Define financial management and examine the three main categories of financial management: capital budgeting, capital structure, and working capital management. Describe the types of decisions each of these involve. Further, examine the objective of the
Financial management is a management process concerned with allocating and administering financial resources. It aims to ensure that a company's financial resources are best used to achieve its objectives. In managing the company's resources, financial managers are expected to be skilled in performing several tasks, including planning, organizing, and controlling the use of financial resources of the organization to best achieve the company's objectives (Shim,2022). It entails implementing and developing financial plans and policies, managing financial resources, and optimizing financial performance. Hence, modern financial management examines all financial aspects of a corporation that cover capital budgeting, capital structure, and working capital management that inform the financial decision-making of a manager.
Capital budgeting is the process by which a company resolves whether to invest in a new project or not. The decision is based on several factors, including the return on investment (ROI), the risk involved, and the company's financial situation. The first step in capital budgeting is to identify the project's expected cash flows. It includes the inflows (revenues) and outflows (expenses) associated with the project. The next step is to discount these cash flows to present value and measure risk using a discount rate. The project is considered financially viable and typically approved if the present value exceeds the investment. The project is typically rejected in case the present value is less than the investment value. The choice of method is informed by an investment decision that discounts cash flows can significantly impact the outcome of the capital budgeting decision (Yap, Komalasari & Hadiansah, 2018). In addition to financial considerations, companies typically consider non-financial factors to arrive at investing decisions, including strategic considerations, regulatory requirements, and societal pressures. The capital budgeting process is an important part of corporate finance and can significantly impact a company's long-term success.
Capital structure is referred to as the use of debt and equity to fund a company's activities so that it can significantly affect the risk and return characteristics of a company. Regarding a company's financial structure, the debt-to-equity ratio is a crucial element whereby a corporation with a higher debt-to-equity ratio is more leveraged than one with a lower ratio. Leverage in this case is the use of debt to finance the acquisition of assets hence if a firm cannot pay its debts, the increased usage of leverage raises the risk of bankruptcy. This is why financial leverage is frequently mentioned when discussing the capital structure of a company making the capital structure of the organization an important consideration when making financial decisions. Financial managers observe leverage keenly since it can raise a company's return on equity, but it can also increase the company's risk of bankruptcy if it cannot meet its debt obligations.
In addition, a company with high leverage will typically have a lower valuation than a company with low leverage because a highly levered company is considered to be riskier. Therefore, a company's capital structure is an important factor to consider when evaluating its value in its solvency (Shim, 2022). A finance manager will consider a company's leverage since it is one of the key determinants of its capital structure because leverage can increase the return on equity for a company, but it can also enhance bankruptcy risks if the company is unable to meet its debt obligations in consideration of a project.
Working capital management manages a company's short-term assets and liabilities by ensuring that its operating cash flow is sufficient to meet its short-term obligations. The management aims to meet a business's short-term obligations while maintaining a healthy cash balance. To ensure it has enough cash to meet its short-term obligations, managers must carefully manage a company's working capital, including its accounts payable, inventory levels, and accounts receivables (Yap, Komalasari & Hadiansah, 2018). The goal is to minimize the amount of cash tied up in these assets while ensuring that the company has enough cash to meet its obligations. Working capital management is critical to a company's overall financial management. Maintaining a healthy level of working capital is important, as this can help a company avoid financial difficulties.
In any corporation, the person in charge of finance must ensure that the organization has the financial resources necessary to achieve its strategic objectives. Therefore, the finance manager's responsibility is to plan, organize, and manage the company's capital budget to make judgments regarding investments that will be financially feasible over time. In addition, the manager's mission is to ensure that the capital structure directs the company's financial actions and that the capital structure is consistent with the organization's strategic objectives to avoid insolvency and obtain optimal returns. In making resource allocation decisions the financial management will have several instruments at their disposal, such as investment, financing, and dividend policies, which can be deployed to achieve the company's objectives while maximizing returns.
Shim, J. K. (2022). Financial management. Professor of Finance and Accounting Queens College City University of New York http://portal.belesparadisecollege.edu.et:8080/library/bitstream/123456789/64/1/%28Schaum%27s_Outline_Series___%29Jae_Shim%2C_Joel_Siegel-Schaum%27s_Outline_of_Financial_Management-McGraw-Hill%282007%29.pdf
Yap, R., Komalasari, F., & Hadiansah, I. (2018). The Effect of Financial Literacy and Attitude on Financial Management Behavior and Satisfaction. Bisnis &Amp; Birokrasi Journal, 23(3). https://doi.org/10.20476/jbb.v23i3.9175
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