3 Main Significance of Financial Management

The importance of financial management is known from the following aspects:- 1. Applicability 2. Chances of Failure 3. Return on Investment.

Significance # 1. Applicability:

The principle of finance is applicable wherever there is cash-flow. The concept of cash-flow is one of the central elements of financial analysis, planning, control and resource allocation decisions. Cash-flow are important because financial health of the firm depends on its ability to generate sufficient amounts of cash to pay its employees, suppliers, creditors and owners.

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Any organization, whether motivated with earning of profit or not, having cash-flow requires to be viewed from the angle of financial discipline. Therefore, financial management is equally applicable to all forms of business like sole traders, partnerships, companies. It is also applicable to non-profit organizations like trusts, societies, governmental organizations, public sector enterprises etc.

Significance # 2. Chances of Failure:

A firm having latest technology, sophisticated machinery, high calibre marketing and technical experts etc. may fail to succeed unless its finances are managed on sound principles of financial management. The strength of business lies in its financial discipline.

Therefore, finance function is treated as primary, which enable the other functions like production, marketing, purchase, personnel etc. to be more effective in achievement of organizational goals and objectives.

Significance # 3. Return on Investment:

Anybody invests his money will mean to earn a reasonable return on his investment. The owners of business try to maximize their wealth. It depend on the amount of cash-flows expected to be generated for the benefit of owners, the timing of these cash-flows and the risk attached to these cash-flows.

The greater the time and risk associated with the expected cash-flow, the greater is the rate of return required by the owners. The Financial management study the risk-return perception of the owners and the time value of money.

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