Scope of Financial Management

Sound financial management is essential in all types of organizations whether it be profit or non-profit. Financial management is essential in a planned Economy as well as in a capitalist set-up as it involves efficient use of the resources.

From time to time it is observed that many firms have been liquidated not because their technology was obsolete or because their products were not in demand or their labour was not skilled and motivated, but that there was a mismanagement of financial affairs. Even in a boom period, when a company make high profits there is also a fear of liquidation because of bad financial management.

Financial management optimizes the output from the given input of funds. In a country like India where resources are scarce and the demand for funds are many, the need of proper financial management is required. In case of newly started companies with a high growth rate it is more important to have sound financial management since finance alone guarantees their survival.

Financial management is very important in case of non-profit organizations, which do not pay adequate attentions to financial management.

How ever a sound system of financial management has to be cultivated among bureaucrats, administrators, engineers, educationalists and public at a large. We can choose Mortgage Brokers Toronto or mortgage brokers Mississauga.

Objectives of Financial Management

Efficient Financial management requires the existence of some objectives, which are as follows

1) Profit Maximization:

The objective of financial management is the same as the objective of a company which is to earn profit. But profit maximization alone cannot be the sole objective of a company. It is a limited objective. If profits are given undue importance then problems may arise as discussed below.

The term profit is vague and it involves much more contradictions.

Profit maximization must be attempted with a realization of risks involved. A positive relationship exists between risk and profits. So both risk and profit objectives should be balanced.Profit Maximization fails to take into account the time pattern of returns. Profit maximization does not take into account the social considerations. 

2) Wealth Maximization:

It is commonly understood that the objective of a firm is to maximize value and wealth.

The value of a firm is represented by the market price of the company’s stock. The market price of a firm’s stock represents the assesment of all market participants as to what the value of the particular firm is. It takes in to account present and prospective future earnings per share, the timing and risk of these earning, the dividend policy of the firm and many other factors that bear upon the market price of the stock. Market price acts as the performance index or report card of the firm’s progress and potential.

Prices in the share markets are affected by many factors like general economic outlook, outlook of the particular company, technical factors and even mass psychology. Normally this value is a function of two factors:

The anticipated rate of earnings per share of the company. The capitalization rate.

The likely rate of earnings per shares depend upon the assessment of how profitable a company may be in the future.

The capitalization rate reflects the liking of the investors for the company.

Methods of Financial Management:

In the field of financing there are multiple methods to procure funds. Funds may be obtained from long term sources as well as from short term sources. Long term funds may be procured by owners that are shareholders, lenders by issuing debentures, from financial institutions, banks and the general public at large. Short term funds may be availed from commercial banks, public deposits, etc. Financial leverage or trading on equity is an important method by which a finance manager may increase the return to common shareholders.

At the time of evaluating capital expenditure projects methods like average rate of return, pay back, internal rate of returns, net present value and profitability index are used. A firm can increase its profitability without adversely affecting its liquidity by an efficient utilization of the current resources at the disposal of the firm. A firm can increase its profitability without negatively affecting its liquidity by efficient management of working capital.

Similarly, for the evaluation of a firm’s performance there are different methods. Ratio analysis is a common technique to evaluate different aspects of a firm. An investor takes in to account various ratios to know whether investment in a particular company will be profitable or not. These ratios enable him to judge the profitability, solvency, liquidity and growth aspect of the firm.