financial management essay topics

financial management essay topics

Exploring Key Concepts in Financial Management

1. Introduction to Financial Management

Financial management as an academic discipline is concerned with decision-making. So-called common-sense business decisions are hardly common sense at all but strongly depend on intuition, judgment, and practical business acumen. Nonetheless, these common-sense decisions hopefully have their underpinnings in the sophisticated quantitative models and expert knowledge possessed by the finance function. Finance functions design the logistics required to transform common-sense decisions into results. These logistics involve procurement and management of funds and efficient and productive investment of funds that have been transformed by placing various debt structures (leverage) on the balance sheet. Permanent monitoring of the ongoing health of the enterprise is part of financial management’s domain. Several subdisciplines grow from these finance function logistics. These subdisciplines are the focus of the book. In addition, short case examples and insights are included to illustrate the most important factors affecting financial management.

Financial management has to do with running the financial affairs of any entity or organization. However, financial management has a unique goal: increasing the wealth of the firm’s shareholders, assuming the firm is a for-profit business. The ultimate measure of success for any entity becomes the bottom line. This book covers the basics of financial management. No attempt is made to cover the rapidly changing business environment. Instead, the book highlights important historical and evolutionary points in financial management development and offers a brief introduction to the contemporary issues in business.

2. Financial Analysis and Decision Making

The ability of the business to effectively carry out its finance function is measured in a variety of standard ways. These measures form what is generally termed the financial position of the business concern. The measurement of business strength may be approached in one of two ways. From a balance sheet or financial position standpoint, it is the ability of the business to meet short-term obligations as they fall due, to finance intermediate or developmental projects which require capital, and to meet long-term debt obligations and reward shareholders with adequate rewards on their investment. Business strength may also be met by actual profitability or performance measurements. The formal measure of business profitability is called the income statement or the profit and loss account. It measures success during an established accounting period such as a quarter, a half-year, or a complete financial year.

The financial manager is primarily concerned with the effective discharging of the financial functions of the business organization. This is a major objective of the financial management discipline. As we focus on the important functions in the management of an enterprise, there is no greater need than the effective organization of the finance function which comprises the major categories of planning, acquiring and investing, controlling, managing and creating finance. They are essential for the development of the organization’s objectives. The environment in which the functions of financial management are completed is a major consideration in the achievement of these objectives. This chapter provides an analysis of the factual concepts to underpin further study in financial management.

3. Risk Management and Capital Budgeting

Capturing changes in the risk-free return, in the market return, and in the company’s factor sensitivity, the financial manager can adjust the rate of return that recognizes the time value of the cash flows inherent in the potential project. Simply adjusting the overall cost of capital does not accommodate the project risk. The opportunity cost concept relates to the best opportunity forgone, not the average project weighted average of the overall weighted costs of capital. That errors have more to do with the market, industry, and firm-specific long-term premiums than with the general view of the industry and firm. Minimal first stage analysis errors sometimes exceed the scale of possible project finance differentiated charges.

The most thriving financial managers can measure, compare, and manage risk. They adopt incoming project analysis and cash flow estimation concepts to reflect the impacts of macroeconomic and industry-based risks. While generally avoiding use of overly complex formulas to derive capital costs, successful managers include appropriate measures of cost to account for taxes and transaction costs, floating rate bonds, and nonoperating assets. They also assess the statistical relationships between cost of capital and firm value.

4. Ethical Considerations in Financial Management

One element that has broad significance for ethical considerations is directly related to the modern corporation. Throughout history, vast sums have been accumulated by a variety of individuals, families, and enterprises and were often maintained in the form of tangible assets. However, tangible assets as a form of maintaining and continuing great wealth began to change as business organizations morphed into larger-scale institutions. As these organizations became larger and more complex, they began to shape their existence so that the wealth was represented primarily by the shares of stock from the business. These shares of stock could change hands through negotiated price on the stock exchange without changing the essential business itself. The result was the development of a separate entity, which the law deemed to be in the nature of a person with the same rights and duties of a person.

In the complex world of financial management, decisions frequently involve some degree of ethical behavior. Financial managers deal with millions or even billions of dollars and play a substantial role in capital allocation throughout the economic system. As a result, there will be pressure to use their position effectively and efficiently.

5. Emerging Trends in Financial Management

One of the most important trends in management is the movement by forward-thinking companies from traditional forms of management to the far more sophisticated contingent or situational forms of management. At least two important trends necessitate this shift. First, the increasing complexity of worldwide business operations has made traditional forms of management much less effective. Second, the advent and concurrent development in the field of management science and information systems provide management with an empirical basis for sophisticated systems of management. In particular, improved opportunities in the fields of financial management. The need and the opportunities are here now.

The increasing complexity of managing global company operations requires that management take into account the global perspective. Major aspects are increasing competition in a world marketplace and continued progress in technology, with a number of new possibilities in finance and marketing. One important development has been the recent movement toward the just-in-time concept of inventory management. In financing, the major trend has been to increase leverage. As interest rates began to rise in the early 1980s, most firms had already reached a maximum favorable point of operation. However, in view of the strong productive capabilities created by the increased real capital investment of the early 1980s, most private analysts conclude that the present generation is increasing leverage at a greater than the historical rate. Such a decision will have an important impact on capital costs, especially in financial management.