Investment, financing, dividend, and risk management decisions all fall within the purview [d1] of financial management.
Financial management: What is it?
The administration of an organization’s finances in order to accomplish its financial goals is referred to as financial management. In financial management for the private sector, it is typically assumed that the company’s goal is to maximize shareholder [d2] wealth.
Money management
The financial manager must make plans to make sure that there is sufficient financing available at the appropriate time to support the organization’s short-, medium-, and long-term capital demands.
(a) In the short term, money may be needed to cover inventory [d3] purchases or to balance out fluctuations in receivables[d4] , payables[d5] , and cash; the finance manager is responsible for seeing to it that these needs are addressed.
(b) The organization can plan to buy non-current assets [d6] such as equipment or plant in the medium or long term. The finance management must make sure that funding is available for these purchases.-
Management of finances
Are the organization’s varied operations achieving its goals? Are resources being utilized effectively? The financial manager may compare information on actual performance with forecast performance to find the answers to these questions. Forecast data will have been created based on historical data that has been updated to account for anticipated future changes in performance.
Business management choices
Investment, financing, and dividend decisions are made by the financial manager. Additionally, risk management must be taken into account.
Asset investments need to be funded in some way. Financial management also considers how to manage short-term cash flow [d7] and find long-term sources of funding.
Retaining profits is a financial choice. The decision’s flip side is that, if earnings are kept, there will be less to distribute to shareholders in the form of dividends, which may discourage investment. When deciding how much of its income should be paid out as dividends and how much should be retained for investment to support future growth and new ventures, an acceptable balance must be achieved.
Examples of many investment decision kinds
Internal decisions:
- whether to take on additional initiatives for the business
- whether to spend money on new equipment and machinery
- decisions on research and development
- monetary commitment to a marketing or advertising
Choices involving external parties
- whether to carry out a takeover or a merger including another business
- whether to lock in a joint venture with another enterprise
Disinvestment [d8] choices
- whether to sell off unprofitable segments of the business
- whether to sell old or surplus plant and machinery
- the sale of subsidiaries
QUESTION:
The financial manager should identify surplus assets [d9] and dispose of them, why?
The company receives no return on a surplus asset. The „cost of capital” for the money that is held in the asset, or the money that can be made by selling it, is probably being paid by the business.
The company may be able to use the cash to reduce its liabilities or invest it in more profitable ventures if surplus assets are sold. In either case, the company’s overall return on invested capital will rise.
Despite the short-term benefits of selling surplus assets, the company should wait to dispose of productive capacity until the likelihood of its future use has been fully assessed before disposing of it.
[d1]Range, scope – zakres
[d2]Owner of shares or stock – udziałowiec / akcjonariusz
[d3]raw materials, work-in-progress, and completely finished goods that are ready or almost ready for sale – zapasy
[d4]amounts owed to a business, regarded as assets – należności
[d5]a company’s short-term obligations owed to its creditors or suppliers, which have not yet been paid – zobowiązania
[d6]a company’s long-term investments that are not easily converted to cash or are not expected to become cash within an accounting year – aktywa nieobrotowe/długoterminowe
[d7]the net amount of cash and cash equivalents being transferred into and out of a business – przepływy pieniężne
[d8]the withdrawal or reduction of an investment. – dezinwestycja
[d9]those assets that are not essential for the operation of the business by a company – nadwyżka aktywów
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