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WHAT IS FINANCIAL MANAGEMENT? MEANING, IMPORTANCE / SIGNIFICANCE

Updated on October 28, 2011

Meaning and importance / significance of financial management suddenly found its way back into the lips, head and heart of almost all living beings. This recent development could be unconnected with the slow recovery of many economies after the devastating effects of the recent economic crisis that rocked the whole world.

MOTIVATION FOR WRITING THIS ARTICLE

The desire to write this article was born after I had a discussion with a friend of mine who is a qualified medical doctor who shamelessly exhibited his complete ignorance of basic financial management knowledge and skills. He does not even know that financial management has grown into a full fledge course studied at the university even up to PhD level.

Like the title of this article suggest, I will start by explaining what financial management is in a very simple language and manner so that all that come across this article will understand the basic concept of financial management.

I have severally been criticized by people (knowledgeable in accounting, finance, cost measurement and financial management) that I oversimplify things. Well, this could be as a result of the way I was brought up. I was taught and nurtured by a very simple man who believed that things should and would always be simply.

WHAT IS FINANCIAL MANAGEMENT?

Financial management is the scientific manipulation and exploitation of our business and financial environment, using a range of statistical, mathematical, and economics tools, with the aim of making the best economic decision, under prevailing circumstances and availability of information and scarce resources.

Simply put, financial management is an intelligent quest for optimal use of financial and other economic resources at our disposal. Tax matters are also considered.

Everybody engage in financial mgt one way or the other on a daily basis without knowing it- at best, they will call it economizing. An average housewife will seek alternative ways of getting more value for the money she spends.

Financial mgt as a discipline sprung out from economics to become a stand alone profession. That is why we have people that call themselves financial manager and investment managers today.

SCOPE OF FINANCIAL MANAGEMENT

Fin. Mgt cuts across wide range of sectors today- in fact, all sectors. Government agencies for instance make use of cost-benefit-analysis to determine the economic wisdom in certain projects.

Financial management has so advanced that many behavioral factors now play significant role in certain aspects of financial management like valuation where bankruptcy cost is factored into options price. The legal practitioners rely on time-value of money to same claims that involves financial compensation.

IMPORTANCE / SIGNIFICANCE OF FINANCIAL MANAGEMENT

  • Economic growth and development: through investing decision, financing decision, dividend decision, and risk management decision, better and more economically viable projects are undertaken by companies. The resultant effect on the economy is economic growth and development. Financial management serve as a good guide to online investing.
  • Improved standard of living: growth and development in the economy that is brought about by financial management will ultimately translate into improved standard of living for all.
  • Improved health: again, good economic condition and improved standard of living culminates into improved health as a lot of ‘financial stress’ related sicknesses will be completely eliminated or reasonably reduced.
  • Allows for better financial decision
  • Creates jobs – those that teach financial management and the jobs that are created as a result of flourishing economy. Better financial decisions will lead to profitability, and profitability will eventually lead to expansion which will in turn mean more jobs.
  • Alleviation of poverty
  • Preserve our environment
  • Promotes efficiency: good financial management does not give room for wastes and inefficiencies that characterizes poor financial management and decision making.

The importance of financial management can take us a whole lot of space to finish listing. This is to say that the once listed above are just but few.

TRADITIONAL AREAS OF FINANCIAL MANAGEMENT

Finance in all sense of it is about cash flows. The management activities of finance can be viewed from four areas. Namely,

  1. Capital structure
  2. Capital budgeting
  3. Long-term financing
  4. Working capital management

Each of these areas can take a full textbook to adequately be discussed. Therefore, I will not delve into discussing it in this article. Look around this site and read up other articles for more information.

CONCLUSION

Financial management is a curious combinations of mathematical and science precisions with variables from the ever complex human behaviour. Financial management has many benefits to the society and has four broad areas.

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    • profile image

      ayesha 10 months ago

      Its gud but not reference material

    • profile image

      ali 24 months ago

      this is gud but there are no reference materal to use

    • profile image

      adi 3 years ago

      Thanks for sharing this priceless information Sir. Im using your definition on my assignment. ^^

    • profile image

      Livhuwani 4 years ago

      Ey thanks a lot you have helped me a lot todo my municipal finance assignment and i have also learned , gained knowlegde here. thanks again hubs

    • profile image

      bikash bhattarai 4 years ago

      very much thanks to whom this posted

    • profile image

      patrick 4 years ago

      added value to mi research thx

    • profile image

      manjot kaur 4 years ago

      it really helps me lot 2 complete my asssignment

    • profile image

      aldwin taberdo 4 years ago

      thanks a lot... its very useful for our research

    • monicamelendez profile image

      monicamelendez 5 years ago from Salt Lake City

      Voted 'useful'. It's amazing to me that anyone wouldn't understand how important financial management is!

    • profile image

      ijeoma 5 years ago

      thanks for the information its useful to me

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      Peter Frank 5 years ago

      Thanks for you hub which makes me to complete my assignment on financial management.

    • profile image

      avoid masiraha 5 years ago

      thanks man you helped me with my assignment.

    • profile image

      yengs 5 years ago

      Thanks chinweihke u just helped me with my homework and u as well educated me

    • ameliem84 profile image

      ameliem84 5 years ago from canada

      Thanks chinweike for Great advice. I’m really grateful to know this very informative publish here.Many thanks for sharing this with us.

    • novascotiamiss profile image

      novascotiamiss 6 years ago from Nova Scotia, Canada

      Great hub. I feel that financial management & planning should be integrated into the modern day education. It's important for all of us and might save people to fall into the debt trap.

    • chinweike profile image
      Author

      Chinweike 6 years ago from Glasgow, UK

      Thanks Whcobb, I am glad this hub on financial management motivated you into thinking of evaluating your financial standing..Cheers!

    • profile image

      boonjaca 6 years ago

      Hello..chinweike Thanks so much for the information that came from your presentation intended. That it would be useful to someone many people.

    • whcobb profile image

      William Cobb 6 years ago from Clarksville, TN

      Good hub... I have to evaluate my financial standing and just by seing the title to this hub is what made me realize that... Thanks. Enjoy the clicks.