Financial Management is made up of two words finance + management..
finance:
Finance may be defined as the art and science
of managing money. It includes financial service and financial instruments.
Finance also is referred as the provision of money at the time when it is
needed. The concept of finance includes
capital, funds, money, and amount. But each word is having unique meaning.
Studying and understanding the concept of finance become an important part of
the business concern.
According
to Khan and Jain, “Finance is the art and science of managing money”.
Management:
Management is the process of planning and organizing the resources and activities of a business to achieve specific goals in the most effective and efficient manner. Efficiency in management refers to the completion of tasks correctly and at minimal costs. Effectiveness in management relates to the completion of tasks within specific timelines to yield tangible results.
Meaning and Definition of
Financial Management
Financial management is concerned with the duties of the financial managers in the business firm. Financial
management is broadly concerned with the use of funds by a
business firm. It involves rising or procurement of funds at the lowest
possible cost in the form suited to the firm or the project in which investment
is being made and investment of the same with a view to make a return at least
higher than the rate at which funds have been procured. The efficiency of a
firm is measured from the return it makes on the capital employed by it. For
example, there are two firms A and B having capital of Rs100 each and having
identical business. Now if ‘A’ makes a profit of Rs. 25 whereas ‘B’ makes a
profit of Rs20, obviously, firm A would be considered as better than B
because it has generated higher return on its capital and therefore it added
more wealth to its shareholders. In other words, we can say that firm A has
used tools and techniques of financial management in a better manner as
compared to firm B. Thus, financial management also deals with all the aspects
related with sources and uses of funds.
According
to Van Horne and Wachowicz,
“Financial Management is concerned with the acquisition, financing and
management of assets with some overall goal in mind.” Thus the decision
function of financial management can be broken into three major areas: the investment, financing and asset
management decisions.
S.C.
Kuchal “Financial Management deals with procurement
of funds and their effective utilization in the business”.
Howard
and Upton : Financial management “as an application of
general managerial principles to the area of financial decision-making.
NATURE OF FINANCIAL
MANAGEMENT:
Finance
is a specialized functional field found under the general classification of
business. The term finance can be defined as the management of
the flows of money through an organization, whether it be corporation, school,
bank or government agency. Finance concerns itself with the actual flows of money,
as well as any claims against money.
As
a business discipline, finance can be carefully differentiated from both
accounting and economics. Accounting is concerned with the recording,
reporting, and measuring of business transactions. Using a widely accepted
double entry book-keeping system, accounting provides data on an organization’s
activities. Finance uses the information provided by accounting system to make
decisions to help organizations to achieve their objectives.
In
a similar manner, finance can also be differentiated from economics. Economics
is concerned with analyzing the allocation of resources in a society. It
studies transactions among people involving goods and services with or without
the exchange of money. It is concerned with supply and demand, costs and
profits, and production and consumption.
The
field of finance rests heavily on the work of economists and uses many economic
tools. It begins with the theories and assumptions developed in micro economics
and attempt to apply them in order to explain the workings of a modern business
firm.
SCOPE
OF FINANCIAL MANAGEMENT
1.
Financial Management and Economics
Economic
concepts like micro and macroeconomics are directly applied with the financial
management approaches. Investment decisions, micro and macro environmental
factors are closely associated with the functions of financial manager.
Financial management also uses the economic equations like money value discount
factor, economic order quantity etc. Financial economics is one of the emerging
area, which provides immense opportunities to finance, and economical areas.
2.
Financial Management and Accounting
Accounting
records includes the financial information of the business concern. Hence, we
can easily understand the relationship between the financial management and
accounting. In the olden periods, both financial management and accounting are
treated as a same discipline and then it has been merged as Management
Accounting because this part is very much helpful to finance manager to take
decisions. But nowadays financial management and accounting discipline are
separate and interrelated.
3.
Financial Management or Mathematics
Modern
approaches of the financial management applied large number of mathematical and
statistical tools and techniques. They are also called as econometrics.
Economic order quantity, discount factor, time value of money, present value of
money, cost of capital, capital structure theories, dividend theories, ratio
analysis and working capital analysis are used as mathematical and statistical
tools and techniques in the field of financial management.
4.
Financial Management and Production Management
Production
management is the operational part of the business concern, which helps to
multiple the money into profit. Profit of the concern depends upon the
production performance. Production performance needs finance, because
production department requires raw material, machinery, wages, operating
expenses etc. These expenditures are decided and estimated by the financial
department and the finance manager allocates the appropriate finance to
production department.
5.
Financial Management and Marketing
Produced
goods are sold in the market with innovative and modern approaches. For this,
the marketing department needs finance to meet their requirements. The
financial manager or finance department is responsible to allocate the adequate
finance to the marketing department. Hence, marketing and financial management
are interrelated and depends on each other.
6.
Financial Management and Human Resource
Financial
management is also related with human resource department, which provides
manpower to all the functional areas of the management. Financial manager
should carefully evaluate the requirement of manpower to each department and
allocate the finance to the human resource department as wages, salary,
remuneration, commission, bonus, pension and other monetary benefits to the
human resource department. Hence, financial management is directly related with
human resource management.
