Importance of Financial Management
(Significance of Financial Management)
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| Importance of financial Management |
Financial management aims at maximizing profits as well as making optimum use of financial resources.
Therefore the study of financial management is important for both for-profit organizations and non-profit organizations. The rapid industrial development in the commercial sector in the last 50 years and the policy of globalization and liberalization has made financial management even more important. Today, production, finance, marketing and service activities are given an important place in any business undertaking, but financial management is given the most important place, because the success of all other activities of the enterprise depends on finance. As Irwin Friend wrote, “The success of a firm, even its existence, its efficiency and willingness to produce, its ability to invest in fixed and working capital to a considerable extent, is determined by its past and present financial policies. Similar views have been expressed by Husband and Dokre, according to which, “To tie various economic and business activities together, some means is needed which can guide them smoothly and finance is the powerful tool in that.” who accomplishes this task." Therefore it will not be an exaggeration to say that finance is the soul of all trade, commerce and industry.
In modern times, due to expansion of joint ownership of industry, variation of ownership and management and increase in the social responsibility of management, the scope of financial management has not been limited to finance offices only, but it is involved in every activity of business planning and control. The role has become extremely important. As Prof. Ezra Solomon has said, “Financial management today is not only a specific activity of fund collection, but has become a part of the entire managerial science. It is directly related to the collection of funds as well as production, marketing and decision making Remains related." Apart from this, the importance of financial management can be made more clear by the following points:
1. Determination of Business Success
Strong financial management is an indicator of guarantee of success, survival and growth of the organization. On analyzing the causes of many sick units, it is found that the main reason for their becoming sick is the faulty financial management. Effective use of employees, machines and machines is possible through sound financial management, so that plans can be made for the development and expansion of the enterprise and they can be successfully implemented. 2. Optimal Utilization of Resources
Financial management emphasizes on optimum utilization of resources in the enterprise. In fact, sometimes the inadequacy of finance is not the reason for the failure of the business, but it is the mismanagement of funds which is responsible for it. In the words of Colleen X, “There are hundreds of faults in bad product management and bad sales management, but there are thousands of faults in the undertaking of faulty financial management.” Financial management plays an important role in optimum utilization and utilization of resources of the enterprise. In a developing country like India, where capital is limited, proper use of financial resources assumes special importance. It achieves maximum results by increasing the productivity of capital funds.
3. Focal Point of Decision Making
Earlier decisions were taken by inspiration and experience, whereas in modern times the basis of decision making is scientific financial analysis. The financial manager analyzes the important facts and figures regarding the financial condition of the enterprise and the progress of its works in a given period and puts it before the managers in the form of financial report. Through this scientific analysis, the Board of Directors is able to take such decisions which involve minimum risk. Thus, in modern large-scale organizations, the financial manager has an important role to play in decision making. 4. Measurement of Performance
The main objective of business is to earn profit. Therefore, even today, the evaluation of the performance of various tasks of the enterprise and the success of the business is measured by the financial results. Establishes a balance between finance, profitability and risk. There is no profit without taking risk and taking risk without the possibility of profit is meaningless. Financial decisions that increase risk reduce the valuation level of the firm. However, finance helps in keeping the valuation level of the firm above the highest by balancing the conflicting factors of risk and profitability. In the words of Weston and Brigham, “Financial decisions affect both the amount of income or profitability and business risk. Policy decisions affect risk and profitability and both these factors together determine the value of the firm. ' 5. Basis of Planning Co-ordination and Control
Financial management provides the basis for planning, co-ordination and control in the enterprise. The purpose of planning is the effective utilization of funds. In the words of James Van Horn, "Planning is a financialManagement has a complex dimension. Plans and various budgets are created through financial forecasts which are the basis of planning. The work of co-ordination in the activities of the business is done by budgetary control, under which the norms of time and cost required for various works and production activities are determined and corrective action is taken if deviations are found. In this way, optimum allocation of available resources and their optimum utilization becomes possible.
6. Advisory Role
The financial manager plays an important role in the success of a business organization by advising the top management. He presents important facts and figures to the higher management regarding the financial position and performance of various departments of the organization. This makes it easier for the top management to evaluate the progress of the organization and make appropriate changes in the principles and policies of the organization. The financial manager assists the top management in the decision-making process by suggesting the best possible alternative among the various available options for a given problem. Thus, financial management is helpful to the management in taking financial decisions at various levels. 7. Valuable for Various Parties
In the present era, the importance of financial management has also increased due to the financial commitment of the management towards different sections, as
It is clear from the following discussion that (1) Utility for business managers: Capital of different sections of the public is invested in corporate institutions and the managers are its trustees whose security is on them. If they have knowledge of financial management, then they can fulfill their obligations by maximizing profit and value of assets by using different techniques of financial management. They are unable to do so without the knowledge of financial management.
