FINANCIAL MANAGEMENT | AFM IMPORTANT TOPIC 2024
The business function known as financial management is responsible for allocating the available financial resources to maximize business success and return on investment.
In financial management, a professional has to arrange and sort, organize plan, and carry on the management of all corporate transactions. They concentrate on finding the funds, whether it comes from the entrepreneur’s initial investment, loan financing, venture capital, public offering, or any other sources.
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Financial management experts are also in charge of effectively allocating cash to support the organization’s overall financial health and growth.
SIGNIFICANCE OF FINANCIAL MANAGEMENT
An organization’s financial management sets the goals, creates the policies, specifies the processes, puts programs into place, and allows the budgets for all financial activities.
By using effective financial management techniques, it is possible to ensure that the company will always have access to enough cash.
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OBJECTIVES OF FINANCIAL MANAGEMENT
Financial management includes the acquisition, distribution, and control of a company’s financial resources.
The key objectives of financial management are as follows:
- to guarantee shareholders receive acceptable returns, which will be based on their earning potential, share price, and expectations.
- To guarantee safety on investment, money should be put into reliable businesses that will yield a sufficient rate of return.
- to guarantee optimal use of the budget. After money has been obtained, it should be spent as effectively and efficiently as possible.
SCOPE OF FINANCIAL MANAGEMENT
A financial manager may raise funds through the following ways and the choice of factor will be determined by the relative strengths and drawbacks of each finance source and period.
Estimating the financial requirements: Based on expected costs, profits, future programs, and policies the concerned financial manager decides estimations of the capital requirement of the company. It is important to make estimates in a way that will maximize the enterprise’s earning potential. It’s the most prior thing for a financial manager to estimate the business’s short-term and long-term financial requirements.
Deciding on a capital structure: After the estimation is finished, the capital structure needs to be chosen. Both a short-term and long-term debt equity analysis is done in this. This will depend on the current equity capital a company has and the amount that has to be raised from other sources.
Selecting a source of finance: To generate additional funds a company may issue shares or debentures, choose to take a loan from a bank or any other financial institution, or may draw public deposits in form of bonds or shares.
Selecting a pattern of investment: To ensure investment safety and consistent returns, the finance manager must choose to channel money into profitable projects.
Proper cash management: The finance manager must appropriately consider cash management decisions. Cash is needed for a variety of things, including paying wages and salaries, utilities like power and water, paying creditors, covering current obligations, keeping enough stock on hand, buying raw materials, etc.
Implementing financial control: Financial control can be built as a comparison of a company’s actual performance to its short-, medium-, and long-term business plans, taken from various angles at various times.
Management of earnings: The finance manager must choose how to distribute earnings among several conflicting needs. A portion of the earnings may be given to the ordinary and preference shareholders; a reserve of a specific amount may be maintained voluntarily or as required by law.
RELATIONSHIP OF FINANCE WITH OTHER BUSINESS FUNCTIONS
Finance also shares relationships with other businesses: the purchase function, productivity function, distribution function, personnel function, research and development, and accounting function.
OBJECTIVES OF FINANCIAL MANAGEMENT
It concerns procurement and utilization of the funds in such a way that the firm’s value and earnings are maximized. Risk, cost, and control factors vary depending on where the money came from. A good balancing of risk and control variables must be done for the cost of funds to be kept to a minimum.
A balance between equity and debt should be struck when determining the source of new business financing to make sure the funding structure is appropriate for the company.
Profit maximization: The financial manager is responsible to achieve optimal profit in the short run and a long run of the business. In order to meet its profit goals, the corporation alters crucial factors including sale price, production costs, and output levels. Profit is crucial for the survival of a business. The distribution of resources and the payment of wages for labor, capital, and organizations promotes social and economic welfare.
Wealth maximization: The value or holdings of each shareholder should rise in relation to dividends. These outcomes are correlated with business performance, therefore the better a business performs, the more valuable its shares will be on the market.
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FINANCIAL DECISIONS
There are various financial matters (assets financing decisions, shareholder value creation decisions, investment-related decisions) that aid the maximization of shareholders’ wealth. It’s to decide what proportion of equity and debt capital has to be invested in the capital structure.
Investment decision: Based upon the risk profiles and return expectations company has to choose the most suited asset. As the business has limited financial resources available to them, top-level management hands out funds to long-term assets and creates capital budgets. Short-term investments are chosen by managers in charge of running a business to ensure liquidity and working capital. The frequency of returns, related risks, maturity times, tax advantages, volatility, and inflation rates all have an impact on investment decisions.
Financial decision: It’s concerned with the borrowing of funds. The fund can be raised from debentures, bank loans, equity shares, etc.
Dividend decision: It concerns the division of the profit among the shareholder and the future contingencies.
PRACTISE QUESTIONS
| Management activity that is concerned with the planning and controlling of a firm’s financial resources is known as
Financial Accounting Management Accounting Financial management None of the above |
| The finance management function involves ……….
Procurement of finance only Utilization of funds only Procurement and effective utilization of funds None of the above |
| Which of these statements is prepared for proper cash management
Cash management statement Bank reconciliation statement Cash flow statement None of the above |
| Maximization of shareholder’s wealth is reflected in
Goodwill of the organization Number of shareholders The market price of equity share None of the above |
| Which of the following is not the cash outflow for the firm?
Depreciation Dividends Interest payments Taxes |
| Which of these is a part of the investment decision?
Capital budget Dividend distribution Working capital management Both A and C |
| Financial decisions related to the distribution of dividend is known as
Investment decision Financing decision Dividend decision All of the above |
| ……….. decisions are irreversible as it’s difficult to take back the decision
Accounting decision Capital budgeting Working capital management None of the above |
| External sources of financing include
Overdrafts Debentures Bank loans None of the above |
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