Is playing with numbers your forte? Are you intrigued by the working of the equity market? Then, you can definitely explore Financial Management (FM) as a career option! Financial Management is a unique blend of various facets of the management field with scores of activities related to the Finance sector like Capital Raising, Portfolio Management, Hedging, etc. Almost every other organization is in dire need of such individuals who are professionally equipped with the knowledge and skills pertaining to the domain. With the evergrowing scope of Financial Management, you can achieve your career aspirations and work at copious organizations in profiles like Financial Planner, Financial Leader, etc. If you are exploring the insights of this field, let us walk you through the blog and highlight some key features of a career in FM.
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This Blog Includes:
- What is Financial Management?
- Nature & Scope of Financial Management Explained
- Objectives of Financial Management
- Types of Financial Management
- Understanding the Nature of Financial Management
- Roles and Responsibilities
- Scope of Financial Management
- Importance of Financial Management
- Career Profiles
What is Financial Management?
Financial Management is a process of organizing, planning, controlling, and directing all the financial activities including utilization and procurement of the funds in an organization. In simple terms, Financial Management mainly comprises various decisions pertaining to the size of investments, use of capital, optimum utilisation and allocation of funds as well as profit maximisation for an organisation. For this process, there is a wide range of financial management techniques used to create the right plan and strategy to ensure the best and optimum allocation of funds, their utilisation and profit maximation.
Nature & Scope of Financial Management Explained
There are four factors that you must familiarise yourself with to understand the scope of Financial Management. These factors are mainly the different types of decisions that a financial manager takes in an organisation and these decisions are Investment Decisions, Financing Decisions, Dividend Decisions, Liquidity Decisions.
As a financial manager, you will be required to decide the right kind of investments available out of the existing finance, in terms of considering long-term and short-term basis. Long-term investment decisions are also referred to as Capital Budgeting and it mainly corresponds to the selection of investment proposal(s) and weighing in different factors to choose the right one that fits the firm’s needs and future plans. On the other hand, short-term investment decisions are concerned with making decisions regarding funds in the short-run like current assets.
In order to find adequate funds to meet the firm’s needs, a financial manager has to decide where or how to get the funds from. Also, you must determine the right proportion between equity and debt and the mix of these two factors, i.e. equity and debt is termed as the firm’s capital structure. As a financial manager, you have to find an optimum capital structure while taking the financing decision and the capital structure is also considered optimum in the condition that the market value of shares is maximized.
The profitability and liquidity of a firm is impacted with the investment in its current assets. Thus, as a financial manager, your central role is to ensure that all the current assets are managed efficiently in order to secure the firm against the risk of illiquidity. This can be done by finding the best techniques for current asset management through which it can also be made sure that the funds are available whenever required.
Another prominent decision that comes under the scope of Financial Management is that of Dividends, i.e. as a financial manager, you will have to find the best choice between distributing profits, retaining them or distributing a specific portion and return the balance.
Objectives of Financial Management
Here are the objectives of Financial Management:
- Efficient financial management ensures the proper supply and availability of funds in an enterprise or organisation.
- It also plays a crucial role in optimum utilisation of finances and funds in an organisation.
- It ensures a stable capital structure thus keep a balance between equity and debt in a business organisation.
- It facilitates the safety of investments thus providing a secure place for an organisation to invest in where they can get the best return from.
- It provides optimum returns, interests and maximisation of profits for the organisation and its shareholders.
Types of Financial Management
To understand the scope of financial management, let us go through the below-mentioned types of financial management-
- Capital Budgeting: Capital budgeting refers to identifying what shall happen financially for the betterment of the company to achieve its set target along with short term and long term goals
- Capital Structure: This refers to the process of determining how the payments regarding operations and growth will be made. It helps taking decisions like debt taking would be the best solution if the interest rates are low.
- Working Capital Management: In relation to the above-mentioned points, management of working capital refers to making sure that there is adequate cash fluidity for day to day operations.
Understanding the Nature of Financial Management
There are two central approaches to understand the functional scope of Financial Management. Firstly, the traditional approach which is used to manage funds for a business enterprise and the second approach emphasises on considering multifarious decisions for optimum utilisation of finance and its allocation. Let’s take a look at these two approaches in further detail:
The traditional approach is often referred to as Corporate Finance and was conceptualised in the 20th century. There are three main aspects of the traditional approach for Financial Management:
1. Institutional Sources of Finance
2. Financial Instruments Issued to Gather Funds
3. A legal and accounting relationship is built between Financial Sources and Business Finances
There are certain limitations of the traditional approach used for the scope of Financial Management such as:
1. It is one-sided as it only focuses on the procurement of funds and tackling the related problems. It avoids exploring the essentials of ensuring maximum utilisation of funds.
2. It also emphasises on large-scale enterprises and corporate entities thus partnership firms or non-corporate entities are not considered under this approach.
