Finance is the lifeblood of a business firm. The health of every business concern mainly depends on the efficient handling of finance functions. In simple term, Financial Management may be defined as the management of the finance or funds of a business unit in order to realize the objective of the firm in an efficient manner. It is broadly concerned with the mobilization and use of funds by a business firm. Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. In other words, it is concerned with acquiring, financing and managing assets to accomplish the overall goal of a business enterprise (mainly to maximize the shareholder’s wealth).
Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. It was a branch of economics till 1890, and as a separate discipline, it is of recent origin. Still, it has no unique body of knowledge of its own, and draws heavily on economics for its theoretical concepts even today.
Definitions of Financial Management
- According to Solomon, “Financial management is concerned with the efficient use of an important economic resource, namely, capital funds.”
- According to J. L. Massie, “Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.”
- According to Weston & Brigham, “Financial management is an area of financial decision making harmonizing individual motives & enterprise goals.”
- According to Howard & Upton, “Financial management is the application of the planning & control functions of the finance function.”
- According to J. F. Bradley, “Financial management is the area of business management devoted to the judicious use of capital & careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals.”
- According to Phillippatus, “Financial Management is concerned with managerial decisions that result in the acquisition and financing of long-term and short-term credits of the firm. As such it deals with the situations that require selection of specific assets (or combination of assets), the selection of specific liability (or combination of liabilities) as well as the problem of size and growth of an enterprise. The analysis of these decisions is based on the expected inflows and outflows of funds and their effects upon managerial objectives”.
Nature of Financial Management
The term ‘nature’ as applied to financial management refers to its relationship with closely related fields of economics and accounting, its scope, functions and objectives. Traditionally, ’finance’ was not considered a separate input until finance theory became well developed. Finance function as an area of management is of recent origin. Financial management has gained considerable importance over the years. It is concerned with overall managerial decision making, in general, and with the management of economic resources in particular. The term financial management can be defined as the management of flow of funds in a firm and therefore it deals with the financial decision making of the firm. Since rising of funds and their best utilization is the key to success of any business organizations, the financial management as a functional area has got a place of prime relevance. All business activities have financial implications and hence financial management is inevitably related to almost every sphere of business operations.
Main Features of Financial Management
On the basis of the above definitions, the following are the main characteristics of the financial management-
- Analytical Thinking-Under financial management financial problems are analyzed and considered. Study of trend of actual figures is made and ratio analysis is done.
- Continuous Process-previously financial management was required rarely but now the financial manager remains busy throughout the year.
- Basis of Managerial Decisions- All managerial decisions relating to finance are taken after considering the report prepared by the finance manager. The financial management is the base of managerial decisions.
- Maintaining Balance between Risk and Profitability-Larger the risk in the business larger is the expectation of profits. Financial management maintains balance between the risk and profitability.
- Coordination between Process- There is always a coordination between various processes of the business.
- Centralized Nature- Financial management is of a centralized nature. Other activities can be decentralized but there is only one department for financial management.