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Financial Management - Finance – An Introduction

Financial Management – Key Areas

   Posted On :  19.06.2018 09:34 pm

The key areas of financial management are discussed in the following paragraphs:

Financial Management – Key Areas
 
The key areas of financial management are discussed in the following paragraphs:

1. Estimating the Capital Requirements of the Concern

The Financial Manager should exercise maximum care in estimating the financial requirement of the firm. To do this most effectively, he will have to use long-range planning techniques. This is because, every business enterprise requires funds not only for long-term purposes for investment in fixed assets, but also for short term so as to have sufficient working capital. He can do his job properly if he can prepare budgets of various activities for estimating the financial requirements of the enterprise. Carelessness in this regard is sure to result in either deficiency or surplus of funds. If the concern is suffering because of insufficient capital, it cannot successfully meet its commitments in time, whereas if it has acquired excess capital, the task of managing such excess capital may not only prove very costly but also tempt the management to spend extravagantly.

2. Determining the Capital Structure of the Enterprise

The Capital Structure of an enterprise refers to the kind and proportion of different securities. The Financial Manager can decide the kind and proportion of various sources of capital only after the requirement of Capital Funds has been decided. The decisions regarding an ideal mix of equity and debt as well as short-term and long-term debt ratio will have to be taken in the light of the cost of raising finance from various sources, the period for which the funds are required and so on. Care should be taken to raise sufficient long-term capital in order to finance the fixed assets as well as the extension programme of the enterprise in such a wise manner as to strike an ideal balance between the own funds and the loan funds of the enterprise.

3. Finalising the Choice as to the Sources of Finance

The capital structure finalised by the management decides the final choice between the various sources of finance. The important sources are share-holders, debenture-holders, banks and other financial institutions, public deposits and so on. The final choice actually depends upon a careful evaluation of the costs and other conditions involved in these sources. For instance, although public deposits carry higher rate of interest than on debentures, certain enterprises prefer them to debentures as they do not involve the creation of any charge on any of the company’s assets. Likewise, companies that are not willing to dilute ownership may prefer other sources instead of investors in its share capital.

4. Deciding the Pattern of Investment of Funds

The Financial Manager must prudently invest the funds procured, in various assets in such a judicious manner as to optimise the return on investment without jeopardising the long-term survival of the enterprise. Two important techniques— (i) Capital Budgeting; and (ii) Opportunity
 
5. Distribution of Surplus Judiciously

The Financial Manager should decide the extent of the surplus that is to be retained for ploughing back and the extent of the surplus to be distributed as dividend to shareholders. Since decisions pertaining to disposal of surplus constitute a very important area of Financial Management, he must carefully evaluate such influencing factors as — the trend of earnings of the company; (A) the trend of the market price of its shares; (c) the extent of funds required for meeting the self-financing needs of the company; (d) the future prospects; (e) the cash flow position, etc.

6. Efficient Management of Cash

Cash is absolutely necessary for maintaining enough liquidity. The Company requires cash to—(a) pay off creditors; (b) buy stock of materials; (c) make payments to laborers; and (d) meet routine expenses. It is the responsibility of the Financial Manager to make the necessary arrangements to ensure that all the departments of the Enterprise get the required amount of cash in time for promoting a smooth flow of all operations. Short-age of cash on any particular occasion is sure to damage the credit- worthiness of the enterprise. At the same time, it is not advisable to keep idle cash also. Idle cash should be invested in near-cash assets that are capable of being converted into cash quickly without any loss during emergencies. The exact requirements of cash during various periods can be assessed by the Financial Manager by preparing a cash-flow statement in advance.
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