Financial Management (Introduction);
Financial management; Almost all kinds of business activities directly or indirectly involve the acquisition and use of funds. There exists an inseparable relationship between finance on the one hand and production, marketing and other functions on the other. In a business set up, he functions of recruitment and promotion of employees are clearly the work of the personnel department. Sales promotion policies come within the functions of the marketing department. These activities performed by the departments (personnel and marketing departments) require outlay fo funds and therefore affect resources. This is also true for the production department and other departments that exist in firm. The finance function of raising and using money although has a significant effect on other functions, but it need not necessary limit the general running of the business. Generally, firms formulate their policies (marketing production, personnel and other policies) most of the time, to tally with the financial resources available to them,
Financial Management is the management activity that is concerned with then planning and controlling of the firm’s financial resources. A lot of problems arise in the business environment and the need to address them very squarely has necessitated that firms should assign realistic role to the financial manager. The practicing managers role to the interested in financial management because among the most crucial decisions of the firm are those which relate to finance, and an understanding of the theories of financial management equips them with the conceptual and analytical knowledge required to make skillful, informed, sound, objective and reliable decisions.
The evolution of finance has greatly impacted on the role and importance of financial management. Finance had changed from primarily a descriptive study to one that encompasses rigorous analysis and normative theory, from a field that was concerned primarily with procurement of funds, to one that includes the management of assets, the allocation of capital , or the valuation of the firm in the overall market, and from a field that that emphasized the external analysis of the firm to one the stresses decision making with the firm. The role of the financial manger is considerably different from what it was in the past and will no doubt continue to change. Financial managers and academics must grow to accept the changing environment and masters it’s challenge.
1. Investment Decisions; This is also called capital budgeting decision. It involves the decision to allocate capital or commit fund to long-term assets that would yield benefits in future. Usually it involves the evaluation of the prospective return on new investment and establishing standard (cut-off) against which the expected returns on the new investments could be compared. Future benefits of investments are difficult to measure and cannot be predicted with certainty. As a result of this, investment decisions involve risk. Investment proposals should be evaluated in terms of expected returns and risk.
2 Financing Decision; The financing decision is an important function of the financial manager. He should decide when, where, and how to acquire funds to meet the firms investment needs. He has determine the firm’s capital structure by establishing the optimum mix between risk and return. When share holders return is maximized with minimum risk, the market value per share will be maximized and the firm’s capital structure would be considered Optimum.
3. Divided Decision; Divided decision involves the financial manager deciding if:
-The firm should distribute all profits
-The firm should retain all profits
-The firm should distribute a portion of its profits
-The firm should retain a portion of its profits
The best or optimum divided policy is one that maximizes the market value of the firm’s share. The financial manager should determine the optimum dividend payment ratio. He should address the following appropriately:
4. Liquidity Decision; Current assets of the firm should be managed very efficiently to prevent the firm from becoming insolent or illiquid. Investment in current assists affects the firm’s risk, liquidity and profitability. If a firm does not invest sufficient funds in current assists, it may likely become illiquid. It may lose profitability if it has excess funds in current assets because idle current assets would earn very little of nothing. A proper trade off must be achieved between portability and liquidity. In order to ensure that neither insufficient nor unnecessary funds are invested are invested in current assets, the financial manager should articulate a sound current assets management technique.
5. Routine Functions; Certain other functions have to be routinely performed for effective execution of finance functions, such routine functions concern procedures and systems and involve a lot of paper work. The financial manager gets involved in routine functions by setting up rules and procedures for performing the routine functions.
These routines are;
- Keeping custody of securities and other valuable papers
- Supervision of cash receipts and Payment
- Safe guarding Cash balance
- Reporting And record keeping
- Recoding details of new outside financing