Financial Management in Corporate Governance
Financial management pertains to the approaches organisations or business entities employ in arranging, organising, directing, and regulating financial activities such as procurement and utilising corporate funds. The principles of management, in general, are applied to manage a company’s financial resources. When the aim is to achieve success, financial management becomes strategic financial management to attain a company’s objectives while maximising shareholder value in the long term. By properly comprehending and handling a company’s assets and liabilities, financial management generates profits for the business while ensuring an acceptable return on investment.
The goal of financial management around the world
Financial management focuses on procuring, allocating, and controlling financial resources to maximise shareholder wealth. Its primary objective is to maintain a steady and sufficient flow of funds into an organisation. Shareholders can expect satisfactory returns on their investment based on their earning capacity, the market value of their shares, and their expectations. Financial management ensures that funds are utilised optimally, considering the least costly approach while achieving maximum returns. The organisation invests in safe ventures that provide adequate returns, ensuring the investment’s safety for the company and shareholders. Additionally, financial management strives for a balanced capital composition that strikes a fair balance between debt and equity capital.
To guarantee that shareholders amass the greatest possible wealth, financial management within an organisation undertakes the following actions:
1. Estimates the capital needs of the organisation: One of the responsibilities of a financial manager is to estimate the capital requirements of a company at all times. This estimation process considers various aspects of the company’s business activities, such as the expected costs and profits of future programs, as well as the organisation’s policies. It is important to exercise prudence when making these estimations, as to do so may increase the company’s earning capacity. A competent financial management strategy should aim to increase the earning capacity of the organisation.
2. Decide on the makeup of the organisation’s capital: The next step after estimation is to decide on the structure of the capital. This entails evaluating the ratio of long-term and short-term debt to equity, which is determined by the percentage of equity capital that the company possesses. Additionally, when determining the capital composition, it is necessary to consider external funds raised from parties outside the organisation.
3. Selecting where to obtain the necessary funds: When a business requires additional funds, various options enable the organisation to obtain the necessary funds for various purposes. For example, the company can issue shares and debentures to traders who want to buy and own them, thereby raising funds. Alternatively, the company can seek loans from banks and lending institutions to aid various activities. Another option is to obtain public deposits, as with bonds. The benefits and drawbacks of each will be considered when choosing among these options.
4. Invest the funds: After acquiring the necessary funds, the financial manager must invest them in ventures that are likely to generate the highest profits for the company. This ensures the safety of the investment and the regular realisation of returns, which benefits the shareholders.
5. Dispose of the surplus: The finance manager is responsible for determining the net profits made by the company and deciding how to allocate them, either by declaring dividends or retaining profits for future use. This decision depends on the company’s plans for expansion, innovation, and diversification. The dividend rates and other benefits, such as bonuses, must also be identified.
5. Oversee cash management: The finance manager is responsible for making decisions that pertain to the management of cash in the organisation. Good cash management protocols are crucial for any business entity, and this involves determining how cash will be used in the organisation, including payments for salaries, overhead bills, creditors, raw materials, and other expenses.
6. Exercise financial control: The finance manager develops plans and procedures for utilising funds and exercises control over finances. This may involve various techniques such as ratio analysis, financial forecasting, cost and profit control, etc. The ultimate goal is to ensure that the business enterprise makes profits, and financial control by the finance manager is essential in achieving this objective. The shareholders benefit from this as they can earn profits regularly.
The goal of financial management and corporate governance
Corporate governance is the principles and practices organisations use to ensure accountability, transparency, and ethical behaviour in their business activities. The term refers to the processes and structures put in place to govern decision-making and control in an organisation. Good corporate governance involves being open and transparent when reporting operational and financial information and demonstrating accountability while operating within ethical standards. Corporate governance is a concept that encompasses the management, organisation, and control of business entities. It is how organisations are directed and controlled, and it promotes fairness and transparency in business practices. On the other hand, poor corporate governance can lead to corruption and mismanagement.
Relationship Between Financial Management and Corporate Governance
The term “corporate governance” refers to how a corporate entity manages its assets and resources to increase shareholder value and satisfy other stakeholders. It pertains to exercising power in managing economic and social resources for business development. Good corporate governance can lead to improved financial management and is critical to an organisation’s success in developed economies. Corporate governance principles involve fairness and transparency in operations, including enhanced disclosures to protect stakeholders’ interests. Corporate governance also demonstrates the direction and integrity of a firm’s operations, making it easier for the financial manager to access funds by building trust with investors and the community. By creating long-term investment opportunities, good corporate governance can improve a company’s ability to access funds.
Financial management is organising, planning, directing, and controlling financial activities within an organisation to achieve its objectives and maximise shareholder value over time. Its primary aim is to increase the wealth of shareholders. Through financial management, stakeholders can expect reasonable returns based on their earnings capacity, share price, and expectations. On the other hand, corporate governance involves conducting business activities fairly and transparently and adhering to acceptable ethical standards. Poor corporate governance leads to corruption and mismanagement. Good corporate governance leads to an improvement in financial management because the two are related. In other words, corporate governance simplifies certain aspects of financial management.
Author Bio: Mark Edmonds is an expert in finance and corporate governance. He has extensive experience in providing high-quality MBA assignment help to students. Mark has a Bachelor’s degree in finance and a Master’s in Business Administration from reputable universities. He is passionate about helping students achieve their academic goals and has received numerous accolades for his exceptional work in finance. With his extensive financial management and corporate governance knowledge, Mark is committed to providing top-notch finance assignment help to students.