WHAT IS FINANCIAL MANAGEMENT?
Financial management is concerned with the acquisition, financing, and management of assets with some overall goal in mind. Thus, the decision function of management can be broken down into three major areas: the investment, financing, and asset management decisions.
The investment decision is the most important of the firm’s three major decisions. It begins with a determination of the total amount of assets needed to be held by the firm.
In the medium and long term, funding may be required for significant additions to the productive capacity of the business, that is, to buy fixed assets like machinery, equipment etc..
In the short term, funding may be needed to invest in buying inventories, pay employee salaries etc... Financing Decision
The second major decision of the firm is the financing decision. Management need to ensure that enough funding is available at the right time to meet the needs of the business.
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.
Another 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.
Asset Management Decision
The third important decision of the firm is the asset management decision. Once assets have been acquired and appropriate financing provided, these assets must still be managed efficiently. The financial manager is charged with varying degrees of operating responsibility over existing assets. These responsibilities require that the financial manager be more concerned with the management of