Financial Management is concerned with rising of funds and creating value to the assets of the business enterprises by efficient allocation of funds. It is the study of the integration of the flow of funds in the most optimum manner to maximize the returns of a firm by taking proper decisions in utilizing the funds.
Good Financial Management is essential to bring about economic health of business enterprises. Financial management consists of decision making within a firm. It Works in the environment of money and capital markets and is concerned with investment.. Thus the three major interconnected area of finance are-
- Money and Capital Markets
- Investment and Portfolio Management
- Financial Management
Basic Principles of Financial Management
Financial management has certain principles through which it functions. These are discussed below--
- Risk and Return- Every financial decision has two aspects these are risk and return. Every decision involves a risk. This risk may be broad spectrum or market risk, which is uncontrollable. It can be unsystematic risk, which is specific to the firm and can be controlled.
- Time value of money- It refers to the mathematics of finance for calculating future values and present values of cash. Time value of money evaluates cash flows expected to be generated at different times. It is the timing of cash flows because money received today is more than the amount received at a future date.
- Cash flow concept- Financial management is based on the inflows and outflows of cash. It does not deal with non cash items like depreciation, amortization of preliminary expenses; it uses cash revenues and cash expenses to find out the return on its investment.
- Wealth maximization- Maximization of shareholders wealth considers all cash flows relating to future decisions. It is the concept based on cash flows to measure the economic value of a firm. Profit maximization may be considered as a part of wealth maximization. It can be said that maximization of shareholders wealth is the objective of financial management.
Scope and Function of Financial Management
Financial management is concerned with the integral part of management. It has the role of a Identifying the needs for funds and selecting the sources from which the funds can be obtained and to use the funds in the business effectively by controlling it. The functions of financial management are discussed below-
1. LIQUIDITY OF FUNDS- A Finance Manager has to match inflows and outflows and thus create Liquidity continuously by managing the flow of the funds of the firm continuously. He has to plan the external borrowing by finding out the requirement. He has to ascertain the inbternal
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