The process of financial management is vital for any business to run effectively. This is irrespective of how amazing the product or the service is. In a nutshell, financial management involves planning, organizing, putting controls, and providing direction to the financial capital in the company.
The Two Approaches to Financial Management
As methods of business have evolved, also compounded by the addition of technology, there have been broadly two approaches to financial management – the traditional approach and the modern approach. It is important to understand this before we go on about the scope.
The Traditional Approach to Finance Management
In this approach, which was mostly seen in the 20th century, the focus was on procuring funds for the company and allocation of these for the best functioning possible. This approach only focussed on long-term growth and did not take into consideration management strategy, working capital, planning, capital budgeting techniques, etc.
Instead, the finance manager considered having funds for liquidation, expansion, re-organization as more important. Traditionally, the finance manager was not responsible for ensuring that the funds are utilized effectively, instead their work was confined to getting funds regularly from external sources. This type of approach was only fit for big corporations and is often deemed as narrow and ineffective.
The Modern Approach to Finance Management
With increasing competition, the advent of strong and effective technology, and the emergency of powerful small businesses, it became vital for the management to make use of existing resources in the most effective manner. Thus, the traditional approach is rendered ineffective in the fast-paced, growing, and dynamic business environment.
The modern approach focussed on procurement of funds and actively using it but in an optimum manner. Some of the main elements that this approach has are financial planning, capital budgeting, determination of cost of capital, working capital, management of income, financial standards for business success, and more.
As an output of this approach, three critical decisions are taken in three domains – investment decision, financing decision, and dividend decision.
9 Scopes of Financial Management
Scope of Financial Management discussed below:
1. Financial Planning
This is a primary scope of financial management. It involves the development, planning, and concretizing of the goals, objectives, and ideas for the business. This step also estimates the process of identifying these goals and considers the initial programs and policies to be implemented to achieve these goals. Furthermore, financial planning also involves
- Determining the financial objective.
- Policies and procedures that drive the financial decisions within the company.
- Creation of a financial plan that contains the estimation of the capital structure, the various sources from which capital can be obtained, and the planning for future development in track with the rapidly changing business market.
2. Procuring the Capital Funds
This is the next scope of financial management, after the planning and determination of capital structure is done. Here, the financial manager endeavors to arrange funds from varied sources such as high net-worth individuals, industries, or institutions. Note that capital is the core of running every business because it is directly used in the selling and marketing aspects of the business.
3. Supervising the Finances
In this third scope of financial management, the manager ensures that the funds that have been collected or raised to act as the capital of the company are carefully utilized for the right means. More specifically, this process involves:
- Establishment of asset management techniques and capital budgeting. Once these have been established, the company needs to utilize them correctly and work in coordination with all involved stakeholders.
- The manager keeps a check on the cash in-flows and out-flows in the organization. They determine the ‘deficit cash’ and the ‘surplus cash’ at all times. There need to be arrangements for maintaining a certain percentage of the company’s wealth in the liquid form, so that it can be used for up-front and everyday expenses such as employee salaries etc.
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4. Exert Control on the Finances
The financial manager ensures that there is proper utilization of the funds in miscellaneous assets of the company, such as manpower. They create a budgeting system in which the expenditure of the company is kept within a limit, taking into consideration margins and uncertainties in cost. Some of the processes which financial control involves are:
- Fixing the financial standards in the company beforehand,
- Build comparison between predicted cost and the actual cost
- Create remedial actions in times of budget overspending
- Establish a system of follow-up and check of the financial plan
- Modify the existing standards and norms accordingly
5. Take or Be A Part of Financial Decisions
Easily, the most important scope of financial management. Here, the financial manager makes key decisions that drive the financial growth of the company. The decisions involved here are:
- Investment decisions: These decisions are typically made by the upper management, for considering investment opportunities
- Financing decisions: These decisions are taken mostly by the financial manager regarding the wealth present in the company. It involves providing funds for specific needs and keeping some funds aside for investments
- Dividend decisions: These decisions are also taken by the financial manager and are focused on distributing the dividends to the different stakeholders. This dividend is also known as the profit created by the company.
6. Creation of Financial Documents
This sixth scope of financial management involves the creation of legal and company-related financial documents such as Balance sheets, tax statements, etc. The two key aspects in these reports that are indicated are the financial growth of the company and the areas in which the growth has increased or decreased. It also shows the net income and expenditure of the company in a specific period or a financial year.
7. Predict Financial Performances
In this scope of financial management, based on the financial trends and previous year reports, the performance of the company is evaluated. On this basis, the financial manager places predictions on the finances in the upcoming year also by using key tools such as net profit, ROI, trend analysis, ratio analysis, etc.
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8. Measure Impact of New Finances
This scope involves measuring how impactful the various elements in the financial plan have been, to achieve the overall objective. This involves conducting periodic reviews, measuring the predicted financial growth vs actual financial growth, etc. At these times, various decisions may be taken to drive the growth to what is ideally required by the company.
This scope involves all the other financial activities which have not been covered in the previous scopes. These involve and are not limited to tax planning, social insurance funds, provident funds, securities, etc.
Final Thoughts – Scope of Financial Management
Finance is a broad concept and a financial manager or the finance team in a company as a whole is responsible for handling various aspects of the company’s wealth. The better and smarter this team, the better will be the money utilized by the company. Understanding these scopes of financial management is the first step to learning how finances inside a company work.
Frequently Asked Questions
Who takes financial decisions within a company?
It is usually the upper management with consultation with the financial team.
Does paying taxes to come under financial management scope?
Yes, because it is an important and unavoidable expense by the company.
When does the financial year begin and end?
The financial year runs from April 1 to March 31.
What does a financial manager do if the company is overspending or under-spending?
They review periodically and take measures or revise the budgeting and the financial plan to keep spending as predicted.
What is liquid cash in a company used for?
It is used to pay salaries to the employees, pay the utility bills of the company and manage other everyday expenses.