financial management

financial management

The Importance of Financial Management in Business

1. Introduction to Financial Management

Another important aspect in Financial Management is the theme of financial planning. In general, in all the functional areas, the theme of planning is very essential, because organization can be capable of secure the required profit only by planning the resources of the organization. The same can be said of Financial Management. In other words, the records of the past have to be marshaled in a comprehensive way, so that the financial planning should evolve among other factors widely different from the trend of the past. Such wide variations of a trend may evolve in future due to development in, say technology, increased production and sales, uses of more sophisticated methods of sales promotion and greater availability of money for use.

Range of functional areas can be considered under the term Financial Management. For instance, one important activity in Financial Management is associated with the raising of funds. In order to reduce the cost of capital the company has to see dish that to secure the finance in such a way that the risk involved in the activity of the company. In the same way, financing decisions such as issue and redeeming of shares, borrowings from various sources, lending to various parties and term loans to the investors must be decided upon because finance is an important source of finance to the company. Hence, in other words, we can say that financial management plays a crucial role screening different proposals of investors, investing funds in various stock market, bonds and other return generating assets to the investors.

Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. It is concerned with the application of the principles of management to the financial resources of the enterprise. Financial management is part of the total management. So, the financial manager should manage the finances in such a way that the cost of capital is kept to a minimum. In general, financial management is the process of planning, organizing, controlling and monitoring the financial resources of an organization. Financial management requires a perfect planning, regular monitoring and followed corrective decisions. A gentle financial manager is said to be investing the funds of investors in different bodies for the betterment of business, irrespective of the size of the business as well as the financial institution.

Financial management is an integral part of overall management. It is concerned with the duties of the financial managers in the business firm. The term financial management has been defined by Solomon, “It is concerned with the efficient use of an important economic resource namely, capital funds.” The most popular and acceptable definition of financial management as given by S.C. Kuchal is that “The financial management deals with procurement of funds and their effective utilization in the business.” Thus, financial management includes financial activities related to operations directly or indirectly for operations of an enterprise. They include procurement (raising) of funds and their optimum utilization through allocation, investment, financing and management of resources of the enterprise.

2. Key Principles and Concepts

Risk will always be associated with investments. If the risk element is not considered, the typical result is a downgrade of the firm’s status. As the risk increases, so too does the company’s grade. Risks included could be the specific risk of the investment, the currency risk if an offshore investment, the sovereign risk, or even the risk of illiquidity. To consider these risks, DCF methodology is used to reflect on the risk calculated through the modern portfolio theory’s beta coefficient. With such information, and considering the cost of debt, an investor will then be able to establish the true cost of equity. The required rate of return of the company is established by a weighted average of the cost of equity, debt, and other risk-related factors.

The time value of money. The premise underlying the time-value of money is to establish the rate of interest that makes an investment acceptable within a given period of time. It’s the concept that a specific amount of money is more desirable than to receive the same amount in the future. The ultimate technique used to make this decision is the discounted cash flow approach. By discounting the future cash flows back to the present, present value is established. When a company selects a project, the cash flow that relates to the project has to be the cash flow after tax. Such a procedure will enable the investor to make the necessary adjustments.

Here, we will look at some key principles and concepts of financial management.

3. Tools and Techniques for Financial Analysis

Cash flow analysis focuses on the conversion of the operating earnings (as calculated in the income statement) into cash flows. That ultimately determines the optimal dividend policy of our project. “Cash is king!” Statement cash flows or operating business-level cash flows are the cash reserves generated by the company from its usual operating income or the operating profit. These are different from the company’s total cash flows that take away the cash required to keep the company in good condition. Company-level total cash flows also include the cash reserves generated by your operating business but also take the Cap Ex, the working capital needs, the interest on your debt and the tax on your income.

Income statement and balance sheet ratios provide different types of information about the performance of the firm. These ratios, also called financial statement analysis (or accounting ratios), measure the relationship between various elements inside the income statement or the balance sheet or both. The return on sales (or the profit margin) measures the return generated by the company on each of its dollars of sales. The asset turnover measures the efficiency with which you are able to deploy your assets to generate sales. The return on assets (or sometimes the return on investment) or the return on equity measure the return generated by the company on each dollar of assets or each dollar of equity. The ratios provide information about the company’s strategies, operations, and financial position.

