Financial management is a technique of managing funds effectively whether it is for a corporation or an individual. Financial management has different implications for corporations and individuals. For corporations, it is meant for effective procurement and utilization of funds. On the other hand, for individuals, it is meant to manage its earnings in order to have good financial health and stability in future.
The word ‘Financial Management’ is a combination of two crucial words in business environment viz. ‘Finance’ and ‘Management’. ‘Finance’ means funds and therefore, financial management refers to the management of funds. It is a technique of planning, sourcing and investing funds in most effective manner.
Broadly speaking, financial management is nothing but the planning of expenditures and incomes to ensure financial stability. Financial stability implies availability of sufficient money at the time of requirement. It is a key concern to be addressed for many entities. Entities may include
corporations (for sourcing and investments of funds), individual (planning for future expenditures and incomes), government (utilizing the public money in most efficient manner), non-profit organizations (planning of funds required for activities to be undertaken) etc.
Financial management can be broadly classified into two levels –
Corporate Financial Management
Corporate finance deals with the financial decisions taken by a company to achieve its financial and other goals. Financial decisions involve procurement of funds and utilization of funds. The expected outcome of activity of ‘Procurement of Funds’ is not only limited to the acquisition of required funds for business but it should be ensured that it is acquired at the lowest possible costs (interest or dividends expectations etc), risks (repayment of funds creating bankruptcy risk) and dilution in control (dilution of shareholding and thereby control over the company).
On the other hand, ‘Utilization of Funds’ entails employment of funds at the right place to ensure highest returns possible which are at least more than the cost of funds. It also needs to ensure that there are no idle funds to incur cost unnecessarily.
Personal Financial Management
Personal finance deals with monetary decisions required at the individual level. It involves evaluating requirements of money in terms of ‘quantum’ and ‘time’ and then planning for earnings, expending, saving, budgeting and investing of money to achieve financial stability and health. It does not mean earning more money but it means utilizing the earned money to satisfy all the requirements in best possible manner. The ultimate aim of personal financial management is to ensure the balance between earnings and incomes. The main components of personal finance are insurance, tax planning, loans like home loans and personal loans, retirement planning, social security, banking etc.