Financial management refers to that part of the management which is concerned with the efficient planning and controlling the financial affairs of the enterprise. Financial management plays the following role.-

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a) Determination of fixed assets: Fixed assets have an important contribution in increasing the earning capacity of the business. Long term investment decisions also called capital budgeting decision raise the size of fixed assets.

 

b) Determination of current assets: Current assets are needed to meet the day to day transactions of the business. The total investment in current assets is to be determined and the split up into its elements is required. For e.g. if it is decided to maintain current assets of Rs 10 lakh, further decision is to be made as to how much cash is required, how much amount to be invested in debtors, stock etc.

 

c) Determination of long term and short term finance: Under this a Finance manager has to maintain a proper ratio of short term and long term sources of finance after estimating its requirement.

 

d) Determination of Capital Structure: A balanced decision related to capital structure is to be made. The proportion of debt and equity is to be determined.

 

e) Determination of various items in the Profit and loss account-The financial decisions affect the various items to appear in the profit and loss account. For e.g depreciation on fixed assets, interest on debt etc.

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