The three basic functions of financial management are to raise funds, invest in assets, and distribute returns to shareholders. When deciding on the long-term investment decision, the finance manager must take into account the risk-reward trade-off and select a project that will yield the highest net present value. Financial management is concerned with maximizing shareholder wealth and, for this reason, the investment decision is one of the most critical. But, how do finance managers make this decision?
First, financial management considers how the capital is raised. It decides what proportion of the capital is owned by the company and how much is borrowed. Typically, the capital mix includes both owned assets and borrowed funds, with more equity equaling a higher share of profits and more debt equaling higher fixed costs and interest. A good balance between equity and debt is essential for stability, liquidity, and the economy. But the decision must also account for the risk and reward of various sources of funding.
The next important decision in financial management involves the distribution of profits. This decision is connected to the decision of whether to distribute profits to shareholders or keep them in reserves. The decision regarding dividends must take into account the effect they may have on share prices. Dividends also need to be considered when determining the amount of profit a company should retain. While large companies often need to retain a substantial portion of profits for future investment, smaller companies with limited access to capital markets may decide to distribute a larger share of their profits to shareholders.
One of the primary goals of financial management is the mobilization of finance. Proper mobilization of finance refers to using different sources of funds in the most efficient manner. The finance manager can effectively manage various sources of funds, so he or she must estimate the company’s financial needs and choose the appropriate source of finance. Proper distribution of finance increases the efficiency of the entire company. If the finance manager is able to allocate finance efficiently, the entire organization will benefit from the investment.
Another goal of financial management is to reduce the cost of capital. By utilizing all of the capital available, a business can increase its EPS and share price. Ultimately, financial management helps the business survive by maximizing the returns and decreasing its cost of capital. financière management also involves the decision to raise funds for business and to maintain reserves for contingencies. financière management is crucial to the survival of a company. A well-managed business can survive in the competitive market.
The third objective of financial management is to optimize the assets and cash flows of a firm. By carefully choosing the assets and cash available for an organization, financial managers can maximize its value and reduce its risks. However, it is essential to understand that all of these decisions involve costs and must be made with a long-term view in mind. The most important financial decision is the choice of which funds to invest in. Investments can either be short-term or long-term and must be a wise mix of assets.