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Financial management is one of the most important responsibilities of business owners and managers. When making specific financial decisions, they must take into account the potential implications of their management choices on revenues, cash flow, and the company’s financial health. The owner must evaluate and control every aspect of the operation of the business because it affects its financial performance.

Financial management is the efficient handling and management of funds which include key finance functions that include planning, organizing, directing, and regulating cash. For example, to accomplish investment objectives, financial management makes use of ratios, stocks, and debt. The cost and amount of credit are both influenced by the financial system. As a result, this system may cause a rise in the cost of financing, which would have a negative impact on economic growth, production, consumption, and employment. A financial system undoubtedly affects an economy’s and its population’s ability to survive.

Financial Functions that a company should pay attention to:

1· Financial Planning: Financial managers are required to perform financial planning as part of their duties. It is an estimate of what the total value of the variables will be in the future. It serves as a guide for future actions that a company should take. Financial managers must consider several factors in order to accomplish this which would include a sales estimate, pro forma financial statements, asset requirements, economic assumptions, and investment financing methods. Financial planning can be done to create a budget, plan expenses, and set aside money for the future. Managers assess the objectives and needs of a business using the information at their disposal. In order to create budgets and make informed decisions, they also assess the state of the economy.

2· Dividend Decision: Dividend payments are a way for businesses to distribute earnings to their stockholders. A firm’s dividend policy affects the company’s market value and stock prices. Therefore, deciding about dividends, particularly how to split net income between dividends and retained earnings, is a crucial task of finance. These choices relate to how much of an organization’s income should be distributed and how much should be kept for further diversification and expansion of the business. Dividends are what are often paid out to shareholders when money is distributed. Retained profits are money set aside for potential investments and unforeseen circumstances. Such choices are difficult and necessitate careful consideration.

3· Liquidity decision: The least risky of all financial products is money held in deposits but inflation erodes its worth so people always choose to keep their money in financial products like stocks, bonds, debentures, etc. The financial markets give the investor the chance to liquidate their assets, but such investments come with a higher level of risk, and less liquidity (i.e., the ability to convert the claims into money). The management and decisions related to working capital are typically centered on liquidity. In order to maintain a going firm, controlling present assets should take precedence. Liquidity problems lead to problems like financial crises and insolvencies. However, having a lot of liquidity can also increase risk so it is crucial to have the correct balance of current assets and liabilities.

4· Capital Structure: The capital structure of a firm refers to the mix of debt and equity used to support its overall operations and expansion. An essential part of financial management is this. If the company is to expand and turn a profit, the model used to establish the capital structure must be workable and long-lasting. A sustainable growth model is used to analyze growth and profitability. A company’s financial flexibility is facilitated by financial slack. It consists of the firm’s capacity for both serviceable and non-serviceable debt. Flexibility will increase with increasing debt capacity.

5· Investments: While raising money can be challenging, it is crucial to invest it effectively to maximize profit. To avoid financial loss, risk and ROI must be accurately calculated. Profitability, safety, and liquidity are three key characteristics that should influence investment decisions. They base these choices on both their immediate and long-term needs. Capital budgeting, which involves businesses committing funds over a lengthy period, is another name for long-term investment decisions. Making short-term investment decisions, in which companies commit funds for brief periods of time, is often referred to as working capital management. It involves choices on how much money to invest in banks, inventory, and other places

6· Capital Management: The management must periodically identify the capital requirements of the organization, determine the capital structure and composition, and choose the source of funding for the capital needs as part of their financial management duties. This guarantees that a business will have enough cash flow to cover both its current and long-term needs. Daily costs and short-term financial commitments can be finished swiftly by businesses. Making sure that a company’s assets and liabilities are in excellent balance is the main goal. This will guarantee that all obligations will be fulfilled without interfering with daily operations.

7· Surplus Disposal: The financial managers of the organizations make the decisions regarding how to use the surplus or revenues of the organizations. They choose whether and how much dividends should be paid out, as well as what percentage of profits must be kept and reinvested in the company or given to the employees as a reward for their performance. This choice will be influenced by several variables, including a company’s earnings trajectory. Finance managers must also determine whether cash will be needed for expansion plans.

8· Funds Procurement: The acquisition of capital to operate the firm is one of the most important functions of financial management. Choosing the funding sources is part of this. The organization may be able to obtain funds from a variety of sources. Depending on how long a project will be financed, different funding sources will be used. These can include borrowing money from financial institutions and raising money without using stock, such as by issuing an initial public offering (IPO).

Everyone in an organization is affected by financial management decisions. The better a company does, the better it is for each employee and all its stakeholders. A company’s financial lifeline is what keeps it afloat. One cannot correctly run a firm without adequate funds. As a result, one must manage the company’s finances such that the business objectives are achieved without interfering with any crucial business processes. Financial management is, therefore, necessary for all businesses. Schedule a call with us today to understand Financial Planning better.


The material / information contained above or other parts of this website is for general information purposes only and should not be relied upon for tax, legal or accounting advice. You should consult an expert in the relevant field before engaging in any transaction since applicability of the above may be different on the facts and circumstances of your situation. While we have made every attempt to ensure that the information contained on this website has been obtained from reliable sources, we are not responsible for any errors, omission or the results obtained by using the above information. We are not responsible for updating the above for changes in law, practices, or interpretation.

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