The ‘Financial Management’ process
Financial management may be defined as the area or function in an organization which is concerned with profitability, expenses, cash and credit, so that the “organization may have the means to carry out its objective as satisfactorily as possible;” the latter often defined as maximizing the value of the firm for stockholders. Financial managers (FM) are specialized professionals directly reporting to senior management, often the financial director (FD); the function tends to be seen as ‘Staff’, and not ‘Line’.
Financial management is generally concerned with short term working capital management, focusing on current assets and current liabilities, and managing fluctuations in foreign currency and product cycles, often through hedging. (see Corporate finance #Financial risk management). The function also entails the efficient and effective day-to-day management of funds, and thus overlaps treasury management. It is also involved with long term strategic financial management, focused on i.e. capital structure management, including capital raising, capital budgeting (capital allocation between business units or products), and dividend policy; this latter, in large corporates, being more the domain of “corporate finance.”
- Profit maximization happens when marginal cost is equal to marginal revenue. This is the main objective of Financial Management.
- Maintaining proper cash flow is a short run objective of financial management. It is necessary for operations to pay the day-to-day expenses e.g. raw material, electricity bills, wages, rent etc. A good cash flow ensures the survival of the company.
- Minimization on capital cost in financial management can help operations gain more profit.
- Estimating the Requirement of Funds: Businesses make a forecast on funds needed in both short-run and long-run, hence, they can improve the efficiency of funding. The estimation is based on the budget e.g. sales budget, production budget.
- Determining the Capital Structure: Capital structure is how a firm finances its overall operations and growth by using different sources of funds. Once the requirement of funds has estimated, the financial manager should decide the mix of debt and equity and also types of debt.
Relationship with other areas of finance
Two areas of finance directly overlap financial management: Managerial finance, is the (academic) branch of finance concerned with the managerial significance of financial techniques; Corporate finance, is mainly concerned with the long term capital budgeting, and typically is more relevant to large corporations. Investment management is the professional asset management of various securities (shares, bonds and other securities/assets), not usually in the company context. The term “financial management” refers to a company’s financial strategy, while personal finance or financial life management refers to an individual’s management strategy. A financial planner, or personal financial planner, is a professional who prepares financial plans here.