The Management of the finances of an organization in order to achieve the financial objectives of the organization.
The usual assumption of financial management for the private sector is that the objective of the company is to maximize shareholder wealth.
- And the process of Financial Management involves 3 key areas,
- Investing Decision
- Financing Decision
- Dividend decision
- So FM all course topics relate to either one of these areas
- Key Objective: Maximize the shareholder wealth, Wealth can be maximized from two things
- From Dividend
- Capital gain (Increases the value of share)
Investing Decision: Means in which project you are going to invest, How do you pick up the project, how you prioritize projects
Financing Decision: if the project was picked, that project you are gonna do, now where are you from going to finance this, is it from equity financing? or debt financing?
Dividend Decision: how much dividend is to be given to shareholders.
Dividend Decision is very important, our objective is to keep share price high, share price depends on the Economic condition of the company, Political Environment, some kind of future threats, Economic boom, Economic depression, Legality…… Future Expectation
If a company gives a lot of dividends to their shareholders it means the company doesn’t have Retain Earnings, if a company doesn’t have to Retain Earnings then the company cant invest if the company cant invest means the company can’t grow if company cant grow means the company cant earn the profit.
On the other hand, if the company does not give dividend at all, So the company gives the message to the market, The management NEED cash, they want to invest somewhere, probably they want to grow so if the company grows the share price will go up
These are both extreme cases, so the company needs to adjust dividends in between, that is why said above Dividend Decision is an important decision area of Financial Management Because will impact the share prices.
Financial Planning-Financial control-Financial decisions
To achieve its objectives, Whether for a profit-seeking or not for profit organization, Financial management can be divided into three main functions
- Financial Planning
- Financial control
- Financial decisions
- Financial Planning: The Financial manager will need to plan to ensure that enough funding is available at the right time to meet the needs of the organization for short, medium, and long-term capital.
- Short term: funds may be needed to pay for inventory or to smooth out changes in receivables, payables, and cash, Here the financial manager is ensuring that working capital requirements are met.
- Medium or long term: The organization may have planned purchases of non-current assets such as plants and equipment. The financial manager will analyze financial data to determine which uses of funds best meet the organization’s financial objectives, Is project A or Project B better? Should a new asset be bought or leased?
- Financial control: The control function of the financial manager becomes relevant for funding that has been raised.
- Are the various activities of the organization meeting its objectives?
- are assets being used efficiently?
- Financial decisions: The Financial manager makes decisions relating to financing, investing, dividends and risk
- Investments in assets must be financed somehow, for example, through loans or share capital.
- How should those funds be used?
- Should some parts of the organization be closed?
- How much profit should be paid back to investors (dividends) to attract investors, but leave enough finance in the company?
- How can risks such as foreign currency risks be managed?
Financial Accounting Vs Management Accounting
Financial Accounting: Reports to shareholders on historic information and performance of the organization.
Management Accounting: Reports internally on both historic performance and future plans. Financial management is ensuring adequate funds are in place and controlled to ensure stakeholders’ objectives are met where possible, the main Financial Management function provides information on, for example, projected cash flows to aid the effective management of finance.