In the case of a business, financial management focuses on how to pay for operations and growth. Companies might sell assets or equity to fund their growth. In addition, they must keep enough cash on hand for day-to-day operations and purchase raw materials. Companies also introduce new products and services, like toothpaste. In these cases, the financial manager calls on a team to determine the cost of the toothbrushes and find sources of funding to meet that cost.
Investment decisions
Investment decisions are important for companies because they decide how to allocate financial resources in various investment categories. Investment decisions are based on an analysis of risk, uncertainty, and investment objectives. For example, when investing money in a company, a top management may choose to invest in long-term assets, such as property and real estate. On the other hand, managers overseeing daily operations may choose to invest in short-term assets. The types of decisions managers make are also affected by different factors, such as the frequency of returns and the amount of risk.
As a general rule, investment decisions are divided into two categories: short-term and long-term. Short-term investment decisions include buying and selling stocks, while long-term investment decisions involve investing in real estate, bonds, and other kinds of fixed assets. The objective is to generate the maximum return on investment while minimizing risk. Investment decisions may also include acquiring raw materials for production. Keeping enough stock of these materials is essential to the smooth functioning of a business. All costs associated with stock maintenance are considered investment expenses.
Capital budgeting
There are five different types of financial management. Capital budgeting is one of them. It involves identifying accounting revenues and cash flows for an investment. It includes both expenses and cash flows, and it includes non-expense items. The Payback Period is a simple capital budgeting tool. In simple terms, the Payback Period represents how long an investment will generate annual cash flow of $100. It includes expenses associated with a capital asset.
The first step in capital budgeting is generating a proposal for investment. The firm may want to add a new product line, expand its existing one, or cut costs on outputs. Regardless of the type of investment, it must match the objective of the business. Using time value of money can help in this step. Ultimately, the objective is to maximize profits by using capital to increase sales, improve efficiency, and increase profits.
Working capital management
Effective working capital management is the key to a firm’s survival. Lack of cash can impair a business’ ability to make timely payments, detract from its reputation, and lower the firm’s creditworthiness. A company must maintain an adequate cash level in order to meet its daily obligations and meet any unexpected expenses. A company’s cash position should be sufficient to meet its ordinary requirements but not so large that it has to borrow money from a bank.
The primary objective of working capital management is to keep a company’s current assets and liabilities adequate to meet its day-to-day operating expenses. A company’s current assets consist of cash and accounts receivable, as well as inventory and short-term investments. Current liabilities include short-term debt obligations and accruals for operating expenses. Some approaches measure current liabilities by subtracting the value of financial debt.
Dividend decisions
When it comes to determining a company’s dividend policy, the ideal dividend policy is one that maximizes the firm’s market value and its shareholders’ wealth. This decision is difficult, but there are certain factors to consider when making it. There are four main types of financial decisions to consider when trying to maximize shareholder wealth. These include determining how much to pay in dividends, identifying potential investments, and evaluating the company’s financial needs and legal constraints.
The first type is investment decisions. The firm should consider the financial risk in a given situation and how much money it is willing to lend. This decision is directly linked to the type of capital the company has to invest, which includes debt and equity capital. The financial risk involved with debt capital is higher, so the amount of debt a company uses should be low. A company may also decide to retain a portion of its profits as dividends.
