Categories: Financial Q&A

Explain the importance of Financial Management!

Question: Explain the importance of Financial Management in the present day Business World.

Answers: The importance/significance of financial management can be discussed/ explained from the following angles:

I – Importance to all types of organizations:

Business organizations – Financial management is important to all types of the business organization i.e. Small size, medium size or a large size organization. As the size grows, financial decisions become more and more complex as the amount involves also is large.
Charitable organization / nonprofit organization / Trust – In all those organizations, finance is a crucial aspect to be managed. A finance manager has to concentrate more on the collection of donations/ revenues etc and has to ensure that every rupee spent is justified and is towards achieving Goals of an organization.
Government / Govt. or public sector undertaking – In central/ state Govt, finance is a key/ important portfolio generally given to most capable or competent person. Preparation of budget, monitoring capital /revenue receipt and expenditure are key functions to be performed by the person in charge of finance. Similarly, in a Govt or public sector organization, financial controller or Chief finance officer has to play a key role in performing/ taking all three financial decisions i.e. raising of funds, investment of funds and distributing.
Other organizations- In all other organizations or even in a family finance is a key area to be looked in to seriously by a competent person so that things do not go out of gear.

II – Importance to all stakeholders:

Financial Management is important to all stakeholders as explained below:

Shareholders – Shareholders are interested in getting optimum devidend and maximizing their wealth which is the basic objective of financial management.
Investors/creditors – these stakeholders are interested in the safety of their funds, timely repayment of the principal amount as well as interest on the same. All these aspects are to be ensured by the person managing funds/ finance.
Employees – They are interested in getting the timely payment of their salary/ wages, bonus, incentives and their retirement benefits which are possible only if funds are managed properly and organization is working in profit.
Customers – They are interested in quality products at reasonable rates which are possible only through efficient management of organization including management of funds.
Public – Public at large is interested in general public welfare activities under the corporate social responsibility and this aspect is possible only when organization earns the adequate profit.
Government – Govt is interested in timely payment of taxes and other revenues from the business world where again efficient finance manager has a definite role to play.
Management – Management is interested in overall image building, increase the market share, optimizing shareholders wealth and profit and all these aspects greatly depends upon the efficient management of financial resources.

III – Importance of financial management to all deportments of a organization.

A large size company has many departments like (besides finance dept.)

Production/ Manufacturing Dept.
Marketing Dept.
Personnel Dept.
Material/ Inventory Dept.

All these departments look for availability of adequate funds so that they could manage their individual responsibilities in an efficient manner. A lot of funds are required in production/manufacturing dept for ongoing / completing the production process as well as maintaining adequate stock to make available goods for the marketing dept for sale. Hence, finance department through efficient management of funds has to ensure that adequate funds are made available to all department and these departments at no stage starve for want of funds. Hence, efficient financial management is of utmost importance to all another department of the organization.