The Myopia Of Financial Management

Introduction

Finance is a life blood of business, without finance nothing can be done in the business. So, various kinds of finance needed to business. Management of funds is an important aspect of financial management. Management of fund acts as the primary concern whether it may be in a business undertaking or in an educational institution. Financial management, which is simply meant dealing with management of money matters.

Meaning and Definition of Financial Management

Financial management is concerned with all aspects of how the business deals with its financial resources in order to maximize profit over the long term

Financial Management is an area of financial decision making. It is the application of the planning & control functions to the finance function. It is the operational activity of a business that is responsible for obtaining & effectively utilizing the funds necessary for efficient operations.

By Financial Management we mean efficient use of economic resources namely capital funds. According to Phillippatus, "Financial management is concerned with the managerial decisions that result in the acquisition and financing of short term and long term credits for the firm". Here it deals with the situations that require selection of specific assets (or combination of assets), the selection of specific problem of size and growth of an enterprise. Here the analysis deals with the expected inflows and outflows of funds and their effect on managerial objectives. So the analysis simply states two main aspects of financial management like procurement of funds and an effective use of funds to achieve business objectives.

Most acceptable definition was given by S.C.Kuchhal is that; "Financial Management deals with Procurement of funds and their effective utilization in the business".

Procurement of funds

As funds can be obtained from different sources so procurement of funds is considered as an important problem of business concerns. Funds procured from different sources have different characteristics in terms of risk, cost and control.

Funds issued by the issue of equity shares are the best from risk point of view for the company as there is no question of repayment of equity capital except when the company is under liquidation.

From the cost point of view equity capital is most expensive source of funds as dividend expectations of shareholders are normally higher than prevalent interest rates.

Financial management constitutes risk, cost and control. The cost of funds should be at minimum for a proper balancing of risk and control.

In the globalised competitive scenario mobilization of funds plays a very significant role. Funds can be raised either through domestic market or from abroad. Foreign Direct Investment (FDI) as well as Foreign Institutional Investors(FII) are two major sources of raising funds. The mechanism of procurement of funds has to be modified in the light of requirements of foreign investors.

Components of Financial Management

Financial Management involves the following activities:

Financial planning, which predicts the performance of the business in financial terms to give an overall measure of how it is performing and to provide a basis for financial decision-making and for raising finance.

Financial accounting, which clarifies, records and interprets in monetary terms transactions and events of a financial nature. Financial accounting will involve maintaining records of transactions (book-keeping), preparing balance sheets and profit and loss accounts, preparing value added statements, managing cash, handling depreciation and inflation accounting. The accounts prepared by the firm will be audited to ensure that they present a 'true and fair view' of its financial performance and position. But there is scope within the law and accounting rules for company accountants to indulge in 'creative accounting' to improve the picture the accounts present to the outside world (the City and investors).

Financial analysis, which analyses the performance of the business in terms of variance analysis, cost-volume-profit analysis, sales mix analysis, risk analysis, cost-benefit analysis and cost-effectiveness analysis.

Management accounting, which accounts for and analyses costs, provides the basis for allocation costs to products or processes, prepares and controls financial budgets and deals specifically with overhead and responsibility accounting. Management accounting provides the data for financial analysis and for capital appraisal and budgeting.

Capital appraisal and budgeting, which selects and plans capital investments based on the returns likely to be obtained from those investments. The capital appraisal techniques comprise accounting rate of return, payback and discounted cash flow.

Scope of Financial Management

A sound financial management is essential in all types of organizations whether it may be profit or non-profit. Financial management is essential in a planned Economy as well as in a capitalist set-up as it involves efficient use of the resources.

From time to time it is seen that many firms have been liquidated not because their technology was obsolete or because their products were not in demand or their labour was not skilled and motivated but there was a complete mismanagement of financial affairs. Even in a boom period, when a company make high profits there is also a fear of liquidation because of bad financial management.

Financial management optimizes the output from the given input of funds. In the country like India where resources are scarce and the demand for funds are many, the need of proper financial management is required. In case of newly started companies with a high growth rate it is more important to have sound financial management since finance alone guarantees their survival.

