Financial Management
Financial Management is concerned with the acquisition, financing and management of assets with some overall goal in mind.
It is the process of planning decisions in order to maximize the owner's wealth.[1]
It is concerned with the three important areas
Financial management means the management and control of money and money related operations within a business.[2]
Companies have finance departments that are responsible for money and money related operations. The executive in charge of these departments is Chief Financial Officer (CFO).
It is concerned with the three important areas
1. Acquisition or Investment Decision
2. Financing Decision
3. Asset Management Decision
1. Acquisition or Investment Decision:
It is the most important part of the organization's three major decisions when it is about value creation.
It begins with a determination of the total amount of assets needed to be held by the organization.
For Example,
How much of the organization do total assets should be given to cash or to inventory?
You must consider what will be the size of the firm i.e. the assets side or the left hand side in Balance Sheet.
You must consider what will be the size of the firm i.e. the assets side or the left hand side in Balance Sheet.
2. Financing Decision
It is concerned with the makeup of the right hand side of the balance sheet.
On one side some organizations have relatively large amount of debt, and on the other side some organizations are almost debt free. It will be not an Ideal situation but on the other side a certain mix of financing can be thought of as best.
In Organization's financing decision Dividend payout ratio is viewed as an integral part.
Dividend payout Ratio
It determines the amount of earnings that can be retained in the organization.
As a means of equity financing a balance is required between the values of the dividends paid to stockholders against the opportunity cost of retained earnings lost.
Once the financing mix has been decided, there is still one more thing required that how best to physically acquire the needed funds.
3. Asset Management Decision
Now after the assets have been acquired and appropriate financing provided, the next thing is how to manage these assets efficiently.
It means that now financial manager should be more concerned with the management of current assets than with that of fixed assets.
by: Glen Mike Gonsalves
References:
[1]Financial Management By Jae K. Shim, Joel G. Siegel
[2]Practical Financial Management By William Lasher