Financial Management is concerned with the acquisition and utilization of capital funds in meeting the financial needs and overall objectives of a business enterprise. Thus the primary function of finance is to acquire capital funds and put them for proper utilization, with which the firm’s objectives are fulfilled. The firm should be able to procure sufficient funds on reasonable terms and conditions and should exercise proper control in applying them in order to earn a good rate of return, which in turn allows the firm to reward the sources of funds reasonably, and leaves the firm with good surplus to grow further.… Read the rest
Financial Management
Financial management entails planning for the future of a person or a business enterprise to ensure a positive cash flow, including the administration and maintenance of financial assets. The primary concern of financial management is the assessment rather than the techniques of financial quantification. Some experts refer to financial management as the science of money management. The five basic components of the Financial Management Framework are: Planning and Analysis, Asset and Liability Management, Reporting, Transaction Processing and Control.
Two Basic Aspects of Financial Management
The general meaning of finance refers to the provision of funds, as and when needed. However, as management function, the term ‘Financial Management’ has a distinct meaning. Financial management deals with the study of procuring funds and its effective and judicious utilization, in terms of the overall objectives of the firm, and expectations of the providers of funds. The basic objective is to maximize the value of the firm. The purpose is to achieve maximization of share value to the owners, i.e. equity shareholders.
There are two basic aspects of financial management :
1. Procurement of FundsAs funds can be obtained from different sources thus, their procurement is always considered as a complex problem by business concerns.… Read the rest
Functions of Finance Manager
The twin aspects, procurement and effective utilization of funds are crucial tasks faced by a finance manager. The financial manager is required to look into the financial implications of any decision in the firm. Thus all decisions involve management of funds under the purview of the finance manager. A large number of decisions involve substantial or material changes in value of funds procured or employed. The finance manager, has to manage funds in such a way so as to make their optimum utilization and to ensure their procurement in a way that the risk, cost and control are properly balanced under a given situation.… Read the rest
Relationship Between Financial Leverage and Risk
Not to be confused with operating leverage, financial leverage involves the use of debt in the firm’s financial structure. Though it may be operationally defined and measured in a variety of ways, it essentially entails the use of debt to extend the earning power of funds committed by the firm’s shareholders. When used properly financial leverage magnifies returns on committed funds.
Because of the nature of financial leverage, it carries within it not only the general types of risk associated with operating leverage, but also two others that have rather specific implications. First, there is the risk of default-the inability to meet debt obligations as they come due.… Read the rest
Relationship Between Operating Leverage and Financial Risk
All strategic investment decisions are going to involve some degree of risk. Risk entails not only the profitable versus unprofitable dichotomy, but also the variability in earnings or losses emanating from an investment project. One dimension of the risk-management question is captured in the concept of operating leverage.
Operating leverage is the degree of magnification of earnings or losses (expressed as cash flows or profits) set off by different levels of output. The magnification results from the variable cost versus fixed cost mix in an investment period. Generally the higher the level of fixed commitment in relation to variable costs, the greater is the leverage (and magnification).… Read the rest
Adjusted Book Value Method of Corporate Valuation
In recent years, management consulting firms have started offering companies advice on how to increase value. This has been possible because of the fear of hostile takeovers. Companies have increasingly turned to “value consultants” to tell them how to restructure, increase value, and avoid being taken over. The consultants suggestions have often provided the basis for the restructuring of these firms. The value of a firm can be directly related to decisions that it makes: on which projects it takes, on how it finances them, and on its dividend policy. Understanding this relationship is key to making value increasing decisions and to sensible financial restructuring.… Read the rest