Ever since 1494 when a monk of Italian origin, Lucas Pacioli wrote the first book on modern accounting, financial management has grown to become the key to corporate growth. Financial management can be simply termed as efficient management of finances of a business/organization in order to achieve financial objectives (financialmanagement.org [online]).
The key objectives of a financial management are to generate wealth for the business and its shareholders, to provide a return of investment and to generate cash flow. There are two main aspects of financial management, namely, the procurement of funds and the effective use of those funds. On the procurement of funds, one may note here that funds may be procured from different sources and funds procured from different sources have different characteristics in terms of cost, risk and control in financial-management-speak. Funds issued through equity participation, that is, the financier acquires some stake in the company, are least risky as the money used to buy equity can only be repaid upon the liquidation of the company (www.economywatch [online]). But in terms of cost, these funds are pricey compared to others mainly because the dividend expectations are normally higher than the prevailing interest rates.
In principle, financial management comprises of risk, cost and control. For a proper balancing of risk and control, the cost of funds should be at the minimum.
Sound financial management is essential in all types of organizations, whether they are profit motivated, public or state owned bodies or those that are altruistic in nature.
Financial management ultimately will involve making of some financial decisions, and there are three types of such financial management decisions; long term investment decisions, long-term financing decisions and working capital management decisions (Baker, Powell, 2005). The third type of financial management decision, unlike the first two, is short term in nature. the decision in this segment involve managing cash, inventories and short term financing (wikipedia 2007 [online]). All financial management decisions should form part of overall strategy and not be seen as separate. The investment decision of financial management involves the managers deciding on the kind and nature of assets that they want to hold. So, inevitably this will involve selling, buying, reducing or holding of various assets. Managing those aforementioned activities is called capital budgeting. The process of decision making on investments will involve one of the cardinal principles of financial management, which is that a firm should hold only those assets which yield a return not less than a prescribed minimum(Baker, Powell, 2005).
Long term financing decision, as the name suggests, involve deciding the mode of procurement of funds to finance the necessary long term investments. The corporate “graveyard” is littered with companies that went burst not because their products had no market or that the workers were lazy, but because the decision makers did not adhere to the principles of good financial management. If, carried out competently, financial management increases the output from the factors of production, especially capital. Good financial management is especially essential for start-ups which need it for their survival. It is also important to an organization even if the profits are not in any way the motivation. Most of non-profit organizations have scant respect for good financial management, but even such bodies, and indeed everyone should be encouraged, if only for a wider utilitarian objective.
1. BAKER, KH, POWELL, GE (2005) Understanding Financial Management: A Practical Guide Blackwell publishing,
Financial management refers to the ability to use resources in a right manner. It aids the firm to achieve its set of goals in the economy. The goals of management in the economy are to enable the company to increase its earnings and improve its operations. There are four elements that should be put into consideration to be in a position to run the economy.
Financial planning is one of the principles that assist to cover both short and lasting goals of the firm. Proper financial plans enable the manager to prepare the business for future operations. Financial control is another aspect that is vital because it assist the firm to meet its goals. It also determines whether resources in the firm are safe. In addition, financial choice control incorporates activities such as benefits payments and investments. Through financial accountability, managers get the chance to account on expenses of purchases and salaries.
In this regard, managers in charge of finances need to take note of procedures that are involved in accounting. This is by considering operation and investment costs. Financial management is significant to firms that do not make profits to generate returns. This will enable them to maximize the investment value in a business. Evidently, nonprofit firms rely on money that is generated to meet specific goals. The purpose of this cash is to balance on flexibility that will facilitate operations in a nonprofit organization.
Financial management is significant to nonprofit firms to depict the progress of the company and how they use their resources. The benefits of nonprofit firms are that they do not have to pay for taxes. Due to their charitable nature, they are in a position to receive donations from the public. Participants are protected from personal liability that could subject them to legal cases against the firm.
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