Financial Management is the unity of two words Finance and Management. It is indicated Money (Fund) and its Management for achieving goals of Incorporation. Financial Management is basically the management of funds with minimum financial risk in achieving the organizational objectives.
The concept of Financial Management or planning is practiced and is written long ago in India (Bharat) than the modern concept. Various books and scripts like Arthashastra were written on economic policy.
The economic development of the country was pushed forward by the Mauryan Dynasty (mentioned in book Arthashastra), The Gupta Dynasty, The Tamil empire, etc. The financial concept or planning practiced by the Ancient Indian Empires were related to the Integration of national outlays and revenues.
The Arthashastra written by Kautilya says that Financial Management is based on the three characteristics-Hierarchy, shared social ethics and, clear or precise control structure to strengthen duties to create wealth while behaving ethically.
Goals of Financial Management
- Profit Maximization– The important aspect of Financial Management is to maximize profit, that every businessman or investor keep in mind while starting or investing money in an organization. Maximization of Profit reduces the risk of failure in business.
- Wealth Maximization (per Share for Shareholder)—It basically improves the wealth of every shareholder and provides efficient allocation of resources.
Financial Management process
- Managing Scarce Resources— Here We have to Manage and use our Resourceseffectively to achieve organization’s mission and objectives.
- Managing Risk—There can be various internal and external risklike Fraud, Fire etc. Thus, we have to recognize those Risk and minimize or uproot the damage it can cause.
- Managing Strategically– Funds should be managed and transferred to whole section of the Organization to achieve long and short goals rather than focus on any specific program
- Managing by Objectives– It gives close attention to projects. The organization can only achieve the objectives through Planning it, executing it and reviewing it again and again
Why Financial Management is Important?
We will never achieve any goals in any sector (small or big) in absence of financial management. As the name “finance” is the base of every projects in the world, without being effective management, we cannot achieve our daily or long-term objectives.
- It helps in achieving objectives (Long-term or Short-term) and full commitment to stakeholders.
- It helps in preparing long term financial sustainability.
- It helps in gaining confidence of funding agencies, partners and beneficiaries.
- It helps in increasing scarce resources.
Principles of Financial Management
There are 7 principles of Financial Management
- Consistency– Organization must use consistent financial policiesand procedures for efficient operation.
- Transparency– All (general or important) information or plan of organization should be delivered to Stakeholders. Eg : Financial report, Financial Statement, Budgeting report etc.
- Accountability–Every Investor and Stakeholders have right to know about finances and other support are being used to meet objectives.
- Viability– There must be balance in spending money both at the operationaland strategical level. It means we must not spend more or less money in operational level and left the other or vice-versa.
- Integrity– The records and reports of finance of an organization to achieve its goal is based on its correctness and perfectness. The accuracy of financial record helps in giving the exact financial statement which is very much required in taking decision.
- Supervision or Guardianship– Quality Management of financial resource is only possible through Strategic planning, estimating financial risk and setting up appropriate system and control
- Accounting Standards–Organization must keep records and documentation which is internationally accepted accounting standard and principles.