financial management essay pdf

financial management essay pdf

The Importance of Financial Management in Modern Business: A Comprehensive Analysis

1. Introduction to Financial Management

In the modern complex business environment, the success of an organization is interdependent on efficient financial management, as finance is the lifeblood of business. Financial management is concerned with the duties of the financial managers in the business firm. The responsibilities of the finance manager would be to decide the requirement of finance in the firm, acquire financial resources at the least cost, and allocate the finances so raised among successful opportunities available. Finance is also called the blood of an enterprise, and its role in the firm’s leading value creation in the long run is substantial and highly acclaimed. Financial management encompasses decisions for the acquisition of funds, investment of funds, and dividend payment, and broadly covers three areas, namely, long-term financing decisions, short-term financing decisions, and the dividend policy. The focus of financial management is acquiring and allocating funds, namely, obtaining funds for the firm at the lowest possible cost, utilizing the funds in profitable projects, and generating sufficient surplus to make regular dividend payments. The management, with the support of the financial manager, has to make three types of key financial decisions, such as investment decisions, financing decisions, and dividend decisions, as described below.

2. Key Principles and Concepts in Financial Management

Extensive accumulation and subsequent disposal of such savings ensure the cyclical nature of the financial system activities, as the various social groups change their preferences related to the forms of asset accumulation, under the influence of changes in income levels and income distribution. Institutions enter into a financial system which plays a significant role in providing financing to organizations for investment purposes, and accumulating the generated employment and realizing the purchase of goods and services produced, which is essential for the continuous process of economic growth. It can be expressed that during the savings period, a large part of the circulating money-metallurgical mass flowing into the economic sectors is not consumed for final use, but is saved. The financial system ensures that part of the current assets will also be used in the future period. In other words, the function of the financial system is a link between the saver and the investor, through which savings are channeled into money, and the creation of other securities important for financing both the public and private sectors.

Investment in finance is given the following interpretation: in the broad sense, this is the creation of financial values – stocks, bonds, bank deposits, units in investment funds; in a narrower sense – bonds, shares and savings. With the accumulation of savings, the order comes from the distribution and use of these funds, i.e. the process of investing in various forms of ownership in order to increase devaluation of savings, to provide groups of the population with additional revenue. Among the most important tasks of the functioning of the financial system of economic entities is the provision of financing and investment in the real sector. Financial institutions, through the concentration of non-durable savings, are required to ensure the effective protection of combined savings from devaluation, provide the population with additional income.

3. Tools and Techniques for Effective Financial Management

The effectiveness of an organization’s leadership and its financial resources are crucial points in ensuring an organization’s survival and prosperity. The primary goal of this model is the maximization of investor profit, and some measures for achieving this goal are: (1) the increase of the firm’s tangible and intangible assets; (2) the reduction of unit costs through optimal operational and financial leverage, risk and liquidity; and (3) investment in the generation of future profits. These measures, among others, are the responsibility and the competence of the financial management framework of any firm. Three or four decades ago, corporate finance was only concerned with the determination of sources of funds to finance the assets of the firm, the promotion of liquidity and its objectives, such as the trade-off between capital and liquidity, the relevance of the trade-off and how management optimally deals with that trade-off; (4) the contribution of financial management theory to operational investment decisions and goals, etc. However, as the crucial role of market value in the relation between equity and debt claims as the ultimate objective of corporate financial management is accepted, any corporate financial decision is seen as a possible strategic or tactical financial decision that can create or destroy shareholder value.

The tools and techniques used for financial management are, in principle, applied by business firms for goal achievement. One of the major concerns of application of financial management tools and techniques is how these techniques benefit a business firm in attainment of its goals in the strategic dimensions. These tools are used to solve business investment decision problems, to evaluate firm performance, and to develop projections and patterns for firm expansion and growth. Some of the essential tools and techniques used in financial management for success in strategic as well as operational initiatives are further summarized.

4. The Role of Financial Management in Strategic Decision-Making

When decisions about which projects to carry out with the business’s earnings are made, the owners commonly confront multiple goals that seek to guarantee long-term business continuity, maximization of the return on their investments, business growth and enhancement of dividends. The decision becomes complicated, especially in the case of larger businesses, not just because of the diversity of the goals, but also because of the different levels involved in the corporate organizational structure between the management levels that have the power to make decisions. This level of business management is the primary focus of Strategic Financial Management. Its objectives become tied together to guarantee the protection of the businesses’ short and long-term interests, to promote the relationship between monetary balance and the business cycles, and to guarantee the sharing of the generated profits.

The basic objective of most businesses is the decision of how much of its profits it should reinvest in order to continue growing and how much to distribute among the owners of the business, either in the form of dividends or through the appreciation of their unit shares. The process is not any different from the one that a farmer goes through when deciding how much to spend and how much to save in the form of seeds to generate next year’s harvest. Basic Financial Management is the art and science of distributing the enterprise’s assets to generate the greatest profit.

5. Challenges and Future Trends in Financial Management

Increased capital market liberalization The 1990s have been the years of substantial progress in international trade and investment liberalization. As the world’s economies move to integrate, the financial markets have been called upon to provide an increased supply of funds to cover the immediate and longer-term capital requirements of the growing number of businesses. Information technology, deregulation, tax changes, trade agreements, with national and supranational support have all added momentum to the process of deregulation of financial markets, which is likely to continue through the millennium. In addition, developing financial markets also improve the liquidity, credit ratings, and competitiveness of local financial institutions and domestic businesses.

Shared below are a few emerging future trends which need to be taken into account by financial managers sooner or later:

Challenges and trends in financial management During the past decade, both the financial markets of the world and the tools and techniques of financial management have developed and revised significantly. A focus on the different trends and challenges in the financial markets and financial management practices prevalent across national boundaries could fuel the fire and help expand the knowledge of financial managers and academicians. The examination and exposure of these challenges are a pretty good way to educate these young minds towards developing a healthy interest in these virtually inaccessible fields.