Ever since 1494 when a monk of Italian
origin, Lucas Pacioli wrote the first book on modern accounting, financial management has grown to become the key to corporate
growth. Financial management can be simply termed as efficient management of finances of a business/organization in order
to achieve financial objectives (financialmanagement.org [online]).
The key objectives of a financial management
are to generate wealth for the business and its shareholders, to provide a return of investment and to generate cash flow.
There are two main aspects of financial management, namely, the procurement of funds and the effective use of those funds.
On the procurement of funds, one may note here that funds may be procured from different sources and funds procured from different
sources have different characteristics in terms of cost, risk and control in financial-management-speak. Funds issued through
equity participation, that is, the financier acquires some stake in the company, are least risky as the money used to buy
equity can only be repaid upon the liquidation of the company (www.economywatch [online]). But in terms of cost, these funds
are pricey compared to others mainly because the dividend expectations are normally higher than the prevailing interest rates.
In principle, financial management
comprises of risk, cost and control. For a proper balancing of risk and control, the cost of funds should be at the minimum.
Sound financial management is essential
in all types of organizations, whether they are profit motivated, public or state owned bodies or those that are altruistic
Financial management ultimately will
involve making of some financial decisions, and there are three types of such financial management decisions; long term investment
decisions, long-term financing decisions and working capital management decisions (Baker, Powell, 2005). The third type of
financial management decision, unlike the first two, is short term in nature. the decision in this segment involve managing
cash, inventories and short term financing (wikipedia 2007 [online]). All financial management decisions should form part
of overall strategy and not be seen as separate. The investment decision of financial
management involves the managers deciding on the kind and nature of assets that they want to hold. So, inevitably this will
involve selling, buying, reducing or holding of various assets. Managing those aforementioned activities is called capital
budgeting. The process of decision making on investments will involve one of
the cardinal principles of financial management, which is that a firm should hold only those assets which yield a return not
less than a prescribed minimum(Baker, Powell, 2005).
Long term financing decision, as the
name suggests, involve deciding the mode of procurement of funds to finance the necessary long term investments. The corporate
“graveyard” is littered with companies that went burst not because their products had no market or that the workers
were lazy, but because the decision makers did not adhere to the principles of good financial management. If, carried out
competently, financial management increases the output from the factors of production, especially capital. Good financial
management is especially essential for start-ups which need it for their survival. It is also important to an organization
even if the profits are not in any way the motivation. Most of non-profit organizations have scant respect for good financial
management, but even such bodies, and indeed everyone should be encouraged, if only for a wider utilitarian objective.
1. BAKER, KH, POWELL, GE (2005) Understanding
Financial Management: A Practical Guide Blackwell publishing, Boston.