Financial management is applicable to every type of organization, irrespective of the size, kind or nature. Every organization aims to utilize its resources in a best possible and profitable way.
Nature of Financial
Financial management is
applicable to every type of organization, irrespective of the size, kind or
nature. Every organization aims to utilize its resources in a best possible and
Management is an integral part of overall management. Financial considerations
are involved in all business decisions. Acquisition, maintenance, removal or
replacement of assets, employee compensation, sources and costs of different
capital, production, marketing, finance and personnel decision, almost all
decisions for that matter have financial implications. Therefore, financial
management is pervasive throughout the organisation.
ii) The central focus of financial management is valuation
of the firm. Financial decisions are directed at
increasing/ maximization/ optimizing the value of the institution. Weston and
Brigham depict the above orientation in the exhibit given below:
iii) Financial management essentially involves risk-return trade-off.
Decisions on investment involve choosing of types of assets which generate
returns accompanied by risks. Generally higher the risk returns might be higher
and vice versa. So, the financial manager has to decide the level of risk the
firm can assume and satisfy with the accompanying return. Similarly, cheaper
sources of capital have other disadvantages. So to avail the benefit of the low
cost funds, the firm has to put up with certain risks, so, risk-return
trade-off is there throughout. iv) Financial management affects the survival, growth and vitality of the
institution. Finance is said to be the life blood of institutions. The amount,
type, sources, conditions and cost of finance squarely influence the
functioning of the institution. v) Finance functions, i.e., investment, raising of capital, distribution of
profit, are performed in all firms - business or non-business, big or small,
proprietary or corporate undertakings. Yes, financial management is a concern
of every concern including educational institutions.
vi) Financial management is a sub-system of the institutional system which
has other subsystems like academic activities, research wing, etc, In systems
arrangement financial sub-system is to be well-coordinated with others and
other sub-systems well matched with the financial sub-system. vii) Financial management of an institution is influenced by the external
legal and economic environment. The legal constraints on using a particular
type of funds or on investing in a particular type of activity, etc., affect
financial decisions of the institution. Financial management is, therefore,
highly influenced/constrained by external environment. viii) Financial management is related to other disciplines like accounting,
economics, taxation, operations research, mathematics, statistics etc., It
draws heavily from these disciplines. ix) There are some procedural finance functions - like record keeping,
credit appraisal and collection, inventory replenishment and issue, etc. It is
normally delegated to bottom level management executives.
x) The nature of finance function is influenced by the special
characteristic of the business. In a predominantly technology oriented
institutions like CSIR, CECRI, it is the R & D functions which get more
dominance, while in a university or college the different courses offered and
research which get more priority and so on.
Tags : Financial Management - Finance – An Introduction
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