The establishment of large industries is taking place in every country. It is critical to get financing for the construction of buildings, the installation of machinery, and the acquisition of working capital, among other things, in order to develop these enterprises. Nature of financial management is concerned with determining how much cash will be required, from which sources this money will be raised, and how this money will be invested, among other things.
Financial management is defined as the effective and efficient use of financial resources in general. Maintaining a balance between financial planning, money procurement, profit management, and funding sources is what it means to be fiscally responsible. Let us understand the features of financial management in depth.
Features / Characteristics / Nature of Financial Management
Aspects of the nature of financial management include the functions of the organization, its objectives, trade-offs with competing objectives, its indispensability, its systems, its relationship with other subsystems within the organization, its environment, its relationship with other disciplines, the procedural aspects, and its relationship with other divisions within the organization.
Identified Funding Sources
Financing is made possible by the issuance of shares, bonds, and debentures as well as venture capital and financial institutions. Retained earnings and owner investment are further sources of funding that are made possible through scope of financial management. Every firm must do a thorough analysis of all available sources of money and select those that are low risk and the most cost-effective in terms of cost.
Choosing a Pattern of Investment
After the money have been obtained, a choice on the investment pattern must be made. The usage of money has an impact on the decision on which investment pattern to adopt. It will be necessary to make a decision as to which assets will be bought in the future. A portion of the cash will need to be spent on fixed assets initially, and then a portion of the funds will need to be kept for working capital.
Even in different categories of assets, making a selection on the kind of fixed or other assets will be necessary in order to maximize returns. When picking a plant and machinery, it is possible to choose from a variety of various kinds of equipment. Making decisions concerning capital expenditures, decision-making approaches such as Capital Budgeting, Opportunity Cost Analysis, and other similar techniques may be applied.
When making investments in diverse assets, it is important not to lose sight of the principles of safety, profitability, and liquidity. Even with these concepts, it is necessary to strike a balance. Even if there are greater profits to be made, some people may not want to invest in a project that they believe would be hazardous.
Estimates the Amount of Capital Required
Features of financial management aids in the anticipation of the fund’s future requirements. It predicts the amount of working and fixed capital that will be required in ahead. The finance manager develops a budget that includes all expenses and income for a certain time period, on the basis of which capital expenditures are calculated.
Regulates the Capital Arrangement
Making the best decision for your ideal capital structure can help you earn more money. Determine the appropriate proportion of different types of assets such as equity, preferred equity, and debt in order to achieve the best capital structure choice. Capital costs can be reduced by maintaining a healthy balance between debt and equity.
The Appropriate Use of Surpluses
It is also vital in nature of financial management to make use of gains or surpluses that have been generated. For development and diversification plans to succeed, as well as for the protection of shareholders’ interests, it is critical to make prudent use of surpluses. The reinvestment of earnings is the most effective strategy for obtaining more funding, but it is in conflict with the objectives of shareholders.
It is important to strike a balance between utilizing cash to pay dividends and keeping revenues to finance expansion plans and other initiatives. The announcement of a dividend as well as the expectation of future profitability will have an impact on the market value of the company’s stock.
Contribution to Profit Maximization
The goals of financial management is to increase the profit of a company through enhancing the efficiency of the organization. The Finance Manager is responsible for overseeing and managing all of the company’s financial affairs, as well as ensuring that all money is spent properly. They are concerned with lowering the cost of operating and minimizing the waste of any available resources.
Increases the Worth of the Company’s Stockholders
Nature of financial management contributes to the increase in the total worth of the company’s owners. It contributes to a higher return on investment for shareholders by lowering the cost of operations and boosting earnings, among other things. The financial manager is responsible for raising funds and ensuring that they are invested in the most lucrative way possible.
Cash Management Should be Done Correctly
Keeping track of all money transfers inside a firm is one the characteristics of financial management. The supervision of cash inflows and cash withdrawals is carried out in an appropriate manner. This guarantees that there is neither a financial shortage nor a cash excess in the company.
The handling of cash is another key responsibility of a financial manager. He is responsible for determining the various financial requirements at various periods and then making arrangements for obtaining funds.
There should be no lack of cash, and there should be no idleness in the cash management system, either. Any cash flow shortfall will have a negative impact on the company’s rating. If cash is sitting idle in the firm, it means that it is not being appropriately utilized.
In order to identify diverse sources and uses, it is preferable if the Cash Flow Statement is generated on a regular basis to avoid the limitations of financial statement analysis. If money is spent on unavoidable expenses, it is possible that such expenditures will be limited. Having a clear understanding of the sources of cash input may also make it possible to evaluate the usefulness of various sources.
It’s possible that certain suppliers aren’t delivering as much cash as we might have anticipated. All of these information will be beneficial in the effective management of cash flow.
Nature of Financial Management for Costing
The ability to keep costs under control is essential for generating the projected profits and achieving the desired growth. Nature of financial management entails a variety of financial control strategies that are used to maintain the costs of the business within acceptable bounds. They develop budgets for all of the company’s activities and ensure that all expenditures are in compliance with the budget that has been established. If the cost turns out to be higher than the budgeted amount, financial managers take all necessary steps to correct the situation.
Establishes the Dividend Policy
The optimal dividend policy for a business is determined by the features of financial management. The finance manager should determine how much of the company’s profits should be dispersed as dividends and how much should be kept for reinvestment in the firm. He should take into consideration all development and growth options that are accessible to the business and should take advantage of them while keeping a reasonable level of profit.
Organizes and Manages Working Capital
The benefits of financial planning is to ensure that the quantity of working capital in a company is always accurate. Working capital is defined as the amount of capital that is invested in short-term assets such as inventory, accounts receivable, cash, and so on in order to pay day-to-day costs.
Reduce Your Chances of Failure
It is the nature of financial management to reduce risk by maintaining a healthy balance between profitability and risk exposures. Financial managers arrange all of the funds in a sensible manner, after thoroughly examining the many investment options that are accessible. They assess the investment proposal’s safety, liquidity, profitability, and risk before committing any funds to it or making any decisions about it.
Financial Controls Should be Implemented
For evaluating the effectiveness of various strategic financial planning, the return on investment (ROI) is the most effective control device available. The greater the proportion, the more favorable the financial result may be. Utilizing a variety of control approaches, the finance manager will be better able to assess and correct performance in a variety of areas, as needed.
Financial controls, as implied, aid in maintaining the actual cost of operation of the firm within reasonable bounds and generating the projected profits.
Finance is closely associated with a number of other areas, including marketing, production, and people. It is necessary to understand the features, characteristics and nature of financial management in order to ensure adequate availability of money as well as appropriate usage of funds. It is critical for every organization to anticipate that investments will be made in a manner that generates returns greater than the cost of financing.