Importance of Financial Management

Financial management is very important or significant because it is related to funds of company. Financial management guides to finance manager to make optimum position of funds. 

With study of financial management, we can protect our business from pre-carious mismanagement of money. Suppose, you are small businessman and you took short-term loan and financed fixed assets with this loan. It means, you have to pay loan within one year but fixed assets cannot be sold within one year. In the end of year, you have not enough money to pay this long term debt and this will create risk to your business’s existence. You will become insolvent. This is the simple example of mismanagement of money in your small business, but we do large scale company business, importance of financial management is greater than small business. We should invest in fixed asset if there is any other source of funds. In financial management, we make optimum capital structure and we should buy all fixed assets out of share capital money because, it will reduce the risk of repayment.

In financial management, we deeply study our balance sheet and all sensitive facts should be watched which can endanger our business into loss. For example, a closing balance sheet shows you, you have to pay large amount of debt in next year and you have blocked all the money by purchasing goods or inventory. Financial management teaches you that this is not good outflow of funds which is invested in inventory. Blocked inventory never generate earning and your balance sheet’s stock value gives you idea that your company is not capable to sell products quickly. Financial manager can elucidate you that overstocking will increase go down expenses one side and it is also risky due to the danger of damage the stock. Moreover, it increases risk of liquidity. Inventory management is the part of financial management and merely using inventory management can be the best way to solve the problem of overstocking.

 Financial management works under two theories. One theory reins bad sources of fund. This theory elucidates us that we should think cost, risk and control and these should be minimum when we get money from others. Only financial management makes good financial structure to minimize cost, risk and control of borrowed money. Second theory clarifies us that we should think about time, risk and return before investing our money. Our ROI should be more than our cost of capital. Our risk of investment should be least. We should get our money with high return within very short-period. All above things can be possible only after study financial management.