Financial Management

WHAT IS FINANCE?

A branch of economics concerned with resource allocation as well as resource management, acquisition and investment.

“Finance deals with matters related to money”

“To raise money through the issuance and sale of debt owner equity”

“To provide or raise the funds of capital”

finance = Equity + Debt

So, finance is the combination of equity and debt.

What is financial Management

The planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization.

• It is an area of finance dealing with financial decision business enterprise make and the tools and analysis used to make this decision.

• Financial Management can be defined as:The management of the finances of a business organization in order to achieve financial objectives,

The key objectives of financial management would be to:

• Create wealth for the business• Generate cash, and• Provide a sufficient return on investment

bearing in mind the risks that the business is taking and the resources invested.

Three Elements of Financial Management

1. Financial Planning• Management need to ensure that enough funding is

available at the right time to meet the needs of the business.

• In the short term, funding may be needed to invest in equipment and shares, pay employees and fund sales made on credit.

• In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions.

2. Financial Control:-

• Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as:

• • Are assets being used efficiently?

• • Are the businesses assets secure?

• • Do management act in the best interest of shareholders and in accordance with business rules?

3. Financial Decision-making:-

The key aspects of financial decision-making relate to investment, financing and dividends:

Investments must be financed in some way – however there are always financing alternatives that can be considered. For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers.

A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.

THREE AREA OF CAPITAL

1. Capital Budgeting

It is the planning process used to determine whether a form’s long term investment. i.e. new machinery, replacement of machinery, new plans, research and development project etc.

“Value of cash flow generated by an assets should be greater than the cost of that assets”

“Note only how much cash expected to receive but also when and how”

2. Capital Structure:-

• It refers to the way a corporation finances its assets through some combination of equity and debt.

• It is the mixture of long term debt and equity.

First goals Mixture will be effect both the risk and the value of the form.

What are least expensive sources?

Debt comes in the form of bond issues or long-term notes payable, whereas equity is classified as common stock, preferred stock, or retained earnings. Short-term debt such as working capital requirements also is considered part of the capital structure.

3. Working Capital Management

It refer to the short term assets and short term liabilities. In short we can say that “day to day activities” In working capital management, we only

study about the current assets and current liabilities.