Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. It means mobilizing firm’s resources wherever it is being required.
Scope of financial Management
Some major scope of financial management are as follows:-
- Investment Decisions:- A firm’s investment decision involve capital expenditures, so they are also referred as capital budgeting decisions. A capital budgeting decisions involves the decision involves the allocation of capital that would benefit in future. Sometimes risk is being involved in investment which is very difficult to measure and cannot be predicted with certainty. Risk is there in investment because of uncertain returns. Investment proposal should therefor be evaluated in terms of both expected return and risk.
- Financing decisions:- The second most important function to be performed by the financial manager is financing decisions. Broadly he or she must decide when, where from and how to acquire funds to meet the firm’s investment needs. The issue before a finance manager is to determine the appropriate proportion of equity is known as the firm’s capital structure. The financial manager must strive to obtain the best financing mix or the optimum capital structure for his or her own firm. The firm’s capital structure is considered optimum when market value of share is maximized.
- Dividend decisions:- The third major decision is dividend decision. The financial manager must decide whether the firm should distribute all profits or retain them or distribute a portion and retain the rest. The portion of profits distributed as dividends is called the called the dividend payout ratio and the retain portion of profits is known as the retention ratio.
- Working capital decisions:- Working capital decision is related to the investment in current assets and current liabilities. Current assets include cash, receivables, inventory, short-term securities, etc. Current liabilities consist of creditors, bills payable, outstanding expenses, bank overdraft, etc. Current assets are those assets which are convertible into a cash within a year. Similarly, current liabilities are those liabilities, which are likely to mature for payment within an accounting year.