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Financial direction: Meaning, Scope, Purpose & Function

Financial management means planning, organizing, directing,

Financial direction: Meaning, Scope, Purpose & Function.

Meaning of financial management

Financial management means planning, organizing, directing, and controlling financial activities such as the provision and use of company funds. It also involves the application of general management principles to a company’s financial resources.

Scope/Elements of financial management

Investment decisions include investing in fixed assets (known as capital budgeting). Investments in working capital are also part of an investment decision known as a working capital decision.

Financing Decisions

These decisions involve raising funds from a variety of sources, which will depend on decisions about source type, funding period, funding costs, and also profitability. Dividend Decisions – The CFO must make decisions regarding the distribution of net profits. Net profit is usually divided into two:

  • Dividends for shareholders – Dividends and their ratio must be decided.
  • Retained earnings – The amount of retained earnings is yet to be finalized, which also will depend on the company’s expansion and diversification plans.

Goals of financial management

Financial management generally deals with the procurement, allocation, and control of a company’s financial resources. The goal could be-

  1. Ensure regular and adequate funding for the company.
  2. Ensure adequate returns for shareholders, this will depend on earning potential, market price of shares, and also shareholder expectations.
  3. Ensure optimal use of capital. Once funds are obtained, they must be used in the most optimal way possible with the lowest cost.
  4. To ensure the safety of investments, i.e. money should be invested in safe companies to get the right rate of return.
  5. Plan for a sound capital structure – A sound and sound capital structure is required to maintain a balance between debt and also equity.

Financial management function

Estimated capital need:

A CFO must provide an estimate of the business’ capital needs. This will depend on the expected costs and benefits and also related future programs and policies.
Estimates should be done appropriately that increases the earning potential of the business.

Determine the capital structure:

Once estimates are made, the capital structure must be decided.
This involves an equity analysis of short-term and long-term debt. This will depend on what percentage of equity a company has and also additional funds that need to be raised from a third party.

Select funding sources:

For more money, a company has many options like-

  • Issuance of stocks and bonds
  • Loans made with banks and financial institutions
  • Public deposits are withdrawn in the form of bonds.

Which factor to choose will depend on the relative advantages and disadvantages of each financial source and period.

Capital investments:

The CFO must decide to allocate money to profitable business activities to ensure the safety of the investment and to be able to obtain regular returns.

Redundancy handling:

The decision on net profit should be made by the CFO. This can be done in two ways:

  • Dividend Statement – This includes determining the dividend rate and other benefits such as bonuses.
  • Retained Profit – The volume must be decided based on the company’s expansion, innovation, and diversification plans.

Cash management:

The CFO must make decisions regarding cash management.
Cash is needed for many purposes such as paying salaries, paying utilities, paying debts, meeting short-term obligations, maintaining sufficient inventory, purchasing raw materials, and more.

Financial control:

The CFO must not only plan, procure and use capital but also exercise financial control 카지노사이트. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.