importance of financial management essay

importance of financial management essay

The Importance of Financial Management

1. Introduction to Financial Management

Basically, financial management calls for the efficient and economical managerial planning and implementation of capital resources to facilitate the continued success of the enterprise and meet its obligations as they become due. Efficiently managed capital resources are an integral part of the successful financial operation of any enterprise. Consequently, financial management is the planning and controlling of the firm’s financial resources to ensure that the most effective and efficient utilization of funds takes place, consistent with the investment decisions of the firm.

According to the Financial Executives Institute, the term “financial management” is the activity concerned with the planning, raising, controlling, and administering of the funds used in the business. The fundamental basis for financial management is Vickers’ definition of the financial manager as implemented in the American Assembly Criteria: the financial manager has the duty of direct control of the capital, which includes the determination of the amount of capital required, the stipulation of an accounting system to give it proper control, and assistance in the pecuniary assessment of the employment of resources. The history of governance, a derivative of “control”, in Western civilization indicates extensive financial control before the concept of management was initiated, although control had a financial basis.

2. Key Principles of Financial Management

Although it is in the long-term context that the techniques of financial analysis and management are used, given the importance of stability and confidence in an ever-changing marketplace, the strategies pursued and the decisions made by financial managers usually have to be short-term in considerations. In thinking about the grounds for short-term steadfastness leading to long-term results, three keys or principles arise. These being a stable rate of return from investments, limited or low levels of risk through borrowing, and paying the minimum effective taxes. An equally effective summary of the overriding principles used in financial management is the association between risk and return.

The strength of any business – and its ultimate success or failure – can be measured by the strength of its financial structure and the effectiveness of its financial management. The financial manager plays a very specialized role in the realm of business, and his main function is related to the financial health of an enterprise. To define financial management, it is important to note that the goal of the financial manager is to maximize the value of the firm to its owners. In general terms, whenever it is possible, this implies maximizing the firm’s profits in the long run.

3. Benefits of Effective Financial Management

Today, of course, management includes an amount of cost to be expended, both in terms of cost directly at management level and cost incurred for the needed management tools. However, the benefits gained far outweigh the cost. After all, time spent on good financial management is a positive investment for the company, rather than mere expenditure. It has been said that if the company’s businesses, financial resources, and other abilities are to be purchased in the state that they deserve, then good financial management must be a part of the purchase price.

When a company enjoys careful and precise financial management, it is also bound to enjoy a broad range of additional benefits. Besides the obvious advantage gained by obtaining an up-to-date snapshot of the company’s financial status and having the information to guide the company’s future moves, financial management offers a number of other advantages. Good financial management can make life easier for the company’s management team by recording and categorizing all necessary data and making it easy to view. A well-managed company will find it easier to stay abreast of legislative obligations, to stay within the relevant legal parameters, and to ensure that the needs of each season of the year are addressed before they become problems. Staff recruitment and retention will undoubtedly improve within a company that is able to demonstrate steady growth and healthy financial statements. The company will be better able to maintain a strong creditor relationship and will find it easier to secure new finance when required.

4. Challenges and Risks in Financial Management

Challenges and Risks in Financial Management include a set of rules and policies that belong to the financial management process. In fact, the rules and policies are established to ensure integrity and proficiency in the management of finances, understanding the financial principles and specialists’ choices. As managers utilize financial reports, the firm’s accounting function serves a purpose in financial management. While the firm’s mission is distinct, financial management focuses on the two main financial categories: how to raise capital and how to use this money. These objectives of relative capital expenditure are crucial to understanding the financial structure in which they take place. Total transparency is central to the coordination and monitoring of the events. It will happen with sufficiently precise reports in a timely manner by unbiased assessors.

Financial management is a process in business in which the finance function is planning, organizing, directing, and controlling financial resources. It is an association that is relevant to many important matters such as strategic objectives, corporate structure, operation, profitability, corporate growth, or job security. These topics also provide employers and employees with job security and opportunities for individual betterment. Financial management is on the job to calculate employee output and performance, linking pay rates to performance, influencing the relation between employees by presenting the economic consequences of union-management disagreements, and affecting the production decision.

5. Conclusion and Future Trends

Mainstream finance and a multitude of studies accept the essential linkage between finance and economic growth. The cornerstone articles that support, discuss, and study this relationship are presented in the next section. A shift towards institutional details of the linkage between finance and economic growth has been introduced afterwards, by several analyses arguing that a firm’s legal and financial framework has important consequences for the efficacy of equity markets. Moreover, they highlight the increased affordability of equity. These wild changes in corporate finance have started a long time ago with a momentum provided by several Nobel Prizes in economics. Nevertheless, like any other science, finance has to supply its solutions to specific problems, to be judged for the solutions provided, and change its solutions as it is required. The paper examines financing patterns based on corporate debt ratings. The argument is that ratings provide substantial information regarding the financial situation of the firm.

This chapter offered a brief overview of the financial management of the firm and the examination of the various aspects of the financial management of the firm. The first aspect that was discussed refers to the most basic concept in finance, which is the time value of money. The first aspect that was examined here referred to the basic present value model and was extended to complex multiple cash flow models. Several investment decision models are also presented, and we concluded the validation of the investment decision models. In the second part of the chapter, we examined two similar classes of financial decision models. The first class referred to the models that determine the capital structure of the firm, which is the mix of securities that a firm uses to finance its investments, and the second class referred to the optimal investment decision models. Based on these models, we concluded the capital gain and the dividend policies for the firm. Throughout the chapter, we have remarked and clarified the links that financial management has with macroeconomics, microeconomics, and decision theories, and highlighted the importance of the financial management of a firm.