Written by I am sure when you heard Financial Management for the first time, what came to your mind was the management of money.
Well!! you are right to an extent. The word financial management is a combination of two words namely finance and management.
Finance deals with cash inflows and outflows such as sources of funds, the ability to expend it on business activities and making the right decisions about profits and taxes that may likely affect the business.
Management is simply the ability to combine resources in order to achieve a set goal or objectives.
Therefore, Financial management encompasses every decision that has to do with financial resources.
It refers to the process of managing and allocating the money of a business in order to achieve the financial objective of the business.
Financial management deals with the maintenance and creation of economic value or wealth by focusing on decision-making with a mindset of creating more wealth.
It involves making investment decisions, financing decisions and dividend decisions of a business in a way that will achieve the financial objectives of the business.
The main objective of financial management is to maximize the wealth of the shareholders of an organization.
In addition to that, financial management seeks to reduce and minimize to the barest minimum the financial risks associated with the operations of a business.
Importance of financial management to business
1. Identification of product line capability: Financial management helps a business identify the products or services it can render at its best capability.
Sound financial management can help a business assess the expenses, revenues and profitability of each product line, which can then be used to make informed decisions about which products to invest in and which product to invest in and which to discontinue.
2. Survival of the business over time: Financial management will help the business organization in its survival over a long period of time.
By helping a business to effectively manage its finances, financial management ensures that a business is able to cover its expenses, invest in growth and diversification, and generate profit overtime.
The result is that business is able to survive in the long term, even when there is adverse economic conditions or unexpected expenses.
3. Sound investment decision: A sound financial management helps a business in taking critical decisions that are relevant to the longevity of the business.
Financial management helps a business know when to invest in new assets and when it has stayed in existing assets for long.
A business can not easily ascertain if if has overstayed to a point it should start investing in new assets that will yields more profit except through financial management.
So, financial management is essential for making sound investment decision.
4. It allows businesses to know its profitability : Another reason why financial management is importance to businesses is that it allows business know how profitable it is.
In a bid to determine the profitability of a business, financial management analyze the financial statement of the business to ascertain its revenue, expenses, and overall financial performance.
Since the economic objective of most business is to maximize profit, determining the profitability of a business is very important.
If the business organization does not have an effective financial management, it can run a loss and still not notice and hence it will collapse soonest.
So, to avoid this, financial management is very importance.
5. Maximization of shareholders wealth: While profit maximization is considered the economic objective, shareholders wealth maximization is consider to be the main objective of financial management.
As a result of profitability, a business can begin to deviate to maximization of shareholders wealth.
This will maximize the price of the existing common stock.
Not only does the goal benefits the shareholders but also provides benefits to society as scarce resources are directed to their most productive use by businesses competing to create wealth.
Shareholders wealth maximization will consider the uncertainty and time value of money which the profitability goal neglects.
Hence, Financial management is important for the shareholders wealth that can be maximized through it.
6. The best sources of funds are easily known: : Businesses can determine whether to borrow and the best sources from which to borrow by using financial management.
Financial management helps businesses take rational decisions not neglecting certainty and time value of money.
If a business borrows from the wrong source and when not needed, it is likely it dies as time goes on.
If after borrowing, a business can not pay up its debt and interest and still plough back some profits into the business for extensive growth and development, then such loan is not advisable
However, all of these can only be revealed through a good financial management.
Therefore, financial management enables a business to easily identify the best sources of funds.
7. It helps a business to know the best time it can sell its investments: Financial management helps a business to know the best time it can sell stocks and bonds after adequate calculations have been made.
Some financial requirement and criteria has to be critically examined. A business can know when to sell its stocks if it has a sound financial management in place.
8. Helps a business determine its liquidity requirement: Financial management enables a business determine how much cash and inventories to maintain.
Through financial management, the necessary requirements to meet the immediate cash needs of the business will be made known.
Conclusion
In conclusion, a sound financial management can help a business stay relevant in the industry and survive over time among its competitors.
When a business possess sound financial management, it will take relevant decisions such as when to introduce a new product, when to invest in new assets, when to replace existing assets, when to extend credit to customers and how much cash and inventories to maintain.
There will be massive growth and development overtime as a result of effective and efficient decision making resulting of financial management.
As a result, Financial management is very essential and important for every business.
