CONCEPT OF FINANCIAL MANAGEMENT

The activities of organisations whether business or non-business, have finance as their centrepiece. The role of finance however reflects the objectives of an organisation. Therefore, financial management is a reflection of the nature and objectives of the organisation.  Financial management is thus a very important aspect of finance although it is not easy to separate financial management from the rest of other finance activities (Myres, 1976). However, an attempt to limit the areas of financial management can be made if one agrees with the fact that financial management itself requires the simultaneous consideration of three key financial decisions (Christy and Roden, 1973), namely:  

i) anticipation of financial needs of the organisation;

ii) acquisition of financial resources for the organisation;  

 
iii) allocation of financial resources within the organisation.

These three key financial decisions provide the basis for periodic financial analysis and interpretation of historical financial practices. The control measures which may be  contemplated by management or re-orientation of management strategies in turn depend on the analysis and interpretation of historical financial data.  

Financial management is, therefore, a dynamic and evolving art of making daily financial decisions and control in households, businesses, non-business organisations and government. It is a managerial activity which is concerned with planning, providing and controlling the financial resources at the disposal of an organisation. Thus, a financial manager continues to answer some basic questions like:   

√ What specific assets should the organisation    acquire?  

√ How much of funds should the organisation commit?   

√ How can such funds be acquired?  

Financial management system is, therefore, very important for adaptation in government, business and other organisations as it provides the theoretical concepts and analytical models and insights for making skillful financial decisions. However, the definition of financial management is influenced by its objectives. It can however, in general, be defined as the use of accounting knowledge, financial models, mathematical rules and some aspects of systems analysis and behavioural science for the specific purpose of assisting management in its function of financial planning, implementation and control.

The role of financial management in a simplified form is the synchronisation of receipts and payments flows. Thus, payments must be planned against receipts in order that the firm may remain liquid to the extent desired by management. In other words, financial management involves the management of funds inflows and outflows efficiently and effectively in order to guarantee the firm adequate liquidity. This implies effective management of financial resources in order to achieve a firm’s two most important objectives, namely: the maximisation of profits or maximisation of shareholder’s wealth and the maintenance of adequate liquidity level.

Functions of a Financial Manager

The financial manager assumes different names depending on the nature, size and organisational structure of the business. In some organisations, he is known as Finance Director or Director of Finance, in others, he is known as Finance Controller or General Manager (Finance).  Here, it will be assumed that the financial manager refers to the person in charge of the finance department of an organisation, whatever name he may be called. The financial manager is usually a member of the Board of Directors and he normally enlightens the board on financial implications of a firm’s decisions since most members of the Board are not usually adequately versed in financial terms and practices.

The functions of a financial manager pervade all the departments of an organisation in that he has to make key decisions affecting the operations of these departments as far as finances are concerned. And some of the functions are as follows,

1 Anticipation of the Financial Needs of an Organisation

Anticipation of the financial needs of an organisation involves the determination of how much the organisation would need within a certain period to run its activities.  This in essence is a forecasting activity. In other words, the financial manager has the responsibility of deciding how much funds his organisation would need within the short term, medium term and long term periods.  The short-term needs for funds are usually determined by considering series of cash inflows and outflows.  The financial manager can make a forecast of the firm’s financial requirements for a period of one month, one year or many years ahead. Forecasts are normally made in the form of budgets.

Forecast of the financial needs of an organisation should normally depend on the long term growth and profit plan of the organisation. By this, the financial manager will be able to determine the nature of funds needed by his organisation. This is because funds could be needed for expansion, in which case, such funds are of long-term nature.

2 Acquisition of Financial Resources  

Acquisition of financial resources is another important responsibility of the financial manager. This is based on the nature of funds needed by the organisation. The financial manager has to determine the time at which such funds could be acquired in order to make them available to his organisation when it most needs them. Thus, timing of funds acquisition is very important in financial management. Timing can equally help to reduce the cost of borrowing if the financial manager knows when to raise such funds from the market. The most important thing for the financial manager to do in terms of funds acquisition is to decide on where he is going to acquire such funds.

The nature and source of funds will determine the cost of borrowing. Funds could be raised from a bank, a non-bank financial  institution or from the capital market. The ability of a financial manager to raise funds from any of the sources would be determined by the size as well as the level of credit worthiness of the business organisation. The financial manager has to make the basic decision of whether funds should come from external or internal sources.  In the case of internal sources, he has to help in the formulation of appropriate dividend policy which will help him to achieve his objectives.

3 Allocation of Financial Resources  

Allocation of financial resources is the third important responsibility of the financial manager. Since the objectives of most businesses are profitability and liquidity, the financial manager has to allocate funds to assets that would help in the achievement of these objectives. The allocation of funds is normally done in a way that would minimise or eliminate over investment in fixed assets, or stock piling of inventory. In allocation of funds, the financial manager is normally conscious of maturity transformation in order to guarantee the firm its needed liquidity level.

4 Funds Management  

Funds management is highly related to allocation of funds. The financial manager can invest temporary surplus funds in securities to earn interest income for the company. He should know when to invest and when to divest. It is also the responsibility of the financial manager to prepare periodic reports on the finances of the organisation for the information of Management, Board of Directors, shareholders and the general public who may be interested in the affairs of the organisation.

