Financial management can be defined as the discipline or role in an enterprise that is primarily concerned with money, expenses, cash flow, credit and the ability of the organization to take on future risks. In the broadest sense, financial management is used to manage a firm’s (or businesses) financial resources. This includes managing the total resources or assets of the company in relation to the total debts and equity that are outstanding. Other important areas of financial management are asset management, trading, investing, and financing. The concept of financial management is relatively new and was not developed by the business or accounting community during the period of time in which business was dominated by private individuals or small organizations. Financial management is a highly specialized area of study and many different methods and concepts have been developed over the years, but they all basically share a common lesson: successful financial management depends upon sound money management.
The term financial management covers a wide range of activities. It is used in the context of banking, including bank supervision and regulation, financial statement preparation and analysis, financial planning, fund raising, management of internal control mechanisms for financial institutions and rating the performance of financial firms. It is also used in the context of economics to describe a range of economic activities that have direct and indirect effects on the value and wealth of a nation. A key objective of financial management is to ensure that the resources of a country are efficiently allocated to meet both long-term and short-term monetary objectives. In addition, financial management also considers the effects of monetary policy, including inflation, unemployment, deflation, and other monetary effects, on the value and liquidity of the assets, funds and liabilities of a financial institution.
There are many approaches to financial management. One approach is known as cyclical financial management, which attempts to create a buffer or cushion against fluctuations in the prices of certain asset classes (such as bonds, currencies and stocks). Another approach is known as investment banking, which is the practice of creating financial products intended to improve the value of a firm by providing short-term financing. Another approach is commercial lending, which is the practice of issuing loans to businesses for the purchase of assets. Financial institutions can engage in a variety of financial activities. They can issue loans, buy securities (such as equity or common equity), issue derivatives (covering forex positions), or engage in activities that generate cash through cash settlements.