Financial management is concerned with efficient acquisition and allocation of fund. Financial management is concerned with flow of funds and involves decisions related to procurement of funds. Investment of fund in long term and short term assets and distribution of earnings to owner’s. Whenever you are planning to start a business, the common questions you need to answer:-- What long term investment will you undertake? How will you raise finance for long term investment? How will you manage regular flow of finance for day to day requirements. The financial management gives answer of all these questions.
“ Financial management is concerned with optimal procurement as well as usages of FINANCE. For optimal procurement, different available sources of finance are identified and compared in term of their costs and associated risks.
INVESTMENT DECISION FINANCING DECISION DIVIDEND DECISION
FINANCIAL DECISION INVESTMENT DECISION Capital budgeting Fixed assets Working capital Stock/ B/R/CA-CL FINANCING DECISIONS Equity Share Capital/ Retained earning Debt Loan/Debt//Advancess DIVIDEND DECISIONS ProfitRetained Earnings
This decision relates to careful selection of assets in which funds will be invested by him. Because firm has maximum option but most suitable investment selected by the firm. Fund have to invested in fixed assets like machines, equipments, buildings etc. and also in current assets such as raw material, stock of furnished goods etc. Decisions relating to investment in fixed assets are known as: CAPITAL BUDGETING and these relating to investment in current assets are called working capital decisions. These decisions are very important because:- 1) Investment decision involve commitment of huge financial resources. Fund have to get from different source. 2) Investment of funds in capital assets means long term commitments i.e. Funds are blocked for a long period of time. Immediate returns may not be expected from such investments.
1.What is investment decision? 2.What do you mean by capital budgeting? 3.What types of assets involve in working capital decisions?
Second important decision which finance manager has to take is deciding source of finance. These relates to raising of funds for different periods. Finance manager has to decide that when, how, and where to procure funds to meet the requirements of the company. Funds are available from various sources varying periods of time. These sources are : i) Owners Fund ii) Borrowed Fund i) Owners Fund involves – Share capital and Retained earnings. ii) Borrowed Fund involves – Loans and Advances and Debentures choice of the fund is based on the merits and demerits of sources of finance. FF inancial manager has also to determine the ratio of owned fund and borrowed fund. T he borrowed fund have to paid back and involve some degree of
risk whereas in owners fund There is no fix commitment of repayment and there is no risk involved. So financial manager mix both the owners fund and borrowed fund in the capital structure of the company.
Such decisions are related to dividend policy of the company. The financial manager has to decide whether the company should distribute all its profit or return them, or partly distributed and retain the balance. Many company retain the profits and reinvest the same in the business for expansion and growth. They follow the conservative dividend policy so they can build up sufficient reserves for payment of dividends regularly year after year.