5 Financial Analysis and Interpretation

The financial manager can also undertake the analysis of the historical financial data of the company in order to advise management on appropriate corporate and management strategies to adopt. An appropriate interpretation of financial analysis can always afford him to do this.  By his close association with the financial markets, the financial manager is in a position to determine the anticipated influence of fiscal and monetary policies on his company’s operations. It is his responsibility to pass informed judgement to management in order to adopt appropriate management strategies which can minimise such effects on the company’s operations.

6 Financial Planning and Control

The responsibility of the financial manager includes participation in product pricing. The determination of unit cost of production is done by accounting method and is under the control of the financial manager. Thus, pricing of products also attracts his attention since his objective is to maximise the difference between revenues and costs. Long-range planning, financial planning and control and budget preparation are very closely related.

INTERNATIONAL FINANCIAL SYSTEM

Sometimes referred to as the global
financial system, this is the collective
name for the various official and legal
arrangements that govern international financial flows in the form of loan investment, payments for goods and services, interest and profit remittances.

The international financial system consists of institutions, their customers, and financial regulators that interact and operate act on a global stage. The term is regarded in an all-bracing to constitute the various official and legal arrangements that govern international financial flows in the form of loans, investment, payments for goods and services, interest and profit remittances.

In basic terms, the main elements of international financial system are the surveillance and monitoring of economic and financial stability, and provision of multilateral finance to countries with balance of payments difficulties. Therefore, the organization at the nerve-centre of the system is the International Monetary Fund (IMF). This is because IMF, in line with its charter, is bequeathed with the responsibility of ensuring its effective running. In another perspective, there is the view that international financial system holds that the system involves the interplay of financial companies, regulators and institutions operating on a supranational level.

The global financial system can be divided into regulated entities (international banks and insurance companies), regulators, supervisors and institutions like the European Central Bank or the International Monetary Fund. The system also includes the lightly regulated or non-regulated bodies, which collectively is known as the “shadow banking” system. Essentially, this covers hedge funds, private equity and bank sponsored entities such as off-balance-sheet vehicles that banks use to invest in the financial markets.

In evolutionary terms, the history of financial institutions can be traceable to the first commodities exchange in Europe, the Burges Bourse in 1309 and the first financiers and banks in the 15th–17th centuries in Central and Western Europe. The first global financiers were the Fuggers (1487) in Germany; the first stock company in England (Russian Company 1553); the first foreign exchange market (The Royal Exchange 1566, England); the first stock exchange (the Amsterdam Stock Exchange 1602).

The remarkable developments in the history of global financial system include the establishment of the Gold Standard (1871–1932), the founding of the International Monetary Fund (IMF) and the World Bank at Bretton Woods 1944. Others include the abandonment of the US dollar as reserve currency in 1971, the abandonment of fixed exchange rates in 1973 and China pegging its currency, the Yuan, to the US Dollar in 1994, which led to their accumulation of more than $1trillion of international reserves.

PERSPECTIVES ON INTERNATIONAL FINANCIAL SYSTEM 
There are three primary approaches to viewing and understanding the global financial system.

1. Liberal Perspective The liberal view holds that the exchange of currencies should be determined not by state institutions but instead individual players at a market level. This view has been labeled as the Washington Consensus.

2. Social Democratic Perspective 
The social democratic view advocates the tempering of market mechanisms, and instituting economic safeguards in an attempt to ensure financial stability and redistribution. Examples include slowing down the rate of financial transactions, or enforcing regulations on the behavior of private firms.

3. Neo Marxists Perspective
Neo Marxists Perspective holds the view that the political North comprising the developed countries abuses the financial system to exercise control over developing countries' economies, which promotes inequality between the advanced economies and the less developed nations.

Main Players of International Financial System 

1) International Financial institutions  
These include important financial institutions such as banks, hedge funds whose failure may cause a global financial crisis, the International Monetary Fund and the Bank for International Settlements.

2) Customers of Global financial system
These include multinational corporations, as well as countries, with their economies and government entities, for instance, the central banks of the G20 major economies, finance ministries, EU, NAFTA, and OPEC, among others.

3) Regulators of Global Financial System
Many of these regulators play dual roles because they operate as financial organizations at the same time. These include International Monetary Fund, Bank for International Settlements, particularly its Global Economy Meeting (GEM), in which all emerging economies’ Central Bank governors are fully participating, has become the prime group for global governance among central banks.

Such apex banks’ governors include President of the European Central Bank, financial regulators of the U.S.A (the US agency quintet of Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Federal Reserve Board, Securities and Exchange Commission, Europe (European Central Bank) and the Bank of China, besides others.

The Financial system

                       

The domestic financial system of any country refers to a set of instructional and other arrangements that transfer savings from those who generate them to those who ultimately use them for investment or consumption. It is made up of a mechanism for organizing and managing the payments for current and capital transactions; a mechanism for the collection and transfer of savings by banks and  other depository institutions; arrangements covering the activities of capital markets with respect to the issue and trading of marketable and transferable  long-term securities; arrangements covering the workings of money and credit markets dealing with short-term financial instruments; and arrangements covering the activities of financial market complementary to the capital market, credit and money markets, which in essence  provide hedging (or risk insurance) facilities, such as the new futures markets.

