Objectives of financial management include efficient financial planning, effectively organizing, directing, and managing financial activities so that wastage of financial resources is minimized and the profit of the business is maximized.
Finances are the backbone of any business, and the resources that a company utilizes to carry out business operations must be actively managed to ensure the smooth run of the financing activities. Most of the resources (including financial resources) are always limited, and demands are always unlimited. Therefore, efficient handling of resources is an important task for the management of a company.
For any business to survive, it’s important to wisely invest finances so that returns of the investment are higher than its cost. To cut a long story short, financial management mainly focuses on the availability of funds, reduction of finance costs, and efficient utilization of available funds.
The manager with a reasonable understanding of financial management is expected to balance working capital management and investment portfolio. The balance is expected to ensure the adequacy of working capital and investment portfolio.
Let’s discuss detailed aspects for the objectives of financial management,
1-Profit and wealth maximization
Financing costs money to the business, and the adverse impacts of the financing can be severe and lead to massive impacts on the bottom line of the income statement. Hence, the business needs to effectively manage its financing functions to control expenses and maximize the profit that maximizes wealth.
The finance manager’s focus is on the achievement of optimal profit in the course of business. For this, a finance manager has to make the right decisions by using appropriate financing methods.
If the financing function is effective in managing finance, it leads to the achievement of the higher market value of the shares, which is the main goal of the shareholders while investing.
2-Mobilization of resources
Mobilization means effective utilization of financial resources to ensure operations of the business are efficient and effective. The effective management of the financial resources requires finance managers to monitor financing needs actively and issue different financial instruments to fulfill business demand for financing.
Hence, the Finance manager needs to make the right decision based on current market conditions, tax status, flexibility, compatibility between need and speed of the financing, and cost of financing, etc.
Further, effective finance management helps manage the financing of the business with the issuance of shares, debentures, bonds, notes payable, or other sources of finance.
3- Cash flow maintenance
Cash inflows and outflows have to be appropriately monitored to ensure a regular supply of liquidity. The financial manager has to maintain an optimum level of liquidity for a business to ensure the availability of the working capital and other financial resources.
In severe cases, the business may have to face inevitable liquidity crises and even liquidation if cash flow is not efficiently managed.
4-Reduced cost of capital
The cost of capital is linked with the risk in the financing structure of the business. If the business and financial risk are higher, the cost of capital is expected to be higher.
Business risk is inherited in the business processes, and financial risk is dependent on debt proportion in the financing structure. However, debt is considered to be a cheaper source of finance than equity because of tax advantage and the matters related to controls.
So, the finance management function of the business needs to actively monitor the level of the risk in the financing structure, estimate the level of the risk with perspective to investors, and arrange finance for future projects.
5-Improved efficiency
The efficiency of the business operations depends on the suitable distribution of funds by the company. An efficient finance manager can estimate the inherent financial risk of the project and allocate sufficient resources based on needs.
Hence, the overall efficiency of the business operations increases with the application of principles to manage finance.
6-Creation of reserves
The reserves play an important role when a company’s objective is to expand its business operations. It’s considered one of the safest sources of finance as it’s entirely dependent on the discretion of the business management to use.
The business reserves are developed with an accumulation of profit; the prime objective of the reserves is to overcome uncertain situations the business may have to face.
7-Optimum utilization of funds
Optimum utilization of funds is significant for a business to grow. It can be achieved by using various financial tools such as inventory management, debtor management, creditor management, and other business functions.
Functions and Nature of financial management
The main functions of financial management include but are not limited to the following,
1-Assessing the Capital Requirement
It is the primary function of financial management to estimate the capital required to run a business. The financial management makes financial estimates to meet long-term and short-term objectives. Capital is required for:
- Expansion of business operations to meet the growth targets.
- To assist the purchase of fixed assets for a company.
- To ensure the continuity of operations by meeting working capital requirements.
2- Sources of funds
Financial managers have to make the right decision to select the appropriate source of finance. There can be various sources from which funds can be raised, e.g., preference shares, debentures, equity shares, public deposits, and other banking instruments.
3-Fund’s procurement strategy
Funds procurement might require negotiations with creditors or financial institutions and issuance of a prospectus. Borrowing of funds depends on other factors such as market conditions, government policies, and economic conditions etc.
4-Capital Composition
It is essential to choose an appropriate mix of equity and debt for financing. The main objective of this technique is to reduce the cost of capital and maximize shareholder’s wealth, and it’s done by maintaining an adequate proportion of the debt and liability.
