Definition of Financial Management



Finance is a branch of economics concerned with resource allocation as well as resource management, acquisition and investment. Simply, finance deals with matters related to money and the markets. It is the science of the management of money and other assets.

The scope of financial management can be described by the functions of the finance manager.

These functions can be summarized into two broad categories, namely:-

  • Managerial functions
  • Routine functions


  1. Managerial Functions

These are the most important functions of the finance manager since they affect the value of the firm. These functions require the technical expertise of the finance manager. They include the following:-

  1. The investment function

This refers to the allocation of the company’s resources amongst the competing projects available. Investment in fixed assets is known as capital budgeting while investment in current assets is known as working capital management.

  1. The financing Function

The financing decision involves determining the sources of finance available to the company. Capital may be obtained from a variety of sources as follows:

  • Long-term sources which include equity ( ordinary share capital plus reserves) ,debt (debentures plus long term loans) and preference share capital.
  • Short term sources which include all current liability items in the balance sheet.
  • Asset-based finance which include mortgage, hire purchase, leasing.

The sources of finance available to the company can be categorized into two.  These are:-

The dividend policy function

This function is also known as the profit allocation function.  Dividends are profits which are distributed to the ordinary shareholders as a reward for investing in the company.

The dividend policy decision affects the investment function because retained earnings are an internal source of finance.  Therefore a high dividend pay out ratio will lead to low retained earnings and hence more external borrowing for investment purposes and vice versa.

  1. Routine functions

These are the day to day functions of a finance office. They involve the setting up of a system of internal controls by the finance manager to ensure that the operations of a firm run smoothly and that the assets of the company are safeguarded and only used for the benefit of the company. Once designed such roles are delegated to junior staff in the finance department and they include the following

  • Receipt and payment of cash.
  • Issue of cash receipts.
  • Safeguarding the important financial documents etc.
  • Ensure authorization to access and use of assets of a company.
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