VIII.

SIGNIFICANCE OFFINANCIAL MANAGEMENT

The importance of financial management is known for the following aspects:

BROAD APPLICABILITY

Any organization whether motivated with earning profit or not having cashflow
requires to be viewed from the angle of financial discipline. The principles of finance are
applicable wherever there is cashflow. The concept of cashflowis one of the central elements
of financial analysis, planning, control and resource allocation decisions. Cashflow is important
because the financial health of the firm depends on its ability to generate sufficient amounts of
cash to pay its employees, suppliers, creditors, or owners. Financial management is equally
applicable to all to all forms of businesslikesole traders, partnerships and corporation. It is also
applicable to nonprofit organization like trust,societies, government organizations, public
sectors and so forth.

REDUCTION OF CHANCES OF FAILUREA

firm having latest technology, sophisticated machinery, high caliber marketing and
technical expert and so forth may still fail unless its finances are managed on sound
principles of financial management. The strengthof business lies in its financial discipline.
Therefore,finance function is treated as primordial which enables the other functions
likeproduction, marketing, purchase and personnel to be effective in the achievement of
organizational goals and objectives.

MEASUREMENT OF RETURN ON INVESTMENT

Anybody who investshis moneywill expect to earn a reasonable return on his

investment. The owners of business try to maximize their wealth. Financial management
studies the risk-return perception of the owners and the time value of money. It considers
the amount of cashflows expected tobe generated for the benefit of owners, the timing of these
cashflows and the risk attached to these cashflows. The greater the time and risk associated with
the expected cashflow, the greater is the rate of return required by the owners.