assignment Reference this

Tags: Business AssignmentsFinance

Introduction:

Financial Management is a vital accounting activity in any organization. It involves the process of planning, organizing, controlling and monitoring financial resources of an organization with a view of meeting the goals and objectives of the business. Financial management helps to control the financial activities of the business which include procurement of funds, utilization of funds, accounting, payments, risk assessment and every other thing related to money. Management Study HQ. (2019). 

In other terms, Financial Management could also be defined as the application of general principles of management to the financial asset of an organization. Proper management of an organization’s finance leads to efficient financial management. Finance should be properly managed in other to avoid severe consequences on the growth and development of the organization. (Holvino, 1996)

"Financial management is the activity concerned with planning, raising, controlling and administering of funds used in the business" Guthman and Dougal

Scope of financial Management

In other to fully understand financial management principles it is important to also understand what makes up the scope of financial management. One of the most important aspect of financial decisions is to take care of the interest of shareholders. Financial management is characterised by the maximization of the wealth of the shareholders, and this depends on the increase in net worth invested in the business and the plowed-back profit for the business to grow and prosper. The diagram below helps to represent the scope of financial management:

Objectives of Financial Management

The primary aim of financial management is the management and resource control which includes the procurement, allocation and control of financial resources of a company or an organization. In simple terms, the objectives of Financial Management are to maximize the value of the business or organization. The complexity of financial management is that it involves, many stakeholders, including owners, creditors, and various participants in the financial market.  Financial management is an essential part of the financial managers role; Some of the objectives are listed below as follows: (Www-personal.umich.edu, 2019)

Profit Maximization

Main aim of any business concern is to make profit. Profit is the financial gain realized when the amount of money gained is more than the expenses, cost and tax needed to keep the company going. Profit maximization means that every financial decision relation to a business must be evaluated in relation to profits. Also, all other financial decisions relating to starting new projects, raising new capital most impact on profit and profitability.

Wealth maximization

Wealth maximization is a concept in financial management whereby the value of a business is increased so that the value of share held by the shareholder, in other words it means when the wealth of the shareholder maximizes, the net worth of the company also maximizes. one of the evidences of wealth maximization is changes in the price of share of a company. Financial managers are seen as agents of the shareholders and their main job is to look after the interest of the shareholders. The objectives of shareholders would be to have a good return on the capital invested in the business.

Maintaining cash flow

Maintaining proper cash flow is one of the short-term objectives of financial management. It is important for companies to have a proper way of maintaining cash flow, this would aid in the payment of day-to-day expenses such as purchase of raw materials, payment of wages, salaries, rent and electricity bills. When a company has a good cash flow, it would be able to key into opportunities such as getting cash discounts on purchases, large-scale purchasing, and giving credit to its customers. A healthy cash flow would help to improve the survival and success of the company in the long run

Survival of the company

How the company survive in its operation is another important objective of financial management. As a result of the nature of competition in the business world it is important for company to survive in such environment, therefore financial managers must be careful when making investment decisions because any wrong decision made might have a lasting impact on the business.

Financial Management Function

The function of financial management is guided by the aim of the business which include profit and wealth maximization. These are some of the duties of a financial manager, and making sure that everything concerning the finances of the company is probably looked after. The functions are listed below as follows:

  • Financial Planning and Forecasting
  • Determination of capital composition
  • Fund Investment
  • Maintain Proper Liquidity
  • Financial Controls

Advantages of financial management:

Investor confidence: It is important for would be investor to a company to have assurance that their money is safe. Investors are usually more interested at looking for signs of security within business operations. This will increase their confidence and the likelihood of more investment opportunities.

Better decision-making process: When the relevant facts are easily accessible it becomes easier to derive solutions based on the circumstances of the situation.

Accountability: Leads to better accounting and proper management of resources.

Conclusion:

The importance financial management in a business cannot be over emphasised. For any business to do well in todays business climate there has to be that physical element of financial management present in its operation. As discussed above financial management plays an important role in money management and wealth creation, therefore it is important financial managers to be of sound mind and have a good knowledge of how to invest its shareholders money thereby making a good return on investment.

References:

  • Management Study HQ. (2019). Financial Management - Meaning, Objectives and Functions - Management Study HQ. [online] Available at: https://www.managementstudyhq.com/financial-management-meaning-objectives-functions.html [Accessed 13 Jul. 2019].
  • Holvino, E. (1996). Reading Organization Development from the Margins: Outsider within. Organization, 3(4), pp.520-533.
  • kuchal, s. (2019). Financial Management - Meaning, Objectives and Functions - Management Study HQ. [online] Management Study HQ. Available at: https://www.managementstudyhq.com/financial-management-meaning-objectives-functions.html [Accessed 13 Jul. 2019].

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