When it comes to scope of financial management, it is concerned with the obligations of the financial managers of a company. Accounting and finance managers are responsible for overseeing and managing the financial affairs of any sort of business, including financial and non-financial enterprises, private and public corporations, big and small businesses, and for-profit and non-profit organizations.
Among the many tasks they carry out are budgeting, financial forecasting cash management, credit administration, investment analysis and fund management, to name a few examples. In a nutshell, financial management is the activity that is involved with the planning, raising, managing, and administering of finances in order to guarantee that they are used efficiently in a company. Let us understand the list and explain the scope of financial management in depth to get clear knowledge on it.
Scope of Financial Management
The finance function includes the tasks of raising funds, investing those funds in assets, and distributing the profits gained from those assets to the company’s shareholders. While carrying out these operations, a company makes an effort to maintain a balance between cash inflow and outflow at the same time understand the limitations of financial management as well. Clearly, the scope of financial management is comprised of four decisions, which are as follows: the liquidity decision, the investment decision, the working capital decision, the dividend decision, and the financing decision. The financial function is comprised of the following components:
Decision on Liquidity
Another key scope of financial management is to ensure that an organization’s liquidity is kept at a healthy level. The finance manager is responsible for ensuring that an organization’s money are available on a consistent basis.
He keeps track of all cash inputs and withdrawals in order to avoid instances where there is an underflow or an overflow of funds. One of the most essential goals of financial management is to ensure that an organization’s liquidity is kept at its optimal level.
Making an Investment Decision
The choice to make a financial investment in a fixed asset is referred to as an investment decision. It is also referred to as capital budgeting in some circles. A long-term or short-term investment choice might be made depending on the circumstances.
Long-term investment decisions allow for the long-term commitment of capital to resources such as fixed assets, allowing for the accumulation of wealth over time. Long-term investment decisions have a major influence on the long-term performance of a firm and its ability to achieve financial objectives throughout the long duration of its existence.
In order to make decisions on short-term investment or working capital financing, it is necessary to allocate funds to resources such as current assets in the short term. Generally speaking, it is utilized to retain funds for a shorter period of time, such as inventory investments or liquid cash, among other things. Investment decisions made by the management team that are taken in the short term have a direct influence on the organization’s liquidity and performance.
Making a decision on working capital
Making sound judgments about working capital is yet another key scope of financial management to consider. These choices are concerned with the purchase of current assets or the sale of current obligations.
Working capital and short-term finance are the two main considerations in working capital choices. A current asset is a financial asset that is now in use. A current liability is a financial asset that is currently in use, such as cash, inventory, receivables, short-term securities, and so on.
Decision on the Dividend
It is the responsibility of financial management scope to make all of the company’s dividend choices. It is necessary to make these judgments in order to create an appropriate dividend policy for the distribution or retention of business earnings. The finance manager should determine the optimal dividend payment ratio based on the amount of earnings that is available. 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.
Decision on Financing
This financial management scope identifies the numerous sources of funding that may be available from various sources of income. There are two main kinds of them. First and foremost, objectives of financial planning decisions is to make an attempt to evaluate the sources of collected money as well as their potential applications.
It is critical to make sound financial planning decisions in order to guarantee that finances are always available when needed. Second, judgments on capital structure necessitate the identification of diverse sources of funding. In order to meet short- or long-term financial requirements, it makes it easier to pick the most appropriate external sources.
Making a Budgeting Decision
The financial manager is responsible for allocating the company’s available finances to fulfil expenditures such as mortgages or rentals, wages, raw materials, employee T&E, and other responsibilities, as well as other duties. In an ideal world, there will be enough money left over to save aside for emergencies and to invest in new company ventures.
Budgets can be either static or variable in nature. Companies often have a master budget, as well as sub-budgets covering other aspects of their business, such as cash flow and operations.
Scope of Financial Management Under Other Areas
Short-term working capital management, with an emphasis on current assets and current liabilities, as well as controlling changes in foreign currency, are some of the primary concerns of financial management professionals. Also included is long-term strategic scope of financial management, with a particular emphasis on capital structure management, which includes capital raising, dividend policy, capital budgeting and allocating funds to various projects and programmes. Let’s take a look at the scope of financial management in relation to other areas of the organization.
Relation Between Product Management and Financial Management
Strategic financial planning support is required for production performances because the expenditures of production (raw materials, machinery salaries, operational expenses, and so on) are handled by the finance department, and money are allocated to each stage of production as needed by the finance department.
Relation Between Mathematics and Financial Management
The most recent scope to financial management made extensive use of a wide range of mathematical and statistical tools and methodologies known as econometrics.
Relation Between Economics and Financial Management
Financial economics is a rapidly developing field that offers tremendous potential to those working in the financial and economic sectors. The use of macroeconomics and microeconomics ideas in the financial management process.
Investment decisions, micro and macro environmental elements, money value discount factor, economic order quantity, and other factors are used by financial managers.
Relation Between Marketing and Financial Management
The finance manager or department is in charge of allocating enough cash to the marketing department, which will be responsible for selling items using new and current ways to do so.
Relation Between Accounting and Financial Management
In the past, financial management and accounting were viewed as if they were the same thing and were combined. Due to the limitations of financial statements, they are treated as independent but interconnected disciplines.
Relation Between Human Resources and Financial Management
The financial manager should thoroughly assess the need for personnel in various departments before allocating funds to the human resource department in the form of wages, salaries, bonuses, and other monetary advantages, among other things.
Scope of financial management encompasses a wide range of topics and employs a variety of techniques. It contributes significantly to overall management by interacting with a variety of functional areas such as human resources, marketing, and production. It also entails applying management concepts to the financial assets of an organization, as well as playing a significant role in fiscal administration.