Financial Management

Financial management itself is sometimes called business finance or corporate finance. Corporate finance is a specialized field of finance concerned with financial decision-making within a business entity. Although financial management is referred to as corporate finance, the principles of financial management are also applicable to other types of business and government organizations. Financial managers are primarily concerned with investment decisions and financing decisions in organizations, whether the organization is a sole proprietorship, partnership, limited liability company, corporation, or government agency.

We are concerned with the use of funds for investment decisions. In this we have to think very carefully like we have to target how much we can buy, hold or sell all kinds of assets. Also many types of questions arise in front of us such as whether a business should buy a new machine, whether a business should introduce a new product line, whether to sell an old production facility, whether to acquire another business, whether to build a manufacturing plant, whether to maintain a high level of inventory.

Financing decisions are concerned with the purchase of funds that can be used to finance long-term investments and day-to-day operations. A company's operations and investments can be financed by borrowing from outside the business. Such financing can be done through a bank loan or through the sale of bonds or by selling ownership interests, as each method of financing obligates the business in different ways. Hence financing decisions are very important. The financing decision also includes the dividend decision, which involves how much of the company's profits to retain and how much to distribute to owners.

A company's financial strategic plan is a framework for achieving its goal of maximizing shareholder wealth. Implementing a strategic plan requires long-term and short-term financial planning that integrates the company's sales forecasts with financing and investment decision-making. Budgeting is used to manage the information used in this planning. Performance measures are also used to assess progress towards strategic goals.

A company's capital structure is a mix of debt and equity, which management chooses to finance the company's assets. There are many economic theories about how to finance a company and whether an optimal capital structure exists.

Investment decisions made by a financial manager involve a long-term commitment of a company's scarce resources in a long-term investment. These decisions are called capital budgeting decisions. These decisions play a major role in determining the success of a business venture. There are some capital budgeting decisions that are routine and do not change the company's course or risk. There are also strategic capital budgeting decisions that either affect the company's future market position in its current product lines or allow it to expand.

It is very important for the financial manager to make decisions about the current assets of the company. Current assets are assets that can be converted into cash within one operating cycle or one year. Current assets include cash, accounts receivable, marketable securities, and inventories, which support a company's long-term investment decisions.

Another important function in financial management is risk management of the company. The process of risk management involves deciding which risks to accept, which to neutralize and which to transfer. There are four major process risks in risk management:

Identification
Assessment
Mitigation
Transference

The traditional process of risk management focuses on managing the risks of only parts of the business, ignoring the impact on the value of the company. In today's era some form of enterprise risk management is practiced by large corporations, applied to the company as a whole. Enterprise risk management allows management to align risk appetite and strategies across the company, identify risks across the company, improve the quality of company risk response decisions, and manage risk across the company.

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