Significance of Financial Management

Significance of Financial Management:

Importance of financial management can’t be forgotten if you have to stay alive in business in long run. With financial management, we take the judgment of taking fund from various sources and its valuable use in different operations of business. If we avoid financial management and use fund devoid of any financial planning, our risk and cost of business will raise. Apart from this, financial management is significant for developing an approach to improve the effectiveness of your business.

Fixed possessions financed out of long term funds:

A prudent financial management is obliging to make a capital structure that is sound. Our aim will decrease risk of solvency. With this management, we will purchase fixed assets out of long term funds. Long term funds have to recompense after 10 or 20 years. Therefore we can easily pay back this fund out of our gain. If we will finance fixed assets out of short term fund, it might be risky as if we will not pay this fund on its maturity, we can’t carry our business long and we cannot as well sell our fixed asset in very short time. The outcome might come in the form of insolvency of business. Therefore, we never take any solvency risk and try to understand the significance of financial management.

Invest in current possession at optimum level:

Financial management instructs us to invest money in current possessions at optimum level. Both over and under investment is unsafe. Main reason of this is to decrease cost and raise return on investment. Under and over investment in current possession will raise the cost and decrease return. I can elucidate this issue with following simple illustration. With this you can understand the importance of financial management. Assume that if a company takes loan of Rs 100000 at 10% interest rate and similar amount is invested in inventory. It is not good since it can’t say optimum investment in current possession. Some inventory might be scrape, some inventory might be outdated, if inventory will not sell, we have to undergo carrying cost. Therefore our overall cost will rise.

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