Importance of Financial Management

Financial management is a discipline that is concerned with the control, organizing, and planning of financial resources in an organization. Financial managers play an important role in optimizing the use of scarce resources to achieve efficiency and profitability. Why is financial management important to an organization?

Financial management plays a critical role in promoting effective investment decisions and efficient operations in an organization. It allows managers to make appropriate decisions with regard to resource allocation to achieve organizational objectives. Financial managers are important in an organization because they make critical decisions on how funds should be spent in line with the organization’s strategic goals. They choose whether to invest in long term projects, pay dividends, fund daily operations, etc.

Objectives of Financial Management

  • To ensure regular and adequate provision of funds for investment and operations
  • To generate returns for shareholders by focusing on earnings, share prices and shareholder expectations
  • To promote optimal allocation and utilization of resources within an organization – gaining maximum returns at the least cost.
  • To ensure safe and viable investment decisions are made – achieving a good rate of returns on investment
  • To ensure that the organization has the right mix of debt and equity in its capital structure
  • To promote proper estimation of financial requirements by establishing financial needs and determining whether the organization has a shortage or surplus of funds.
  • To ensure timely payment of financial obligations to creditors and lenders – being able to repay debts and promote financial commitment with lenders and creditors.

Functions of Financial Management

  • Estimation of Capital Requirements: companies use financial management to estimate their capital requirements, based on their expected income and expenditure.
  • Making capital structure decisions: Financial management is used to make decisions with regards to the short-term and long-term debts, equity, and other ways of funding investments. It helps a company to determine the proportion of equity and debt that is appropriate for their investment decisions.
  • Choosing Sources of Funds: Financial management helps a company to choose appropriate sources of funds such as long term debts, shares, loans, or bonds.
  • Investment of Funds: Financial management is also necessary to understand how firms make investment decisions; how to allocate funds to investment projects that give the best returns.
  • Disposal of Funds: Sometimes a company may have surplus money. Financial management concepts will help them to determine the best ways of disposing them e.g. through dividend payment to shareholders or through retained earnings for future growth and expansion.
  • Cash Management: Businesses also need to make appropriate decisions on how to utilize cash to ensure proper cash flows to manage operations, while at the same time ensuring that cash does not lie idle. Cash is used to pay wages, bills, and current liabilities. It is also needed for the maintenance of inventory and purchase of raw materials. Therefore, cash should be managed efficiently to ensure that the company does not run into shortage of funds or have too much surplus that could otherwise be used to generate more income.
  • Financial Controls: Another function of financial management is to plan, acquire and utilize funds appropriately to meet the organization’s long term goals.

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