A Study on Financial Management

Financial management is defined as planning, organising, directing, and regulating the firm’s economic endeavours, such as capital acquisition and usage. In other words, it is applying general management principles to the firm’s financial resources. The concept of Financial management is fundamentally the discipline of developing a business strategy and ensuring that all departments stay on track. Solid financial management enables the organisation to give data that help create a long-term plan, guides investment decisions, and generates insights on how to fund those cash runway, liquidity, profitability, investments, and more. Let us understand various approaches to financial planning. 

Traditional Approach to Financial planning

The conventional method was also known as corporate finance during the twentieth century. This strategy was implemented to raise and manage finances for the firm. The three points listed below were utilised to analyse the concept of financial management in this method:

• Financing from institutions.
• The issuance of financial instruments to recover capital market refunds.
• The accounting and legal connection between the source of funding and the business.

Finance was necessary under this strategy not for ongoing business operations but one-time events such as restructuring, promotion, liquidation, growth, etc. It was thought essential to have finances for such events, and it was viewed as one of the most important tasks of a financial manager.

Traditional Approach Limitations

• One-sided approach- It is more careful of fund acquisition and administrative concerns, but it pays little regard to the practical application of money.
• Attention to Irregular Occurrences- It offers finances for rare events such as consolidation, incorporation, restructuring, and mergers, among others, while ignoring day-to-day company activities.
• Gives Emphasis to Corporations’ Financial Difficulties- Because it solely concentrates on the financial problems of corporate organisations, it limits the opportunities for the finance function.
• More Emphasis on Long-Term Funds- It addresses long-term financial difficulties.

Modern Approach to Financial planning 

With technical advancements, increased rivalry, and the development of reliable corporations, it was critical for Management to make the most effective use of the available financial resources. As a result, the old technique has become inefficient in a rising company environment.

The modern method took an utterly analytical approach, emphasising the acquisition of finances and their active and optimal usage. The fund structure is a critical component of the overall financial function. The essential elements of this technique include an appraisal of alternative uses of money, capital budgeting, financial planning, ascertainment of economic criteria for company performance, cost of capital determination, working capital management, income management, and so on. The three critical decisions made under this technique are as follows.

• Investment Selection
• Decision on Financing
• Dividend Policy

Modern Approach Characteristics

The following are the key characteristics of a contemporary approach.

• More Emphasis on Financial Decisions- This method is more analytic and less descriptive, as the best business decisions can only be made using accounting and statistical data.
• Unlike the conventional way, the current approach is a continuous activity in which the financial management makes various finance decisions.
• Broader Perspective- It emphasises the most efficient use of funds and the procurement of the funds. Similarly, it includes characteristics such as cost of capital, capital budgeting, and financial planning, among others.

How is Financial planning beneficial? 

Solid financial management is the bedrock upon which the three pillars of excellent fiscal management are built:

• Making judgments or supporting firm leaders in selecting the best method to carry out plans by providing up-to-date financial reports and statistics on key performance indicators (KPIs).
• Strategising or identifying what has to happen financially to fulfil its short- and long-term goals. Leaders, for example, desire insights into current performance to prepare for the future.
• Controlling or ensuring that each department contributes to the objective while keeping it under budget and on schedule.

With an adequate understanding of the concept of financial management, all employees understand where the company is headed and moving.

Financial Management’s Scope

Planning

The financial manager forecasts how much money the firm will need to sustain positive cash flow, allocate funds to expand or add new goods or services, deal with unforeseen occurrences, and distribute that information with business partners. Capital expenditures, T&E and personnel, and indirect and operational expenses may all be divided into categories in planning.

Budgeting

The financial manager allows the company’s available cash to cover expenses such as mortgages or rentals, wages, raw materials, employee T&E, and other responsibilities. Ideally, some money will be left over for emergencies and to fund new business ventures. Companies typically have a master budget and may have separate sub-budgets.

Conclusion

One of the most crucial components of the company is financial management. To establish or even operate a profitable business, you must be well-versed in understanding the concept of financial management. As previously said, financial management is the strategic planning, organising, directing, and managing of financial endeavours in an organisation or institute. It also includes applying management concepts to an organisation’s financial assets and playing a significant role in fiscal management. In this post, we looked at two of the most frequent strategies for financial planning: traditional and modern.