FINANCIAL MANAGEMENT – AN OVERVIEW
Finance, no doubt is a life blood for an organization. No firm can be able to survive in the industry without adequate finance.
The term Business finance consists of a wide range of activities and disciplines that basically revolves around the management of finance and other valuable assets within an organization or in other words it can be defined as a process of acquisition and distribution of funds within an organization.
As the finance is very important for an organization, it is important to manage it effectively. It basically involves proper planning as well controlling of the firm’s financial resources. The main goals of financial management include:
- Profit Maximization by increasing revenue, controlling costs and minimizing risk.
- Wealth Maximization as it not only serves shareholder’s interest but provide security to creditors.
The basic function of finance basically includes the three financial decisions such as:
It is the first and foremost important financial decision. The business generally has limited finance but the opportunities to invest are much wider. Hence the finance manager is required to access the profitability or return of various investment decisions and decide a policy which ensures high liquidity, profitably and sound health of an organization.
It includes short term investment decisions known as working capital management decisions and long term investment decisions known as capital budgeting decisions.
Once the requirement of funds has been estimated, the next important step is to determine the sources of finance. The manager should try to maintain a balance between debt and equity so as to ensure minimized risk and maximum profitability to business.
The third and last function of finance includes dividend decisions. Dividend is that part of profit, which is distributed to shareholders as a reward to high risk investment in business. It is basically concerned with deciding as to how much part of profit will be retained for the future investments and how much part of profit will be distributed among shareholders. High rate of dividend ensures higher wealth of shareholders and also increase market price of shares.
INVESTING, FINANCIAL AND DIVIDEND DECISIONS ARE ALL INTERLINKED:
Although the basic decisions of finance includes three types of decisions i.e. investing, finance and dividend decisions but they are interlinked with each other somehow. It can be evident from the following points:
- The main objective of all the above decisions is same which is profit maximization of business and wealth maximization of shareholders.
- In order to make investment decisions such as investing in some major projects, the first thing we need to consider is the finance available and required to make investment.
- Finance decision is also influenced by dividend decision. If more of the dividend is distributed, there is a need to raise more finance from external sources.
- If more of the profits are retained for long term investment, there is less need of outside financing.
Hence, there is a need to take into account the joint impact of all the three decisions and effect of each of the decision on the market value of the company and its shares to achieve the overall objective of the business.