MYOPIA OF FINANCIAL MANAGEMENT: FOR MY FRIENDS WHO ARE NEW TO FINANCIAL MANAGEMENT

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

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
•  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.

There are three types of financial decisions:

• Financing Decision:

This function is mainly concerned

with determination of optimum capital structure of the

company keeping in mind cost , control and risk. It is alsoknown as Procurement of Fund.

• Investment Decision:

It is also known as Effective

Utilization of Fund. In this respect finance department has
to identify the investment opportunities and to choice the best one , after a proper evaluation 

• Dividend Decision:

The finance manager is also

concerned with the decisions to pay or declare dividend. He assists the top management to decide the portion of profit to be declared as dividend 

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.

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 managers, and financial accounting seeks to meet the needs of users outside the business itself.

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