9 Scopes of Financial Management

Financial management is essential for any organization to function properly. This is true regardless matter how fantastic the product or service is. In a nutshell, financial management entails planning, organizing, implementing controls, and directing the company’s financial capital.

The Two Approaches to Financial Management 

There have been basically two approaches to financial management as company processes have progressed, also compounded by the incorporation of technology: the traditional approach and the modern approach. This is critical to comprehend before moving on to the scope.

The Traditional Approach to Finance Management 

The focus of this method, which was largely seen in the twentieth century, was on obtaining finances for the organization and allocating them for the best potential functioning. This strategy only considered long-term growth and ignored management strategy, working capital, planning, capital budgeting approaches, and so on.

Having cash for liquidation, expansion, and reorganization, on the other hand, was more crucial to the financial manager. Previously, the financial manager’s role was limited to obtaining funds from external sources on a regular basis, rather than ensuring that the funds were used effectively. This method was designed for large organizations and is frequently regarded as restricted and ineffective.

The Modern Approach to Finance Management 

With increased rivalry, the introduction of powerful and effective technology, and the need for powerful small firms, it became critical for management to maximize the utilization of available resources. As a result, in today’s fast-paced, developing, and changing corporate world, the traditional strategy is made ineffective.

The modern strategy focused on obtaining funds and actively employing them, but in the most efficient way possible. Financial planning, capital budgeting, cost of capital determination, working capital management, income management, financial standards for business success, and more are some of the main elements of this approach.

Three essential decisions in three areas are made as a result of this approach: investment decision, finance decision, and dividend decision.

9 Scopes of Financial Management

Financial management’s scope is addressed below:

1. Financial Planning 

This is one of the most important aspects of financial management. It entails the creation, planning, and implementation of the company’s goals, objectives, and concepts. This step also considers the initial programs and policies that will be implemented to achieve these goals, as well as the process of identifying them. In addition, financial planning entails

  • Identifying the financial goal.
  • Rules and procedures that guide the company’s financial decisions.
  • The formulation of a financial plan that includes the evaluation of the capital structure, the various sources of capital, and future development planning in line with the continuously changing business market.

2. Procuring the Capital Funds 

After capital structure planning and determination, this is the next level of financial management. The financial manager attempts to secure funding from a variety of sources, including high-net-worth people, industries, and institutions. It’s important to remember that capital is at the heart of any organization because it’s employed directly in the selling and marketing processes.

3. Supervising the Finances 

The manager ensures that the monies gathered or raised to act as the company’s capital are carefully used for the right purposes in this third area of financial management. This procedure entails the following steps:

  • Establishment of asset management and capital budgeting methodologies. Once these have been created, the organization must properly implement them and work in collaboration with all stakeholders.
  • The manager keeps track of the organization’s cash inflows and outflows. They keep track of the cash deficit and surplus at all times. There must be plans in place to keep a specific percentage of the company’s money liquid so that it can be used for immediate and ongoing needs like staff pay.

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4. Exert Control on the Finances 

The financial manager ensures that funds are properly allocated to the company’s various assets, such as manpower. They develop a budgeting method that keeps the company’s spending under control while accounting for margins and cost uncertainties. Financial control includes the following processes:

  • Setting the company’s financial criteria in advance
  • Make a comparison between the projected and actual costs.
  • Develop a plan to deal with budget overspending.
  • Create a mechanism for monitoring and checking the financial strategy.
  • Change the existing standards and norms to reflect this.

5. Take or Be A Part of Financial Decisions 

Easily, the most important scope of financial management. Here, the financial manager makes key decisions that drive the financial growth of the company. The decisions involved here are: 

  • Investment decisions: Upper management often makes these decisions while examining investment opportunities.
  • Finance decisions: The financial manager makes the majority of these decisions about the company’s wealth. It entails allocating finances to specific requirements while also setting away certain funds for investment.
  • Dividend decisions: The financial manager makes these decisions, which are aimed at delivering dividends to various stakeholders. The profit generated by the company is also known as the dividend.

6. Creation of Financial Documents 

The compilation of legal and company-related financial records, such as balance sheets and tax statements, falls within the sixth aspect of financial management. The financial growth of the company and the sectors in which the growth has increased or decreased are the two major features that are stated in these reports. It also illustrates the company’s net income and expenditures for a given time period or financial year.

7. Predict Financial Performances 

The company’s performance is evaluated in this area of financial management, based on financial trends and previous year reports. The financial manager uses crucial techniques like net profit, ROI, trend analysis, ratio analysis, and so on to make projections about the finances for the following year.

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8. Measure Impact of New Finances 

This scope entails determining how effective the various aspects of the financial plan were in achieving the overall goal. This entails conducting periodic evaluations, comparing expected and actual financial growth, and so on. Several decisions may be made at this stage to help the organization achieve the optimal level of growth.

9. Miscellaneous 

All other financial activities not covered in the previous scopes are included in this scope. Tax planning, social insurance funds, provident funds, securities, and other financial instruments are among them.

Final Thoughts – Scope of Financial Management 

Finance is a broad topic, and a financial manager or a company’s finance team is in charge of managing numerous areas of the company’s wealth. The better and wiser this staff is, the better the company’s money will be spent. Knowing these financial management scopes is the first step in learning how a company’s finances work.

Frequently Asked Questions

Who takes financial decisions within a company?

Upper management, in cooperation with the financial team, is normally in charge.

Does paying taxes to come under financial management scope?

Sure, because it is a necessary and unavoidable business expense.

When does the financial year begin and end?

The fiscal year begins on April 1 and ends on March 31.

What does a financial manager do if the company is overspending or under-spending?

They examine and adjust the budgeting and financial plan on a regular basis to ensure that spending stays on track.

What is liquid cash in a company used for?

It is used to pay staff salaries, pay the company’s power bills, and manage other daily expenses.

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