(ii) The work of management in the utility company or corporate institutions for the shareholders is done by the directors elected by the shareholders. If the shareholders are aware of the principles of financial management, they can evaluate the financial condition of the company and make suggestions in the annual meeting. But if they do not have knowledge of financial management, then they will be completely dependent on the directors who can cheat them by taking advantage of their ignorance.
(ii) Utility for the investors: Most of the investors in the country invest their accumulated capital in the shares and debentures of the companies. They have to rely on securities sellers or brokers to guide them. If the investors have knowledge of the theory and practice of financial management, then they can compare different securities and their institutions and select the best securities.
(iv) Utility for Financial Institutions: Managers of various financial institutions like commercial banks, investment banks, trust companies, underwriters, sanctioned houses, discount houses, etc. require detailed knowledge of financial management. In the absence of this knowledge, they may invest in wrong securities or lend to such institutions whose financial position is not sound or may be bound to incur more losses by wrong underwriting. Here is the reason why such institutions only appoint financial experts as administrators.
(v) Useful for economists and politicians: Crores of rupees are invested in economic development in every country. The success of this investment depends on the effectiveness of the financial management. With the knowledge of financial management, politicians and economists can take such policy decisions which are most appropriate in two countries.
Limitations of Financial Management
(Limitations of Financial Management)
Like other branches of knowledge, financial management is also not without limits. Although the origins of financial management have greatly improved managerial performance, it still faces many challenges and constraints. This has reduced the effectiveness of financial management. The following are such limits
(1) Based on Accounting Records: Most of the information used in financial management is taken from financial accounting, cost accounting and other similar records and documents. Techniques like analysis and interpretation of financial statements, cost-volume-benefit analysis, budgetary control used in financial management are based on accounting records only. Therefore, whether the decisions taken on the basis of these will be correct, it depends on the accuracy of these information.
(2) Lack of knowledge of related subjects: Financial management is related to other subjects like economics, statistics, management etc. The full benefits of financial management can be obtained only when the financial manager has sufficient knowledge of all these related subjects. But in today's era of specialization, it seems very difficult for a person to have knowledge of so many subjects.
(3) Not a substitute for administration: Financial management presents the top management with fully analyzed and selected information related to the financial position and performance of various departments of the institution. He also suggests the best possible alternatives but the final decision and corrective measures are taken by the management and not by the financial manager. so financialManagement is not a substitute for administration.
(4) Lack of objectivity: Financial management is completely subjective. The decisions taken by the financial managers are influenced by their personal biases, views and opinions which can sometimes be harmful to the organization. Therefore, the success of financial management depends on the financial manager's understanding, his knowledge and ability to take cooperation.
(5) Developmental stage: Financial management is still in the developing stage, it has not reached the final stage. Its traditions are not fixed and established like other sciences. Therefore, being an uncertain science, its results depend to a large extent on the judicious interpretation of the aggregates used for managerial applications.
(6) Economical: Establishment of effective financial management requires elaborate organization and many rules and bye-laws. This requires heavy investment which can only be done by large institutions. Hence it is an expensive method.
organization of financial management
(Organization of Financial Management)
Organization of financial management refers to the division and classification of various functions to be performed by the finance department. The position of the finance department in the organization generally depends on the size and nature of the business. In small enterprises, which have simple operating procedures and very little delegation of powers, no separate officer is appointed to handle the finance function. The business owner himself completes all the financial works. A separate department can be established at a higher level under the Board of Directors or a higher level officer to conduct the entire financial activities in medium-sized enterprises. This task can be assigned to a committee or to a senior manager. It is called by the name of financial controller, financial operator or financial manager. All important financial decisions are taken by this committee or manager and routine decisions are left to the lower level management.
For organization of finance work in large sized enterprises, 'financial controller' and 'treasurer' are appointed. The Financial Controller performs planning and control, preparation of annual reports, budgeting of capital expenditure, profit analysis, cost and inventory management and general accounting etc. The main functions of the treasurer include receipt of additional funds, management of cash and receivables, audit, protection of funds and securities, maintaining relations with banks and other financial institutions, etc. The organization of the finance function is shown in the following figure.