In this essay we will discuss about ‘Financial Management’. Find paragraphs, long and short essays on ‘Financial Management’ especially written for school and college students.
Essay on Financial Management
Essay Contents:
- Essay on the Definition of Financial Management
- Essay on the Scope of Financial Management
- Essay on the Objectives of Financial Management
- Essay on the Sources of Finance
- Essay on the Functions of Financial Management
Essay # 1. Definition of Financial Management:
Financial management simply means dealing with management of money matters.
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Some of the definitions of financial management are:
Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources.
OR
Financial management is defined as the management of the finances of a business/organization in order to achieve financial objectives.
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OR
Financial management is that activity of management, which is concerned with the planning, procuring, and controlling of the firm’s financial resources.
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Financial management entails planning for the future of a person or a business enterprise to ensure a positive cash flow. It includes the administration and maintenance of financial assets.
Essay # 2. Scope of Financial Management:
The scope of financial management involves three important decisions:
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(a) Financing Decisions:
Financing Decisions i.e., from where to get the money. These relate to the raising of finance from various resources, which will depend upon the type of source, period of financing, cost of financing and the returns thereby.
(b) Investment Decisions:
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Investment Decisions i.e., where to allocate funds. Investment decisions include investment in fixed assets. Investments in current assets are also a part of investment decisions called as working capital decisions.
(c) Dividend Decisions:
Dividend Decisions i.e., how much to distribute and what to retain. The finance manager has to take decision with regards to the net profit distribution.
Essay # 3. Objectives of Financial Management:
The objectives of financial management are:
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a. To ensure regular and adequate supply of funds.
b. To ensure adequate returns to the shareholders. This will depend upon the earning capacity, market price of the share and expectations of the shareholders.
c. To ensure optimum utilization of funds by maintaining proper balance between profitability, liquidity and safety.
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d. To ensure safety on investment, i.e., funds should be invested in safe ventures so that adequate rate of return can be achieved.
e. To coordinate the activities of the finance department with the activities of other departments in the organization.
Essay # 4. Sources of Finance:
The main sources of finance are:
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(i) Shares.
(ii) Debentures.
(iii) Public Deposits.
(iv) Ploughing Back of Profits or Retained Earnings.
(v) Loan from Banks.
(vi) Loan from Financial Institutions.
(i) Shares:
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These are issued to the general public. A large amount of funds can be collected by selling shares to public. Shares can be issued at any time. Normally these are issued either at the start of a business or at the time of expansion of business.
A share in a company is one of the units into which the total requirement of capital is divided. For example, if the capital requirement of a company is Rs.100000 and it is divided into 10000 units, then each unit of Rs.10 is called a share. A person holding shares is called a shareholder.
Shares are of three types:
a. Preference Shares.
b. Equity Shares.
c. Deferred Shares.
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a. Preference shares:
Preference Shares are the shares which carry preferential rights over the equity shares. A person holding these shares is entitled to get fixed rate of dividend, which means that the shareholders would not benefit from an increase in company’s profits. Investment in these shares is safe, and a preference shareholder also gets dividend regularly.
b. Equity shares:
The equity share or ordinary shares basically represents ownership in the company. These shares get their dividend only after dividend on preference shares are paid out of profit of company. There is no fixed rate of dividend for equity shareholders. The rate of dividend depends upon the surplus profits.
c. Deferred shares:
Holders of these shares get their dividend only after the payment of the dividend on all classes of shares is made.
(ii) Debentures:
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A company can raise money by issuing debentures. It is just like the acknowledgement of the loan by a company. It specifies the terms and conditions, neb as rate of interest, time repayment, and security offered, etc. These are safer than buying shares because the company will pay interest rates. However, it does not mean that debenture holder has a share in the company.
(iii) Public Deposits:
Public deposits are another method of raising finance by the companies. Companies accept deposits from the public to meet its short and long-term financial needs. The deposits are accepted for varying periods ranging from six months to three years at a rate of interest normally higher that rate of interest offered by commercial banks.
The rate of interest varied depending upon the period of deposit end the reputation of the company. The company issues a deposit receipt under terms and conditions printed on the back of the deposit receipt.
(iv) Ploughing Back of Profits or Retained Earnings:
In this type of fund raising source, the companies do not distribute their profile among the shareholders, but a part of profit is ploughed back or retained in the company. These retained earnings are used to meet long-term financial.
(v) Loan from Banks:
Earlier banks provide loans only for the working capital requirements of a company and were avoiding long term advance against fixed assets. The banks follow this system due to security reasons. But recently they have started giving loans for a long period. Banks give term loans i.e., for more than one year. The period of repayment of short-term loan is extended at intervals and in some cases loan is given directly for a long period.
(vi) Loan from Financial Institutions:
There are many specialized financial institutions established by the Central and State Governments which give long-term loans at reasonable rate of interest. Some of these institutions are Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Unit Trust of India (UTI), State Finance Corporations etc.
Essay # 5. Functions of Financial Management:
Some of the functional areas covered in financial management are:
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(i) Estimation of Capital Requirements.
(ii) Choice of Sources of Finance.
(iii) Management of Cash.
(iv) Financial Controls.
(v) Dividend Policy.
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(i) Estimation of Capital Requirements:
The finance department must estimate the capital requirements of the firm accurately for long-term and short-term needs. In estimating the capital requirements of the business, the finance department must take help of the budgets of various activities of the business e.g., sales budget, production budget, expenses budget etc. prepared by the concerned departments. Correct estimates ensure the availability of funds as and when they are needed. In estimating the requirement of funds, nature and size of the business, modernization and expansion plan should be given due consideration.
(ii) Choice of Sources of Finance:
A company can raise funds from different sources e.g., shareholders, debenture holders, banks, financial institutions, public deposits etc. A finance manager has to be very careful and cautions in approaching different sources. Before raising the funds, it has to decide the source from which the funds are to be raised. The choice of the source of finance should be made very carefully by taking a number of factors into account such as cost of raising funds, conditions attached, charge on assets, burden of fixed charges etc.
(iii) Management of Cash:
Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc.
(iv) Financial Controls:
The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.
(v) Dividend Policy:
Dividend is the reward of the shareholders for investments made by them in the shares of the company. The investors are interested in earning the maximum return on their investments whereas management wants to retain profits for future financing. Dividend policy is an important area of financial management because the interest of the shareholders and the needs of the company are directly related to it.
(vi) Capital Budgeting:
Capital budgeting is the process of making investment decisions in capital expenditures. It is an expenditure the benefits of which are expected to be received over a period of time exceeding one year. Capital budgeting decisions are vital to any organization.