Simply if we explain what financial management is, we define it as planning, organizing, directing and controlling the economic pursuits such as acquisition and utilization of capital of the firm. Or we can simply say that it is applying general management standards to the financial resources of a firm.
Let’s understand its approaches to understand the scope of financial management, financial management approaches are divided into two sections and they are:
The traditional approach to financial management
Before the traditional, the approach was also known as a corporate approach. This approach was initiated to procure and manage funds for the company. Under this approach of financial management, the following points were used-
· Institutional sources of finance.
· Issue of financial devices to collect refunds from the capital market.
· Accounting and the legal relationship between the source of finance and business.
Under this approach, finance was required for occasional events like reorganization, promotion, liquidation, expansion, etc. It was considered to have funds for such events and regarded as one of the crucial functions of a financial manager. The traditional approach was emphasized on the fund's procurement only by corporations. Hence, this approach is regarded as narrow and defective.
The modern approach of financial management
With technological improvement and development in strong corporate, it was important for management to use the available financial resources in its best possible way. Therefore, the traditional approach became inefficient in a growing business environment.
The modern approach had a more comprehensive analytical viewpoint with a focus on the procurement of funds and active and optimum use. The main elements of this approach are an evaluation of alternative utilization of funds, capital budgeting, financial planning, working capital management, etc. The three critical decisions were undertaken under this approach and they are- investment decision, financing decision, dividend decision. This approach emphasis more on the financial decision and has a broader view and measure the performance of the firm.
Roles of financial management-
· Taking part in utilizing the funds and controlling productivity.
· Capital management. It is the responsibility of financial management to estimate the capital requirements of the organization from time to time determine the capital structure and composition and makes the choice of source of funding for capital needs.
· Cash flow management. It is extremely important for organizations to have sufficient working capital and cash flow to meet their operational expenses and emergencies. Financial management tracks account payable and receivable to ensure there is sufficient cash flow available at all times.
· Financial decisions associated with the finance raised from different sources which would rely upon the accord on the kind of resource, when is the financing done, cost incurred and the returns as well.
· In the case of dividend decision, the financial manager is who is responsible for the accord that is taken by him or her regarding the net profit distribution.
· Risk management. Sound financial management prepares the organization to forecast risks, put in place mitigation plans as well as to meet unforeseen risk and emergencies.
Financial management practice is a field that deals with financial decisions including short and long goals of organizations and ensure that there is a high return on invested capital without necessarily taking excess finance risk. Thus, act as an important tool for the safe and successful running of a business.