Financial Management Roles and Objectives

¶ … Financial Management

Roles and objectives of financial management

Financial management refers to the organizing, planning, controlling and directing of finance for proper utilization of a company's funds. It also refers to the general management principles applied to the financial resources of a company Paramasivan C., 2009.

Financial management will play a critical role in the contribution towards the company's goals achievement of reducing costs and improving the financial position.

The objectives of financial management are to ensure there is adequate and regular funds supply for the enterprise. This means the company's finances must be well budgeted to ensure that proper planning is done and funds are availed when needed. The next objective is maximizing profits. Financial management has to ensure there is an adequate return on the shareholders investment. The finance manager will try to earn the maximum profits they can for the company in both short and long terms. Wealth maximization is another objective of financial management. This means earning maximum wealth for shareholders. The CFO will give the maximum dividend depending on the profits the company earns to the shareholders. They will also try and increase the shares market value. The company performance will determine the market value of the company's shares. Therefore, to get maximum wealth for shareholders, the company will need to have some good overall performance.

Another objective is proper estimation for the company's total financial requirements. This is a vital objective in financial management because the CFO will need to have proper estimates regarding the company's financial requirements. They will have to establish the amount of finance required in running the company for a given period of time, the working capital, and fixed capital required by the company. These amounts have to be correct to ensure that there will be no shortage. To come up with the correct estimates, the CFO will have to consider the following technology used within the company, operation scale, legal requirements, and employee numbers.

Proper mobilization of funds is another objective. Once the CFO has estimated to company's financial requirements, they are required to ensure the funds are utilized as expected. This would allow a company to keep track of its funds and account for their uses. Using the funds as expected will allow the company to maximize on its profits and reduce its costs, which would in turn maximize on the shareholders wealth.

Significance of evaluating financial performance, financial planning, and forecasting

Financial performance is a measure of how a company uses its assets to generate revenue in its primary business mode Bertoneche & Knight, 2001.

The term can also be used to describe a company's financial health. The importance of evaluating a company's financial performance is to determine is a company is able to use its assets well in order to generate income. Financial performance evaluation will also assist managers in identifying the company's weaknesses and strengths in regards to percentages and dollars. This evaluation will provide great insights as to whether the company has enough cash to enable it meet its obligations, is the company generating sufficient sales volumes, is the company able to make timely payments to its suppliers, and is there enough working capital for the company.

The most objective way of evaluating financial performance is through financial statement analysis. This will involve assessment of the company's profitability, leverage, solvency, and operational efficiency. The principle tool used to conduct this evaluation is financial ratio, and the main challenge is identifying which ratios to use, and the results are interpreted.

Financial planning focuses on the future of the company. It involves employing certain techniques, which will assist in determining how to plan a company's financial goals. Financial planning allows a company to forecast how it will spend the financial resources it has, and how the company will manage to make profits out of the decisions it has made. Therefore, financial planning is important as it enables the company to look into its future and build the type of security it would like. This planning will allow a company to anticipate and handle any obstacles that might arise in the process of attaining its financial goals.

For a company to proper plan it finances, it will need to analyze its net worth. This will allow a company to determine it has a negative or positive worth. The company's expense budgets will need to be analyzed too to determine how the company is spending money. The company's financial plans and goals will be analyzed. This will allow for the development of a financial plan.

Forecasting allows a company to make good decisions regarding its business model. It allows the management to resolve the dilemma of greater shareholder expectations and demanding customer requirements Palmatier, n.d ()

. Any company that is striving to achieve operational excellence, and gain competitive advantage will need to perform continuous forecasting in order for it to satisfy its customers and manage its resources.

Current conditions of fixed income and common stock securities

Fixed income is a type of investment where the borrower has to pay a fixed amount at a specific time Dwyer & Tkac, 2009.

Fixed income has to be paid whether the company is making a profit or not because there is an agreed payment schedule. If the borrower is misses to make a single payment on the fixed income, the payees can use the relevant law to force the issuer to pay or declare bankruptcy.

Fixed income securities are usually considered to have lower returns or profits on the investment because they have lower risks. This is because the borrower is obligated to pay the fixed income even when the company is making a loss. They have lower risks because the repayments are scheduled and there is a specific number of payments the payees can expect. Fixed income securities have to be planned for to ensure that no payment is missed. This would mean a company will have to direct its finances to paying the fixed income first before it can consider making other financial obligations.

Common stock securities refer to ownership of a company through shares. Commons stock securities do not have to receive any payment at a specific time. Payment is dependent on the company making high profits. This payment referred to as dividend will be made after fixed income securities have been paid and preferred shareholders paid too. If the company makes minimal profits or none, then the common stockholders will not receive any dividend. This security is considered to have high risks and high returns. This is because there is no guarantee of a dividend been issued but when a dividend is issued it usually has high returns on the investment made.

In financial management common stock securities have no major impact because they are dependent on the company making high profits. Though this might be the case, the CFO will need to ensure the company remains profitable, and dividend issued to ensure the company's stock price does not fall due to massive sell out by the stock holders.