Scope of Financial Management
- Estimating Financial Requirement
- Deciding Capital Structure
- Selecting a Source of Finance
- Selecting a Pattern of Investment
- Proper Cash Management
- Implementing Financial Controls
- Proper Use of Surpluses
Table of Contents
Estimating Financial Requirement
The first and foremost task of a financial manager is to estimate the short-term and long-term financial requirements of the organization. These estimates must be based on sound financial principles so that there is neither shortage nor excess of funds.
Deciding Capital Structure
Capital structure refers to the composition or make-up of a firm’s capitalization. After determining the quantum of funds required by the organization, the next step is to determine the proper composition and proportion of different securities for raising funds.
A decision about the capital structure should be linked to the cost of raising funds. Capital structure decision is an important decision that influences both the short-term and long-term financial planning of an enterprise.
Selecting a Source of Finance
After deciding the composition of a firm’s capitalization or the capital structure, the next task is to select appropriate sources of finance.
Various sources from which finance may be raised include share capital, debentures, commercial banks, etc. The need, purpose, and cost involved in procuring finance may be the factors influencing the selection of a suitable source of financing.
Selecting a Pattern of Investment
After the funds have been procured then a decision about the investment pattern is to be taken. Selection of investment pattern is related to the use of funds. The decision making techniques such as capital budgeting, opportunity cost analysis, etc. may be used in making decisions about capital expenditures. A balance should be struck even in these principles.
Proper Cash Management
One of the major tasks of the finance manager is cash management. Finance manager must assess the various cash needs at different times and make necessary arrangements for arranging cash. Cash may be required for purchase, payments, wages, etc.
Cash management should be such that neither there is a shortage of it nor it is idle at any point in time. A proper idea of the sources of cash inflow and outflows will help the finance manager to properly manage cash.
Implementing Financial Controls
An efficient financial management system requires the use of various control devices. Financial control devices generally used are return on investment, budgetary control, ratio analysis, audits, etc.
The use of these various control techniques helps the finance manager in evaluating the financial performance of the firm and take corrective measures whenever required.
Proper Use of Surpluses
The utilization of profits or surpluses is an important activity in financial management. Prudent use of surpluses is essential for expansion and diversification of the organization and also helps in protecting the interests of shareholders.
A balance should be struck in using the surpluses for paying off dividends to the shareholders and ploughing the profits back for diversification and expansion plans of the organization.
The finance manager must consider factors such as market value of the firm, expected earnings, trend of earnings of the organization, etc. to make judicious use of surpluses.
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