3. It only focuses on irregular events in a business and not its day-to-day activities and operations. Moreover, working capital financing decisions are also not considered under this approach.
As the business environment evolved with new technologies and increasing competition in the digital era, the modern approach of Financial Management came into view. It aimed to ensure that all the financial resources of a business are used in an optimum manner. It adopted an analytical perspective to procure funds as well as allocate and utilise them in an optimal and best possible manner. Here are the key elements of the modern approach of the scope of Financial Management:
1. Assessment of Alternative Utilisation of Funds
2. Financial Planning & Capital Budgeting
3. Ensuring the Financial Standards for the Success of a Business
4. Income Management
5. Calculation of Cost of Capital
6. Working Capital Management
The three main decisions taken in the modern approach are Investment Decision, Dividend Decision and Financing Decision [explained in the next section].
Here are the prominent features of the Modern Approach of Financial Management:
1. Focus on Financial Decisions on the basis of accounting records and statistical data.
2. Evaluation of Capital Budgeting
3. Continuous Functioning with an emphasis on operational and daily activities of a business.
4. A broader scope for optimum utilisation of finance for a business.
Roles and Responsibilities
Before we delve deep into the scope of Financial Management, let us first understand what this field entails. Upon completing a degree in the field, you can explore various employment opportunities. If you want to work in various profiles in this sector, you will have to handle a certain set of roles and responsibilities. Most of the jobs would require you to undertake the below-mentioned roles & responsibilities:
- Monitor the financial reports and details to make sure that the legal, as well as financial requirements, are met.
- Analyze draft reports of various business activities, statements, and forecasts.
- Manage and supervise the employees handling finance and accounts.
- Determine Capital Structure and identify the fund requirements.
- Carefully study the market trends to maximize the profits and make full use of opportunities to expand the business of the firm.
- Examine the weekly financial reports of the company and formulate new ways to reduce costs.
- Provide assistance to the management of the company in taking all the crucial financial decisions.
Scope of Financial Management
Scope of financial management includes various points such as-
- Financial Planning: It refers to determination of goals objectives and ideas for enhancing a business.
- Securing Capital Funds: This refers to the fact when the quantum of the capital structure is designed keeping in mind the upcoming necessary steps.
- Financial Supervision: This refers to the supervision as well as collection of the funds for maintaining a proper job role and functions in the company.
- Financial Control: The optimum utilisation of investment as well as miscellaneous resources such as manpower is known as financial control.
Apart from the above-mentioned scopes of financial management, here are some other ones-
- Financial Decisions
- Preparation of Annual Financial Statements
- Estimation of Financial Performance
- Evaluating the Impact of New Financing
- Miscellaneous Functions
Importance of Financial Management
Financial management provides a solid foundation through three pillars such as-
- Strategizing or planning what it is necessary to happen for the company in terms of financial aspects to achieve its long term and short term goals.
- Decision making or assisting the leaders in gauging the best way a through which they can execute high-end and up-to-date plans for providing financial reports
- Controlling and maintaining that each department is contributing towards the vision and mission of the organisation and is operating within the budget
With a galore of opportunities, pursuing a career in the field of Financial Management has been a popular choice amongst various business geeks. Varied set of duties has led to a rise in the demand for professionals and well-trained individuals who can take up the jobs proficiently. While pursuing the higher-level courses like MBA in Finance, PGDM in Finance, Master of Finance, etc, a thorough knowledge regarding how to ensure the adequate supply of funds, maintenance of shares, techniques to work towards fulfilling the expectations of shareholders along with a plethora of other topics will be provided. Thus, with all these course inclusions, the scope of Financial Management as a career is vast.
Let us have a look at the prominent work profiles available which give us the idea of how diverse is the scope of Financial Management as a career:
Financial Managers are responsible for monitoring the accounts, finance reports as well as generating the yearly financial statements of the organization.
As a Financial Analyst, you will work towards improving the monetary assets and maintaining the financial stability of the firm along with identifying the latest trends in the financial market.
Holding such a senior level position in the company would require you to manage and supervise the company’s account statements, cash flow, tax returns along with other financial statements of the company.
Investment Banking Analyst
You will be tasked with assessing the transactions and conducting a study on the performance of stocks. Apart from this, you will also be required to analyze the data for further banking investments from the firms’ part.
Insurance and Risk Manager
When we discuss the scope of Financial Management, Insurance and Risk Manager is another profile that you can consider. Guarding the company against all the financial losses and minimizing the cost damages are the main responsibilities.
Apart from all the aforementioned profiles, here are some other work profiles that you can consider:
- Financial Planner
- Credit Manager
- Investor Relations Associate
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Thus, we hope that through this blog, you are now aware of the scope of Financial Management as a career. If you want to enter the evergrowing field of financial management but are confused about which course to pursue then reach out to our experts at Leverage Edu who will help you find the most suitable program and university for you!