The financial system is complex, comprising many different types of private-sector financial institutions, including banks, insurance companies, mutual funds, finance companies, and investment banks- all of which are heavily regulated by the government. The Nigerian banking industry which is regulated by the Central Bank of Nigeria, is made up of; deposit money banks referred to as commercial banks, development finance institutions and other financial institutions which include; micro-finance banks, finance companies, bureau de changes, discount houses and primary mortgage institutions.

At international level, world financial system consists of a set of institutional and other arrangements governing the transfer of savings from those generating them to those wishing to use them, across national frontiers.

 Attributes of an Ideal Financial System

An ideal financial system is characterized by the following closely inter-connected attributes: it should be stable, efficient, competitive, flexible and balanced.

a. Stability  

It is imperative for confidence to be maintained in the financial system, especially in times of financial panic. It must be able to absorb shocks arising from the greater-than-anticipated and allowed for risks, and hence to contain a contractionary impact on activity, and trade, as well as any inflationary effect on prices.

 b. Efficiency
An efficient financial system directs savings to investments with the highest rate of return, allowing for risk. This consists of allocative, operating, and dynamic efficiency.

c. Competitiveness
A good financial system must have an adequate number of participants.

d. Flexibility  
The instruments employed and the methods of operation must be able to adapt to changes in the economic and financial structure.

e. Balanced
A balanced financial system requires that there should be an optimal mix of various types of financial system with respect to both transfer of current savings and the stock of past savings. The optimal mix would be such that changes in any one component could be absorbed by changes in another without having excessive impact on the providers and users of saving, while allowing both and adequate period of adjustment. It is important to note that the ideal combination of these closely inter-connected attributes will change as the process of economic growth proceeds.  

 The Nature of Financial Institutions 

A financial institution is an establishment that conducts financial transactions such as investments, loans and deposits. Almost everyone deals with financial institutions on a regular basis. Everything from depositing money to taking out loans and exchanging currencies must be done through financial institutions. According to Mishkin and Eakins (2012:46), “Financial institutions are what make financial markets work. Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities. They thus play a crucial role in improving the efficiency of the economy.”

In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries.
They are responsible for transferring funds from investors to companies in need of those funds. Financial institutions facilitate the flow of money through the economy. Most financial institutions are regulated by the government.

 Types of Financial Institutions

There are three major types of financial institutions (Siklos, 2001, Robert, E. W. and Quadrini, V. (2012)

1. Depositary Institutions : Deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies

2. Contractual Institutions : Insurance companies and pension funds; and

3. Investment Institutions : Banks, underwriters, brokerage firms.


However, financial institutions can be broadly classified into two: banks or bank financial institutions, and non- bank financial institutions. Commercial bank, Central bank, Merchant bank and Development bank are institutions in the banking sector while building societies, hire purchase companies, insurance companies, pension funds, and investment trusts are non-bank financial institutions. Whilst liabilities of banks form part of the money supply, the liabilities of non-bank financial institutions do not; for they are referred to as near money.
In Nigeria, the following types of financial institutions can be classified:

a. Traditional financial institutions
b. Commercial Banks
c. Central Bank
d. Development Banks
e. Merchant Banks
f. Insurance Companies

Meaning of Financial Markets

Financial markets (money and capital markets) consist of institutions, agents, brokers and intermediaries (banks, insurance companies, pension funds) transacting purchases and sales of securities. Financial markets facilitate the movement of funds from those who save to those who invest in capital markets. The persons and institutions operate in the friendships, contracts and communications networks which form an external visible financial structure. Financial markets are divided into two: investors and financial institutions. These financial institutions are organizations which act as intermediaries, agents and brokers in financial transactions. Financial intermediates purchase securities for their own account and sell their own liabilities and ordinary shares etc, agents’ and brokers’ contract on behalf of others.

  Financial markets are made up of:

 i. Financial intermediaries

ii. Agents and brokers

iii. Investors and borrowers.

Financial intermediaries, agents and brokers make up financial institutions. Thus one can say that financial markets are made up of financial institutions, investors and borrowers.

Lines of defence in the financial system to avert crisis 

Banks, insurance companies and
other financial institutions form the
first line of defence against financial
crises. It is their responsibility to
remain viable and solvent, checking
the creditworthiness of borrowers and
thereby managing the risks that they
take on.

Measures adopted by public
authorities in order to prevent or
mitigate financial crises constitute a
second line of defence. These
measures include:

1. prudential regulation (i.e. rules
that financial institutions have
to comply with in order to
ensure effective risk
management and the safety of
depositors’ funds),
accompanied by the disclosure
of information so as to promote
market discipline;

2. prudential supervision (i.e.
ensuring that financial
institutions follow these rules);

3. monitoring and assessment
activities, which identify
vulnerabilities and risks in the
financial system as a whole.

If, despite all of these measures,
financial institutions run into trouble,
public authorities may need to
intervene.