In this article, we are going to talk about the Fundamentals of Financial Management and the purpose is to enable you to understand the financial decision-making process.
1. What is Financial Management
Financial management is concerned with the utilization of finance in a profitable manner. Financial management is all about the acquisition, financing, and management of assets.
Focuses on decisions relating to how much and what types of assets to acquire, how to raise the capital, how to run the firm so as to maximize its value.
Financial Management plays a vital role in the overall management of business related to various functional departments like personnel, marketing, and production.
It covers a wide area of business with multidimensional approaches.
Financial management is also interconnected with the human resource department, which arranges manpower for all the areas of the management.
Financial Manager has to take care of the requirement of manpower to each department and allocate the finance to the HR department as wages, salary, commission, bonus, pension, and monetary benefits.
Thus financial management is directly related to human resource management.
Fundamentals of financial management can be broken down into three major areas:
2. Fundamentals of Financial Management
Investment Decision
The investment decision is one of the most important decisions for a firm to increase value creation.
The investment decisions are the most important decisions of the firm and the main focus is the firm’s capital investment.
When we indicate to a particular decision that is connected to financial managers, we are talking about decisions pertaining to a capital project.
Managers must evaluate a number of factors in making investment decisions.
Not only does the financial manager need to estimate how much the firm’s future cash flows will change if it invests in a project, but the manager must also analyze the unpredictability associated with these future cash flows.
The firm’s capital investment decision has maybe consisted of a number of distinct decisions, each referred to as a project.
Sometimes these projects require the firm to increase its investment in its working capital — inventory, cash, or accounts receivable.
Working capital is the collection of assets needed for day-to-day operations that support a firm’s long-term investments.
Financing Decision
The second significant decision of the firm is the financing decision made by the financial manager.
A person with expertise in the field of financial management and responsible for monitoring a company’s finances, maximizing profits and take care of tax laws and regulations.
Here the financial manager is worried about the right-hand side of the balance sheet.
If you look at the financing for various firms across industries, you will see remarkable differences.
Some of them have large amounts of debt, compared to others and some of them are almost debt-free.
Here we need to understand what type of financing makes a real difference? If so, why?
The finance manager plays a very important role in the field of financial management. His position is very demanding and analytical to deal with various problems concerned with finance.
The finance manager has to be an expert in the field of accounting, finance, economics, and management.
Asset Management
Asset management is the next major decision in the organization deals with the assets have been acquired over a period of time, still, it is very essential to manage these assets effectively.
The financial manager has to do more focus on operating responsibility for existing assets.
These responsibilities demand that the financial manager has to be more concerned with the management of current assets rather than fixed assets.
Responsibility for the management of fixed assets would reside a large proportion with the operating managers who employ these assets.
Financial managers usually invest funds in assets, eventually, these assets create income and cash flow so that it can be reinvested into more assets or can be distributed to the owners of the firm.
Capital investment refers to the firm’s investment in assets, and these investments may be either short term or long term in nature.
Capital budgeting decisions involve the long-term commitment of a firm’s scarce resources in capital investments.
When such a decision is made, the firm is committed to a current and possibly future outlay of funds.