Individuals, businesses, and government organizations all have distinct goals to achieve. To reach these objectives, they implement various programs such as manufacturing, trading, or providing services. These programs require a range of resources, including natural resources like raw materials, human resources like skilled labor, and financial resources in the form of funds. Effective management of financial assets is crucial for maximizing the utilization of both human and environmental resources.
In an individual context, managing financial resources is referred to as personal finance. In government institutions, this concept is known as public finance. For business firms, it falls under the umbrella of financial management. The field of finance can be broadly categorized into three primary domains: public finance, financial management, and personal finance. In this discussion, we focus exclusively on financial management and exclude public finance and personal finance from our scope.
Today, terms like financial management, business finance, corporate finance, and managerial finance are often used interchangeably. However, in this context, we will primarily use the term financial management. In the early stages of finance’s evolution as an independent field, scholars and professionals used the phrase ‘business finance.’ Later, they adopted ‘corporate finance’ due to the prominence of corporate entities in the business landscape. Initially, business finance focused mainly on securing the capital required to establish and expand a company.
As time has progressed, the scope of finance has expanded significantly. It now encompasses not only fundraising but also the acquisition, financing, and management of a corporation’s assets. This contemporary perspective on financial management reflects the broader responsibilities of modern financial managers.
To illustrate this contemporary interpretation of financial management, consider this scenario: You and your friends want to start an ice cream factory with the goal of enhancing the owners’ wealth. To kickstart this venture, you need fixed assets like machines, freezers, and delivery vans, as well as current assets like inventory (raw materials and finished products), receivables (credit sales), and some cash. The financial decisions you make in this scenario include investment decisions (how much to invest and the expected benefits and risks), financing decisions (sources of funds, equity capital, and debt), current asset management (optimizing components of current assets), and dividend decisions (how much to reinvest for future growth and how much to distribute to shareholders).
In summary, financial management encompasses a series of decision-making processes related to investment, financing, dividends, and current asset management within a corporation. This multifaceted approach ensures the efficient use of resources and the achievement of organizational goals.
