Role of Financial Management cannot be over-emphasized, since it has a direct bearing on the financial health of a business. Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. The financial statements such as Balance Sheet and Profit and Loss Account reflect a firm’s financial position and its financial health. Almost all items in the financial statements of a business are affected directly or indirectly through some financial management decisions. Some prominent examples of the aspects being affected could be as under:
(i) To ensure regular and adequate supply of funds to the concern. And and ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
(ii) The quantum of Current Assets as well as its break-up into cash, inventories and receivables: With an increase in the investment in fixed assets, there is commensurate increase in the working capital requirements. The quantum of currents assets is also influenced by financial management decisions.
(iii) The amount of long term and short term financing to be used: Financial management, inter alia, involves decision about the proportion of long and short-term finance.
(iv) Break-up of long term financing into debt, equity etc: Of the total long term finance, the proportions to be raised by way of debt and/or equity is also a financial management decision.
(v) All items in the Profit and Loss Account e.g., Interest, Expense, Depreciation etc. : Higher amount of debt means higher interest expense in future. Similarly, use of higher equity may entail higher payment of dividends.
In other words it can, thus, be stated that the financial statements of a business have been largely determined by financial management decisions taken earlier. Similarly, the future financial statements would depend upon past as well as current financial decisions. Good financial management aims at mobilization of financial resources at a lower cost and deployment of these in most lucrative activities.