Analysing financial management

Money is the lifeblood of business. Finance is known to different people in different forms. To some money is a resource or capital. To some, it is a matter relating to the supply and demand of monetary resources in a business during the normal course of business activities. To some, it means activities comprising rising of capital, utilization of funds, payment of dividends etc.

It is known to all that the main objective of a business enterprise is to earn money (profits) through the production of goods and services and to sell in markets. To accomplish this objective business needs physical and human resources for production and marketing etc. For the acquisition of physical and human resources and to maintain them satisfactorily, the enterprise needs financial resources. In the present-day world, the success or failure of the production and distribution functions of an enterprise depends on how its financial resources are managed and in many cases a single financial decision at the policy-making level may determine the success or failure of the enterprise. Efficient management of financial resources is a sine-qua-non for the smooth operation of an enterprise. In the early stages of business, the financial function was not regarded as of much significance because of the limited capital requirements and because the methods of production were simple and inexpensive.

But after the Industrial Revolution, the production of goods became machine-based, requiring huge investments of capital for machines and equipment and raw materials. All this introduced a significant change in the business scenario and capital became the most important factor of production.

Financial management is that branch of business management which is mainly concerned with- Investment decisions: decisions as regards the utilization of funds in one activity or the other; Financing decisions: decisions as regards how the total funds required by the firm are to be raised, namely by issuing of shares, by going for loans, or by retaining profits. Dividend decisions: decisions as regards, what part of profits earned by the firm is to be distributed among the shareholders in the form of cash dividend and how much of the profits are to be retained for utilization by the firm (Ploughing back); Enforcing discipline: financial discipline is ensured through control and coordination of business activities.

To make Financial management more clear and transparent let us look at the views expressed by Financial experts Husband and Dockery, “In an organism composed of several separate activities, each working for its end but simultaneously making a contribution to the system as a whole, some force is necessary to bring about direction and coordination of economic activity and facilitate its smooth operation. Financial management is the agent that produces this result.”

The various aspects of financial management are as follows: (a) Forecasting of Financial Requirements: Financial management is concerned with forecasting as correctly as possible, the financial requirements of the enterprise for various activities. This requires a sound cost-benefit analysis of whether the proposed expenditure is of a capital or revenue nature. The object of this exercise is to know what amount of capital will be needed in the immediate and distant future and to ensure that the purpose for which the capital is needed will be economically viable, maximize profits or minimize risk.

If the fund is to be locked up in a project or activity which does not provide an adequate return, the enterprise may land in a situation where a shortage of funds is felt which might lead to the closure of the firm. (b) Raising of necessary Funds: Upon carefully ascertaining the financial requirements, financial management is to be concerned with raising funds. There are several sources from which funds may be raised. This may be by the issuance of shares and debentures, loans from banks and specialized institutions, public deposits, retained profits etc. A careful cost-benefit analysis is necessary for the matter of choice of the source of raising funds. This would include a careful examination of the effect of additional funds on (i) Risk-bearing capacity (ii) Capital structure (iii) Income of equity shareholders and (iv) Equity shareholders’ control of the enterprise. (c) Control overutilization of Funds: Funds raised may be utilized for various purposes such as the acquisition of fixed assets, meeting working capital needs, building inventories, providing credit to customers and so on.

It is the responsibility of financial management to ensure that the funds are utilized in such a way that the benefits accruing from the investment are more than the cost of collection. A clear policy is to be there regarding utilization of funds and monitor actual performance and identify any deviations from formulated policy and go for corrective action to adjust deviation to policy. (d) Coordination of diverse operations: As coordinator of diverse activities of an enterprise, financial management is concerned with lying down policies which will lead to maximization of profits and wealth of the enterprise and ensure easy availability of funds to pay its obligation. These will include policies relating to the control of production costs, pricing of goods and services, management of assets and funds, granting credit to customers and securing credit from suppliers etc.

Financial management is a specialized field of business for an enterprise. It is mainly concerned with the inflow and outflow of money of an enterprise. The finance manager is a Staff officer, responsible for financial matters, who is to plan, organize, direct, coordinate and control all financial operations of an enterprise.

Financial management is not the same as accounting. Accounting is concerned with recording, reporting, and measuring business transactions to provide data regarding the activities of an enterprise. On the other hand, financial management is concerned with the utilization of the information provided by accounting to achieve the objectives of the enterprise. Accounting is a data–collection process, while financial management is a decision-making process. Financial management relies heavily on Economics in respect of making decisions regarding pricing and production in different situations.

Financial management is to pursue a variety of objectives. It sub- serves the interest of different sections of the people, namely shareholders, management, workers, consumers and the community at large. Traditionally, the basic objective of financial management is to work toward the maximization of profits. However, modern thinking is different from traditional thinking in the sense that the traditional views are neither ideal nor rational or logical as it relies on profit maximization, whereas the modern view is concerned with the maximization of wealth, as wealth is the index of the worth of the firm and its maximization is consistent with the maximum economic welfare of the firm. To sum up the objectives of financial management we may conclude the following: (i) Maximization of wealth, (ii) Maximization of profits, (iii) Minimization of risks, (iv) Liquidity of funds, (v) Financial control, (vi) Flexibility, (vii) Disposition of profits.

The writer is former Director General of EPB. He can be contacted at [email protected]