4. Strategies for Effective Financial Decision-Making

Create strategies for effective financial decision-making. After you decide to invest in an asset, it must be financed. This is your financial decision-making concern. The concerns here are not unique, but the magnitude of consideration most certainly is. When corporations borrow or issue new equity, their actions have critical implications to the continued viability and profitability of the firm, and implications to the creditors’ and shareholders’ financial positions as well. Effective financial decision-making in the spirit of shareholder value creation requires financial architectural skills and sound judgment. The capital structure decision that denotes the mix of debt and equity financing that you choose affects the general risk of the enterprise and how the enterprise pays its debt holders and shareholders. Corporate financial managers always mix debt and equity securities to finance enterprise risk projects using debt, equity or some creative combination of the two. This attitude makes sound economic sense to corporations that want to maximize the long-term best interests of their shareholders. Nothing is free. Corporate finance is about insuring that the financing choices that you make come at the least possible cost. They also give signal to the market. Characteristics of a well-structured financial management strategy include the appropriate division of responsibilities, authority, and employee skills, the maintenance of meaningful financial reporting data on the results of both the operating and investment decisions and responsibilities, and other systems to strengthen and monitor the responsible decision-makers and their decisions.

Before you decide to finance the acquisition of an asset, you must first decide whether to acquire the asset and second, how to acquire it. These are decisions of a capital budgeting nature as it pertains to firms or investment decision-making as it applies to individual investors. Here the concern is your ability to make sound capital budgeting decisions, to identify and assess profitable projects. The goal of “getting the most for your money” is universal since it applies to one as much as it applies to firms. Decision-making demands the use of sound judgment and good judgment is derived from hard data generated from detailed analysis. Many factors must be considered when deciding to acquire an asset including operating risk, funding and opportunity costs, and the ever-changing value of the money that will be invested in an asset. There are also value-added considerations as well, including the signal such investments send to the market and the company’s strategic objectives. Both factors demand close attention.

5. The Role of Technology in Modern Financial Management

In the chapters that follow, the information system for finance and accounting will be studied and examined, revealing the utility in relation to the functional needs and the inherent financial effort. This effort will have to lead to a coherent choice. The resulting systems can be structured punctually, addressing the specific areas of accounting and tax management, and in an integrated manner. In its integrated form, the finance and accounting structure process all information items from financial transactions and generate provisional budgets, the necessary management reports, the final reports derived, and financial and management indicators.

Information systems integrated with computing technologies can contribute significantly to streamlining and quickening the organizational processes of finance and accounting. The implementation of an adequate technological architecture for these components must meet some requirements, including, mainly, the need for a coherent solution in technological terms and that meets the specific organizational needs and the underlying financial constraints of the organization. Another requirement, no less important, imposes consistent protection of the data from external threats, be they fraud attempts, sabotage, errors, that is, protect the system from damage or degradation that hinders its operation in the pursuit of the established goals. In a few words, the establishment of careful security rules for the information and data is important. The basic objective is to incorporate the necessary safeguards to minimize threats and associated vulnerabilities of the system in order to establish reliable and safe conditions of operation that maintain the integrity, availability, and confidentiality of the protected data.

Placements can also integrate Content Management (Information Corporate systems transform data into information that is useful to the operation of the organization. The data is processed using data processing procedures to generate information following the set of logical rules that have been established for that purpose. Then the information, which arises from the processing of data, is classified, organized, and stored according to some criteria and procedures, so that it can be at the disposal of those who use the system, who prepare instructions to feed the system with data, make decisions, control the decisions, and verify the results that have been generated thereby.

We will refrain from detailed analysis of information systems used in finance and accounting, as this is not the area of this textbook. Let us only mention that this is a great book for people who wish to start working in business management. This book is also very useful for supervisors of business enterprises, administrative departments, and even employees. In fact, humans and society are becoming increasingly dependent on information, especially in recent times with the emergence of information technology. Proper operation cannot be imagined without computer sources of processing various operations like data collection, data input, data storage and retrieval, arithmetical operations on data like addition, subtraction, etc., and then transferring the processed data to the respective branches, departments, and administrative units. It will be well to acquire an overview of the information system from the perspective of management.