|What is financial management and example?|
We will be covering financial management. The meaning the definition of what it means and then the various financial decisions like the capital budgeting capital structure Working Capital Management,
As well as the dividend decision. Moving on to our first content slide, which is on the financial management the basic definition which you all would be found everywhere on the web, is
That it deals with planning, organizing directing, and controlling financial activities. So just take an example like you wanted to purchase a car,
And that car is expensive. So you are, you’re somehow going out of your budget. Now what you would do, you would plan, from where to get the money from,
And then you would organize your, you would try to keep a control on when you wanted to buy that guy, then you would be able to the venue will be able to purchase that car from.
Just a basic example from a daily life convinced what the financial management is it is concerned with maximizing shareholders’ wealth.
See, we are here we’re talking about in concern of the organizations and the companies so shareholders are the owners of the companies,
Any financial decision would be regarding the maximization of their wealth because their wealth is dependent on the profit which the company would be earning.
Financial management deals with that sound allocation of funds, maintaining cash flow, and minimization of capital costs
When you having funds, it’s not just that you’re having funds and your business will go on. It’s like; you’ll have to allocate those funds in a better way to achieve some returns,
Which will be more than the cost or the investment which you have made to run that business?
Getting the returns more than the cost will convert into a profit for your business. And this is how it would be a sound allocation, which would ensure the efficiency of your company the effectiveness of your company.
It helps an establishment survive the expansion and growth of the business. So like here we can see it helps in every stage of the business right from when you’re thinking of starting a business, you must be thinking of where to get the funds from to start that business.
Now when your business is running, but it’s not going well for the survival of that business, you would. Now think of getting some more funds to invest in that for the expansion also,
And for the growth of that business for all these various stages of business, you will be thinking about how to manage the finances how to acquire funds and how to allocate that properly to smoothly
Run all of these stages, a comparative analysis of cost, risk and return constitute an important aspect of financial management.
When you are talking about finance you are not just talking about one aspect you are talking about the cost which will be the cost that will be incurred while you are running the business,
The risk which you will be taken while you are investing in some projects, and the return which you will be getting out of those projects
These are things that should be balanced like costs should be minimized; your risk should be at a balanced level so that you don’t just fall out of on big things,
And your returns should be efficient enough to cover your cost and get profitable and get profitable, earning to run your business for the raising the market value of firms
All these financial management decisions will help you in raising the market value of your firm because your business will be going well.
And that would create a good reputation that would bring more customers more sales revenue profits and does the market value of your farm would increase.
There are four types of financial decisions. Starting with the capital budgeting decision, we will be covering this decision in detail in detail form in the upcoming slides.
Capital budgeting decision is the investment decision. The investment that you will be making, while you will be making in your business,
The capital structure decision is the financing decision from where you will be acquiring the funds from how you will finance,
All those projects which you have to think of investing and working capital management decision which is the liquidity decision,
How much cash you should maintain in your, in your organization to meet the daily operational activities to run your business smoothly dividend decision. Like the shareholders which are
The owners of your fund are owners of your firm who have invested such amount in your firm, you need to pay out something to keep them with you, that is in the form of dividends
Decisions would be made regarding that also we will be covering all these one by one in the upcoming slides so let’s move on to capital budgeting is the process in
Which a business with our minds and evaluates decisions regarding the expenses or investments that are large.
Okay capital budgeting talking about capital budgeting, this is the investment decision. Like, if you’re running a business you need to make some larger investment
We are talking about an investment which involves huge cost, long term decisions, one that won’t be that won’t be a word back, like if you have invested such a huge amount in some project
With the expectation of gaining a good profit out of it, you can’t revert that decision because you have already incurred so many costs than that.
Capital budgeting decision is actually that you have to think of it very properly before making any investment so that your decision doesn’t go wrong,
That your decisions don’t go wrong and it won’t affect your business rather it would bring out profit for your business and would help the inefficient running of your business.
Now, what type of decisions could be there could be decisions like you want to acquire a new fixed asset? You want to invest in research and development,
Any new product need to be launched, or the expansion of your business. Anything major, which would involve huge costs,
All those investment decisions would come under the capital budgeting decision. These capital budgeting decisions would depend on the nature of the business as well.
We use some of the techniques some of the tools provided which would suggest to us whether to go on with this project or not.
And these tools are like the net present value the internal rate of return profitability index payback period. All these tools help us in taking the investment decision,
It shows us whether to move on with this project, whether it would be profitable for our business or not, and whether we should accept that whether we should reject that.
