Nature and Purpose of Financial Management

Financial management can be defined as 'the identification of the possible strategies capable of maximizing an organization’s net present value, the allocation of scarce capital resources among the competing opportunities and the implementation and monitoring of the chosen strategy so as to achieve stated objectives'.
Financial management decisions
The financial manager makes decisions relating to investment, financing and dividends. The management of risk must also be considered. Investments in assets must be financed somehow. Financial management is also concerned with the management of short-term funds and with how funds can be raised over the long term.
The retention of profits is a financing decision. The other side of this decision is that if profits are retained, there is less to pay out to shareholders as dividends, which might deter investors. An appropriate balance needs to be struck in addressing the dividend decision: how much of its profits should the company payout as dividends and how much should it retain for investment to provide for future growth and new investment opportunities?
Financial planning
The financial manager will need to plan to ensure that enough funding is available at the right time to meet the needs of the organization for short, medium and long-term capital.
(a) In the short term, funds may be needed to pay for purchases of stock, or to smooth out changes in receivables, payables and cash: the financial manager is here ensuring that working capital requirements are met.
(b) In the medium or long term, the organization may have planned acquisition of fixed assets such as plant and machinery, for which the financial manager must ensure that funding is available