What is Financial Management?

Finance is the life blood of any business. Business may be big or small, finance is needed, the only difference is the amount of finance required. Small sized business is invariably financed out of the personal savings of the businessman. But after the industrial revolution the size and complexities of business increased tremendously, making impossible for a sole trader or partnership firms to finance such large sized ventures. Joint stock companies filled this gap and made possible to collect huge funds from a large number of persons and that too with their liability limited. “The joint stock company form has proved a flexible and valuable instrument. It joins the venturesome and the countious, the wealthy and the penniless, the capable and unskillful, the energetic young and retiring old into a system of contractual relationships which make it possible for each to make the most appropriate part in those gigantic business enterprises  which strech across the continents and overseas1.” In our study of financial planning, we shall primarily refer to the financial planning of joint stock companies because this form of business organisation dominates the industrial world.

Business finance simply means the provision of money when it is required. In the present money- oriented  economy, we simply cannot imagine any business without money. It has been rightly remarked by someone that money is needed to earn money but in order to earn money, the money invested must be well managed. That is why Wheeler defined business finances as that activity which is concerned with the acquisition of capital funds in meeting the financial needs and overall objectives of the business enterprise2.

Finance Function :

Finance function is a separate functional area of management like production, marketing, personnel etc. No doubt, production and marketing are the basic sub-systems of a business system but finance sub-system is of strategic importance because their success depends directly upon the efficient operation of finance sub-system. Finance function is so closely inter-related with the other sub-systems of a business system that it is almost impossible to segregate it from the general business management. In fact, so closely are the financial matters of a business system associated with the plans and results of every other  department that in a sense, every proposal and every decision involving financial problems has a  bearing  on financial results. It is precisely due to the ever increasing importance of finance function in the business that the role of the finance manager is undergoing a constant change and the scope of finance function has broadened beyond recognition.

Fig : 1. Financial Planning Process

Earlier finance function was concerned with procurement of funds, hence all the earlier studies were confined to sources of raising finance and the institutions involved in raising finance. Finance was defined by Paish as the provision of money at the time it is wanted. Now it is well recognised that procurement of funds, though an important aspect, covers, only a part of the finance function. The other important aspect is the wise-use of funds procured for business.

Fig : 2. Personal Financial Plan

The primary objective of any business is to earn sufficient profit to pay a reasonable return to the investors and also to retain a part of the profit for ploughing back into the business. So the scope of finance function not only covers the task of fund procurement but also the most suitable allocation of funds so as to maximise the profits. In the words of Guthmann and Dougale. “Business finance can broadly be defined as the activity concerned with the planning, raising, controlling and administering of funds used in the business”.

  1. Guthmann and Dougale : Corporate Finance Policy.
  2. Wheeler : Business : An Introductory Analysis.

1 thought on “What is Financial Management?”

  1. Thanks for your write-up. I would like to comment that the very first thing you will need to do is determine whether you really need credit repair. To do that you will need to get your hands on a duplicate of your credit rating. That should not be difficult, since government mandates that you are allowed to be issued one free of charge copy of your credit report on a yearly basis. You just have to consult the right folks. You can either browse the website with the Federal Trade Commission as well as contact one of the main credit agencies right away.

Leave a Reply

Your email address will not be published. Required fields are marked *