I will be talking about all these in detail in my upcoming videos. For now, these are the basic gist of what capital budgeting is moving on to the capital structure.
The capital structure decision involves decisions regarding financing for the firm. Now that you have made your mind to invest in certain projects
Which you think would be profitable for your business and it would increase your earning and the market value. Now you need to manage funds for that,
Where to get those funds from Are you having enough money to invest in that project because those projects are larger that would involve huge costs.
You’ll have to manage funds from somewhere. So in a capital structure decision, what you do is making a comparison between the various capital structures like whether to raise the funds from equity or to raise the funds through tech or to have a mix of both.
Here also we try to. We try to evaluate based on the risk and the cost involved, and the returns which you, which we will be getting out of it.
Forming the capital structure that will maximize the earnings per share we want to have a capital structure that could maximize the earnings per share,
Because only when we are having more earnings, it would be seen as an appreciation of shareholders wealth, as well as an appreciation of our business, it will, it will motivate us to do the business more efficiently.
It would act as a support to the investment decision like I said. Once you have made the investment decision you think that project is very is going to be very successful,
But you have to manage to, you have to manage the funds to invest in that project without having any fun, how the project is going to be successful.
This is like something which supports your investment decision. Once you have made that decision. You need to have funds to invest in that.
An optimal financing mix can maximize the revenue of the firm, thus creating a positive market value. So yeah, you have to create optimal financing, mix.
Next year is talking about the equity depth to the preference share capital, all of those sources from where you would be acquiring the fund.
And what makes you should be, how much weight is you should give to the debt how much weight is you should give to the equity or share,
Raising funds because all these sources are having different costs involved. So how to minimize that cost and create a good capital structure that would prove to be beneficial for your business.
You’re gonna see Working Capital Management involves decisions regarding the required level of working capital and business to run the operational activities smoothly.
Working capital management is a balance between the current assets and current liabilities; you’re trying to make a balance between the current assets and current liabilities,
Like you need to invest in some current assets you need to have cash in your business. And for that you need to pay them, you need to pay your liabilities out there.
Working capital management helps in taking all those decisions. It depends on various factors like the nature of the business length of the operating cycle the business condition as well.
Gross working capital, what does that mean that means the investment in current assets and net working capital it shows the difference between
The current assets and current liabilities This is generally done to maintain a cash flow in your business, like to run your business operational activities to run the day to day activities,
You efficiently need working capital so that you will be able to run your business smoothly.
That all those activities won’t be hampered you won’t be missing out on any opportunity. If you are getting a discount to buy some materials,
Only with the cash payment, you must be having that cash amount in your business so that you can extract that opportunity out there. working capital is the decision about how much, how much instant fund you should have in your business.
Now when we talk about working capital management, there is always a trade-off between liquidity and profitability,
What does that mean that means liquidity is you’re keeping some money in cash in the business to be you’re keeping some money in cash or short term liquidity which needs to be, which needs to be, which need to be utilized in the business.
That money you could have invested somewhere and on top of it, or returns out there. So you’re compromising on your profitability to manage your liquidity.
This is creating a trade-off; you have to decide on what would be the optimum amount of working capital so that you don’t lose much on your profitability and your ability to manage your liquidity in the business as well.
A dividend decision involves a decision concerning the dividend payment to shareholders Now this decision is very important because if you’re earning something
If you’re earning out from the business, you’re earning profits you are earning good returns. Now you have to decide whether to keep these returns as a dividend, or whether to keep these returns as retained earnings to be invested
For the projects to be invested for the growth of the business to be invested for in some good projects to on more returns and increase the value of performing in a better way.
But then you have to think of the two aspects like shareholders point of view if you see, they would like to have dividend out of the company’s profit as a report to their investment,
They would be waiting like if the company is going to run in good profits why they’re not paying us the dividend, and what the managers think of the think of some projects are
There this would be very useful which would be very beneficial I would somewhere and future payout the dividend but right now I have been investing whatever earnings have been made in that project there comes a conflict between both viewpoints.
The dividend decision plays an important role and how much the dividend you should pay in what form you should pay. When you need to pay that dividend,
To keep out the conflicts, and to manage them and to manage your business efficiently to keep the shareholders also happy with your decision and to keep your business running efficiently.
Maximization of shareholder wealth by profit maximization and cost reduction, all these are covered under dividend decision.