Whether or not a business works for profit or non-profit, finances are necessary, which is often why financial management gains importance over other activities of the company. The ultimate objective or end goal of any business concern is wealth maximization, which can be achieved through the following activities of financial management.
Estimation of capital requirement
So how much actual money is required? The solution to this question lies in the manner how financial managers accordingly estimate the needed capital requirements. The estimation of capital requirement is arrived upon after estimating the company’s present and future costs and profits, working capital requirement, purchase of a fixed asset and business plans for expansion.
Procurement and allocation of funds
The often wondered question is where the money will arise or come from? Through financial management activities, it ensures adequate and regular supply of funds by identifying various sources of funds and decided to procure these sources at the lowest costs. Once the funds are pooled, the next objective would be to prudently invest them in different assets with the intention of achieving profitability, liquidity, security, and safety.
Determining the structure of capital
When determining the capital structure, ambiguity arises when what proportion of capital should be invested and how? This is where the financial management comes into play in the picture. The primary objective of sourcing capital is to grow it to earn sufficient returns while maximizing shareholder wealth. This can be achieved by determining whether the whole capital should be invested in the business or the market. The decision regarding short term and long term investment and debt-equity mix are to be taken as well.
Distributing the surplus
The question of where to dispose of the surplus arises. Here, surplus refers to profits. The company can decide whether to retain the profits entirely or to re-invest in the business with an intention to expand or diversify it. However, if shareholders exist, it would make more sense and practicality to distribute the profits by declaring dividends and bonus. All of the said decisions fall under the category and scope of financial management.
Maintaining financial control
How much return has the capital earned? Financial management makes it possible for exercising control over money through evaluation of financial performance at regular intervals. This can be achieved through techniques such as financial forecasting, ratio analysis, audits and analysis of accounting or bookkeeping records. All of the said techniques give results on ROI or Return on Investment. Financial managers exercise the sole control of the sources of money and cash flow.