James Van Morne defines Financial Management as follows:
“Planning is an inextricable dimension of financial management. The term financial management connotes that funds flows are directed according to some plan.”
Financial management can be said a good guide for allotment of future resources of an organization.
Scope of Financial Management
The main objective of financial management is to arrange sufficient finances for meeting short term and long term needs. A financial manager will have to concentrate on the following areas of finance function:
- Estimating Financial Requirements:
The first task of the financial manager is to estimate short term and long term financial requirements of his business. For this purpose, he will prepare a financial plan for the present as well as for future. The amount required for purchasing fixed assets as well as for working capital will have to be ascertained.
- Deciding Capital Structure:
The capital structure refers to the kind and proportion of different securities for raising funds. After deciding about the quantum of funds required, it should be decided which type of securities should be raised. It may be wise to finance fixed assets through long-term debts and current assets through short-term debts.
- Selecting a Source of Finance:
After preparing capital structure, an appropriate source of finance is selected. Various sources from which finance may be raised include share capital, debentures, financial institutions, commercial banks, public deposits etc. If finance is needed for short period then banks, public deposits and financial institutions may be appropriate. On the other hand, if long-term finance is required then, share capital, and debentures may be useful.
- Selecting a pattern of Investment:
When funds have been procured then a decision about investment pattern is to be taken. The selection of an investment pattern is related to the use of funds. A decision will have to be taken as to which asset is to be purchased. The funds will have to be spent first on fixed assets and then an appropriate portion will be retained for
working capital. The decision-making techniques such as capital budgeting, opportunity cost analysis etc. may be applied in making decisions about capital expenditures.
- Proper cash Management:
Cash management is an important task of finance manager. He has to assess various cash needs at different times and then make arrangements for arranging cash. The cash management should be such that neither there is a shortage of it and nor it is idle. Any shortage of cash will damage the creditworthiness of the enterprise. The idle cash with the business will mean that it is not properly used. Cash flow statements are used to find out various sources and application of cash.