Financial management is very important in case of non-profit organizations, which do not pay adequate attentions to financial management.

How ever a sound system of financial management has to be cultivated among bureaucrats, administrators, engineers, educationalists and public at a large.

Nature & Characteristics:

Financial management is a branch of business management
Essence of managerial decision
Important position in the organization structure
Financial management is a scientific & analytical analysis
Continuous administrative function
Centralized nature
Basis of managerial process
Forecasts of cash requirements

Objectives of Financial Management

Efficient Financial management requires the existence of some objectives, which are as follows

Profit Maximization

Objective of financial management is same as the objective of a company that is to earn profit. But profit maximization cannot the sole objective of a company. It is a limited objective. If profits are given undue Importance then problems may arise as discussed below.

The term profit is vague and it involves much more contradictions.
Profit maximization has to be attempted with a realization of risks involved. A positive relationship exists between risk and profits. So both risk and profit objectives should be balanced.
Profit Maximization does not take into account the time pattern of returns.
Profit maximization fails to take into account the social considerations

Wealth Maximization

It is commonly agreed that the objective of a firm is to maximize value or wealth. Value of a firm is represented by the market price of the company's common stock. The market price of a firm's stock represents the focal judgement of all market participants as to what the value of the particular firm is. It takes in to account present and prospective future earnings per share, the timing and risk of these earning, the dividend policy of the firm and many other factors that bear upon the market price of the stock. Market price acts as the performance index or report card of the firm's progress.

Prices in the share markets are largely affected by many factors like general economic outlook, outlook of particular company, technical factors and even mass psychology. Normally this value is a function of two factors as given below,

The anticipated rate of earnings per share of the company
The capitalization rate.

The likely rate of earnings per shares (EPS) depends upon the assessment as to how profitably a company is growing to operate in the future. The capitalization rate reflects the liking of the investors for the company.

Methods of Financial Management

In the field of financing there are various methods to procure funds. Funds may be obtained from long-term sources as well as from short-term sources. Long-term funds may be availed by owners that are shareholders, lenders by issuing debentures, from financial institutions, banks and public at large. Short-term funds may be availed from commercial banks, public deposits, etc. Financial leverage or trading on equity is an important method by which a finance manager may increase the return to common shareholders.

At the time of evaluating capital expenditure projects methods like average rate of return, pay back, internal rate of returns, net present value and profitability index are used. A firm can increase its profitability without affecting its liquidity by an efficient utilization of the current resources at the disposal of the firm. A firm can increase its profitability without affecting its liquidity by an efficient management of working capital.

Similarly for the evaluation of a firm's performance there are different methods. Ratio analysis is a popular technique to evaluate different aspects of a firm. An investor takes in to account various ratios to know whether investment in a particular company will be profitable or not. These ratios enable him to judge the profitability, solvency, liquidity and growth aspect of the firm.

Financial Management In India

In the country like India there is a changing scenario of financial management. As the economy is opening up and global participation is increasing very fast, the opportunities have no limits. Presently financial management passes through an era of experimentation as a larger part of finance activities are carried out.

A few highlights in this context:

Interest rates are free from regulations.
Rupee is fully convertible in current account.
Optimum debt equity mix is possible.
Maintaining share prices are also crucial. In liberalized scenario the capital market is an important avenue of funds for business.
Ensuring management control is vital especially in the light of foreign participation.

Conclusion

Finally, financial management is concerned with acquisition, financing and management of assets, whereas accounting refers to the process of identifying, measuring and communicating information to permit informed judgements and decisions by users of the information. Management accounting seeks to meet the needs of a business's managers, and financial accounting seeks to meet the needs of users outside the business itself.

References

1.Fundamentals of Financial Management by Prasanna Chandra, Publisher Tata Mcgraw Hill
2.Financial Management - An Introduction. By Jim McMenamin.
3.Financial Management- Principles and Applications
Author : Keown, et al.
4.Fundamentals of Financial Management by Brigham
5.www.google.com
6.www.answers.com