Concept of Financial Management and its importance

Financial management is that specialized function of general management, which is related to the procurement of finance and its effective utilization for the achievement of common goal of the organisation. It includes each and every aspect of financial activity in the business. Financial Management has been defined differently by different scholars
.

Definitions

According to Prof. Weston and Brigham had defined as, “Financial Management is an area of financial decision making, harmonizing individual motives and enterprise goals”.
According to Prof. Joseph and Massie defined as, Financial Management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations”.

From the above definitions, it is clear that financial management is that specialised activity which is responsible for obtaining and effectively utilizing the funds for the efficient functioning of the business and , therefore, it includes financial planning, financial administration and financial control.
Importance of finance cannot be over emphasized. It is, indeed, the key to successful business operations. Without proper administration of finances, no business enterprise can utilize its full potentials for growth and success. Money is universal lubricant which keeps the enterprise dynamic develops product, keeps men and machines at work, encourages management to make progress and creates values. The financial activities, during the last three decades, have undergone various changes. The financial management, therefore, has gained much importance over the time. It has now assumed an important place in the business firm largely depends upon the financial policies developed by the financial management.

The Importance of Financial Management:

1.    Successful Promotion depends on Financial Administration:

One of the most important reasons of failures of business promotion is a defective financial plan. If the plan adopted fails to provide sufficient capital to meet the requirements of fixed and fluctuating capital and particularly, the latter, or it fails to assume the obligations by the corporation, the business cannot be carried on successfully.

2.    Smooth Running of an Enterprise

Sound financial planning is necessary for the smooth running of an enterprise. Money is to an enterprise, what oil is to an engine. As finance is required at each stage of an enterprise i.e., promotion, incorporation, development, expansion and administration of day-to-day working etc.

3.    Financial administration Coordinates various Functional activities:

Financial administration provides complete coordination between various functional areas such as, marketing, production etc., to achieve the organizational goals. If financial management is defective, the efficiency of all other departments can, in no  way, be maintained.

 

4.    Focal point of Decision Making:

Financial administration provides scientific analysis of all facts and figures through various financial tools, such as different financial statements, budgets, ratios analysis etc., which help in evaluating the profitability of the plan in the given circumstances, so  that a proper decision can be taken to minimize the risk involved in the plan.

5.    Determinant of Business Success

It has been recognised even in India that the financial managers play a very important role in the success of the business organisation by advising the top management the solutions of the various financial problems as experts. They present important facts and figures regarding financial position and the performance of various function of the company in a given period before the top management in such a way so as to make it easier for the top management to evaluate the progress of the company and to amend suitability the principles and policies of the company.

6.    Measure of Performance:

The performance of the firm can be measured by its financial results i.e., by its size of earnings. Riskiness and profitability are two major factors, which jointly determine the value of the concern. Financial decisions which increase risks will decrease the value of the firm and on the other hand, financial decisions which increase the profitability, will increase the value of the firm.