May 30th, 2008
Financial Management is the efficient and effective planning and controlling of financial resources so as to maximize profitability and ensuring liquidity for an individual(called personal finance), government(called public finance) and for profit and non-profit organization/firm (called corporate or managerial finance). Generally, it involves balancing risks and profitability.
The decision function of financial management can be divided into the following 3 major areas:
- Determine the total amount of assets needed by a firm hence closely tied to the allocation of funds
- Two type of investment decisions namely:
- Capital Investment decisions re: large sums, non routine, longer term, critical to the business like purchase of plant and machinery or factory
- Working Capital Investment decisions re: more routine in nature, short term but are also very critical decisions like how much and how long to invest in inventories or receivables
- After deciding on the amount and type of assets to buy, the financial manager needs to decide on HOW TO FINANCE these assets viz the sources of fund
- Financing decisions for example:
- Whether to use external borrowings/debts or share capital or retained earnings
- Whether to borrow short, medium or long term
- What sort of mix – all borrowings or part debts part share capital or 100% share capital
- The needs to determine how much dividend to pay out as this will directly affects the financial decision.
ASSETS MANAGEMENT DECISION
- Once assets have been purchased and appropriate financing ar secured, it now involve the efficient and effective management of current assets like cash, inventories & receivables so as to maximize returns and minimize the risk of liquidity.
- Example of assets management decision like
- Extension of credit term to increase sales
- To hold more stocks or on a longer term