Financial Management: Objectives, Tasks, and Tools

Posted on Sep 2, 2024 in Economy

Financial Management Objectives

The two main objectives of financial management are:

  1. Profitability: Maximizing returns on investment for owners or shareholders.
  2. Liquidity: Ensuring the rapid conversion of assets into cash.

Financial management involves managing a company’s financial resources to achieve these objectives. This requires balancing the need for profitability with the need for liquidity, often referred to as the financial manager’s dilemma.

Role of Financial Management

To achieve profitability and cash flow, financial management focuses on:

  • Securing funding from various sources, such as investors, creditors, and retained earnings.
  • Utilizing and allocating financial resources effectively within the business.

Financial Administrator Tasks

Financial administrators play a crucial role in interpreting and analyzing financial data to guide company management. Key tasks include:

A) Balance Sheet Analysis

The balance sheet provides a snapshot of a company’s financial position at a specific date. It outlines:

  • Assets: Everything of value owned by the company.
  • Liabilities: What the company owes to others, including owners’ equity.

B) Income Statement Analysis

The income statement details the company’s financial performance over a period. It shows how profits or losses were generated, providing insights into the company’s operations.

C) Financial Planning, Control, and Analysis Tools

Financial administrators utilize various tools for planning, control, and analysis, including:

  1. Financial Ratios and Indicators: These provide insights into liquidity, profitability, and debt management.
    • Liquidity Ratios: Measure the company’s ability to meet short-term obligations.
      • Current Ratio: Compares current assets to current liabilities.
    • Turnover Ratios: Assess how efficiently assets are managed.
      • Accounts Receivable Turnover: Measures how quickly receivables are collected.
      • Inventory Turnover: Indicates how efficiently inventory is sold.
    • Debt Ratios: Evaluate the company’s leverage and financial risk.
      • Debt Ratio: Shows the proportion of assets financed by debt.
      • Total Debt to Equity Ratio: Indicates the extent to which debt finances assets.
    • Performance Ratios: Measure profitability in relation to investment and sales.
  2. Statements of Sources and Uses of Funds: Track the flow of funds within the company over a period.
  3. Budgets: Provide a written financial plan, categorized into:
    • Operating Budgets
    • Cash Budgets
    • Capital Investment Budgets
  4. Financial Forecasting: Involves projecting future financial performance, including the creation of pro forma financial statements.
  5. Project Evaluation: Assesses the financial viability of investment decisions using tools like:
    • Payback Period
    • Net Present Value (NPV)
    • Internal Rate of Return (IRR)