Basics of Financial Management – Part 3

The social and economic significance of financial management is accentuated by three factors. The first one is organization of business on the corporate basis and assumption of increasing public responsibilities as the enterprise increases in size and influence. The second one is a wide distribution of corporate ownership and the third one is the separation between ownership and management. It will remain so as long as it is necessary to obtain funds from private owners. Management owes direct responsibility to the body of shareholders. The most important single test of managerial ability is to be found in the adequacy, regularity, and growth of net return on the total investment involved.

There has to be a deep consciousness on the part of management handling other’s money. Business has to be carried on a safe and sound basis, but this does not mean avoidance of reasonable and inevitable risks of business operations. Further, management owes responsibility – though vague in character – to the public, in general. The interest of the public lies in the continued life of business enterprises and the same is adversely affected by their failure since employment position is likely to be disturbed.

The financial side of business mechanism with all the attendant problems of ownership, control, and distribution of income is of paramount importance to those who are in charge of the operation of our economic society. Economists, sociologists, and students of politics should all be familiar with the machinery of business finance if they are to be more than dilettanti in their analysis of present day social problems as they are affected by property, chiefly business property, which constitutes business empire and social power in our current capitalist regime.

Finance is the main resource for industrial growth and development. So, it becomes incumbent on our part to take up a systematic and critical study of financial management.