What is Financial Management? Nature and Scope of Financial Management

 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.