5-Liquidity management
Management of cash is an essential function of a finance management function. It includes the estimation of cash inflows and outflows. This is done to avoid a surplus or shortage of cash. Further, funds should be sufficient enough to meet the requirement of day-to-day business expenses and payment for goods.
6-Financial Control
The management of business evaluates the financial performance by calculating returns earned on investments. These returns are compared with other investments and prior periods to assess whether they are showing upward or downward trends. Other techniques used for effective financial controls are breakeven analysis, internal audits, budgetary controls, and ratio analysis etc.
Also read, Financial accounting and Managerial accounting and objectives of financial management.
Financial Management and Accounting
Financial management is a hot topic of discussion in the business world as its accurate allocation helps a business to flourish. Here, we have discussed the functions of financial management that will help businesses to achieve long-term goals.
It’s linked with the activities like planning, raising, organizing, administering, and controlling the monetary resources of an entity. It helps to ensure finance cost is minimized and profit of the business is maximized.
On the other hand, accounting is a systematic way of reporting financial information by following International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAPs). It includes organized techniques of recording, adjusting, and reporting financial information.
The information produced with accounting/financial reporting is reported in a standard manner to make it understandable by internal and external users or stakeholders. So, they can make a decision on the basis of it. On the other hand, accounting relates to bookkeeping and reporting of financial information, whereas the main focus of financial management is on the effective utilization of assets and resources.
Let’s further explore the differences between accounting and finance management.
Key differences (Accounting vs. Financial Management)
Users of the information
The primary users of accounting information are creditors, investors, management, employees, owners, customers, and regulators. On the other hand, the management and shareholders of the business are interested in using the financial management information of a company.
Objectives
The main objective of accountants is to prepare and report financial information. On the other hand, the life objectives like profit and wealth maximization stand as the primary goal of the financial management function.
Measurements basis
Funds are measured on the accrual basis in accounting, whereas cash flow is used in financial management.
Time frame
Financial reports are prepared on a quarterly, half-yearly, or annual basis. In contrast, financial management activities can be done at any time during the year based on the discretion of the management. Similarly, accounting statements are past-oriented, whereas financial management reports are future-oriented.
Likewise, accounting information is helpful in measuring the business’s past performance, and financial management is about decision-making related to the future.
Reports
In accounting, summary reports are prepared in the form of financial statements. However, financial management information is used to prepare detailed reports of future actions like development and expansion.
Purpose
The primary purpose of accounting is to collect and present information in a meaningful manner. On the other hand, financial management uses data for financial decision-making related to the future. For instance,
- How much capital needs to be raised.
- Formulating investment policies.
- Assessing financial feasibility.
- Assessing the rate of return for the shareholders and finding ways to improve it via investing.
- Ensuring availability of sufficient resources to ensure operational and capital needs of the business.
Functions of the financial management department
Following are some of the functions performed by the finance management department.
Calculating capital needs of the business- The capital needs of the business are calculated by estimating the business demand and growth capability of the business.
Profit allocation – Profit allocation refers to allocating the proportion of earned profit to the different business functions. For instance, purchase of fixed assets, working capital, reserves, expansion, innovation, bills, salaries, bonuses, and other operational expenses.
Exercising financial controls refers to applying certain financial managing tools to analyze and control the short and long terms business objectives.
Wisely investing capital – The business needs to find feasible investing opportunities to generate a return for the business. So, the finance function needs to find profitable ventures in line with the risk appetite of the shareholders.
Efficient money management – It refers to allocating money for various operational and capital tasks.
Roles performed by finance managers.
Following are some of the roles performed by a professional holding degree in finance management.
- Financial advisors.
- Finance managers.
- Credit analysts.
- Budget analyst.
- Financial planners
- Investor relations executives.
- Investment bankers.
- Corporate managers
Conclusion
Financial management is about the effective management of financial resources to minimize the cost and increase the business’s profitability. Further, the application of financial management techniques enables the business to manage its financial and investment portfolio.
In addition to this, the business calculates the cost of capital, estimates the cash needs of the business, manages liquidity, and ensures all aspects of the finance are managed efficiently.
Further, there is a difference between accounting principles and financial management. For instance, accounting principles are primarily about keeping a financial record, organizing, and reporting financial information. On the other hand, financial management is about effective management of the finance that helps to utilize the finance that leads to enhanced profitability.
For further knowledge on financial management and objectives of financial management.
