The purchase, allocation, and control of finances for an organization are the primary goals of financial management. Proper financialmanagement also enables for efficient use of assets, assuring the best possible returns as well as the safety of investments. The following are some of the areas of financialmanagement:
- Calculating the budget
Finance executives must estimate the quantity of fixed capital and working capital necessary in a specific period, such as one year, two years, four years, and so on, based on their projection of the volume of business operations of the company. Finance executives must anticipate when and at what rate more cash from outside sources will be committed to operations, in addition to calculating the amount of capital.
- Determining the capitalization structure
Finance executives must decide on the composition of capital after estimating the capital requirement, according to Joseph Stone Capital. They must calculate the proportions of the owner’s risk capital and borrowed finance, as well as the short-term and long-term debt-to-equity ratios. These judgments must get made in light of the expense of acquiring funds from various sources, the time frame for which funds get required, and a variety of other criteria.
- Finance sources of choice
Shareholders, debenture holders, banks and other financial institutions, public deposits, and other funding are available to the management. Each source or method of finance must get evaluated, and the best source must get chosen based on many parameters.
Public deposits, for example, have higher interest rates than debentures but do not require any security of the company’s assets. If a corporation does not want to charge against its assets, it might use this source. A corporation will borrow money if it does not wish to dilute its ownership, according to Joseph Stone Capital.
- Decisions on investments
The cash raised from diverse sources will be wisely invested in assets to maximize the return on investment. The use of long-term money necessitates a thorough examination of various options via capital budgeting and opportunity cost analysis.
A portion of the long-term funds must get used to supplement the company’s working capital. Three fundamental elements should guide management when making investment decisions: safety, liquidity, and profitability.
- Administration of earnings
The finance executive must decide how to allocate earnings among competing demands. A portion of the income may get plowed back or reinvested; another option may get dispersed to ordinary and preference shareholders; yet another piece may be maintained as a reserve voluntarily or as a legal necessity, and yet another portion may be plowed back or reinvested. The finance executive must assess the benefits and drawbacks of various strategies for utilizing funds generated by the company’s profits.
- Cash flow management
Creditors must get paid, materials must get purchased, labor must get paid, and daily expenditures must get met. There should never be a cash shortage because it will harm creditworthiness. There should be no need for more cash because money has a time value.