Significance of Financial Management

Significance of financial management can not be forgotten if you have to survive in business in long run. With financial management, we take the decision of taking fund from different sources and its effective use in different operations of business. If we ignore financial management and use fund without any financial planning, our risk and cost of business will increase. Except this, financial management is important for developing a strategy to enhance the efficiency of your business.

Significance of financial management can also be explained from following answers of questions :

Q: - 1. Why are fixed assets financed out of long term funds?

Ans. # A prudent financial management is helpful to make a capital structure which is sound. Our aim will reduce risk of solvency. With this management, we will buy fixed assets out of long term funds. Long term funds have to pay after 10 or 20 years. So, we can easily repay this fund out of our profit. If we will finance fixed assets out of short term fund, it may be risky because if we will not pay this fund on its maturity, we can not carry our business long and  we can not also sell our fixed asset in very short time. The result may come in the form of insolvency of business. So, we never take any solvency risk and try to understand the importance of financial management.

Q: - 2. Why do we invest in current asset at optimum level?

Ans. #  Financial management teaches us to invest money in current assets at optimum level. Both over and under investment is harmful. Main reason of this is to reduce cost and increase return on investment. Under and over investment in current asset will increase the cost and reduce return. I can explain this issue with following simple example. With this you can understand the significance of financial management. Suppose, if a company takes loan of Rs 100000 @ 10% interest rate and same amount is invested in inventory. It is not good because it can not say optimum investment in current asset. Some inventory may be scrape, some inventory may be outdated, if inventory will not sell, we have to suffer carrying cost. So, our overall cost will increase. So, analyze this investment through proper inventory and other current asset management.

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Accounting Education: Significance of Financial Management
Significance of Financial Management
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