Importance of Financial Management

Importance of Financial Management

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It is important mainly because it helps to make decisions towards the maximization of the value of the firm. It is concerned with raising financial resources and their effective utilization towards achieving the organizational goals.

This form of management is important for various reasons. Some of them are

  • Helps organisations in financial planning and acquisition of funds;
  • Helps organisations in effectively utilising and allocating the funds;
  • Helps in improving the profitability of organisations;
  • Increases the overall value of the firms or organisations;
  • Provides economic stability.

The importance of financial management to a firm are as follows:

  • Financial Management Helps Setting Clear Goal

Clarity of the goal is important for any firm. Financial management defines the goal of the firm in clear terms (maximization of the shareholder’s wealth). A setting goal helps to judge whether the decisions taken are in the best interest of the shareholders or not. Financial management also directs the efforts of all functional areas of business towards achieving the goal and facilitates among the functional areas of the firm.

  • Financial Management Helps Efficient Utilization Of Resources

Firms use fixed as well as current assets which involve a huge investment. Acquiring and holding assets that do not earn minimum return do not add value to the shareholders. Moreover, the wrong decision regarding the purchase and disposal of fixed assets can cause a threat to the survival of the firm.

The firm also requires current assets for its operation. They absorb a significant amount of a firms resources. Excess holdings of these assets mean inefficient use and inadequate holding exposes the firm into higher risk. Financial management helps to decide what level of current assets is to be maintained in a firm and how to finance them so that these assets are utilized efficiently.

  • Financial Management Helps Deciding Sources Of Financing

Firms collect long-term funds mainly for purchasing permanent assets. The sources of long term finance may be equity shares, preference shares, bond, term loan etc. The firm needs to decide the appropriate mix of these sources and amount of long-term funds; otherwise, the firm will have to bear the higher cost and expose to higher risk. Financial management (capital structure theories) guides in selecting these sources of financing.

  • Financial Management Helps Making Dividend Decision

The dividend is the return to the shareholders. The firm is not legally obliged to pay a dividend to the shareholders. However, how much to pay out of the earning is a vital issue. Financial management (dividend policies and theories) helps a firm to decide how much to pay a dividend and how much to retain in the firm.

The importance of this management is not limited to the managers who make decisions in the firm. Proper financial management will help firms to supply better product to its customers at lower prices, pay a higher salary to its employees and still provide a greater return to investors.

 

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