Author: Jim Riley Last updated: Sunday 23 September, 2012
Introduction to financial management
Financial Management can be defined as:
The management of the finances
of a business / organisation in order to achieve financial objectives
Taking a commercial business as the most common organisational
structure, the key objectives of financial management would be to:
• Create wealth for the business
• Generate cash, and
• Provide an adequate return on investment bearing
in mind the risks that the business is taking and the resources invested
There are three key elements to the process of financial
(1) Financial Planning
Management need to ensure that enough funding is available
at the right time to meet the needs of the business. In the short term, funding
may be needed to invest in equipment and stocks, pay employees and fund sales
made on credit.
In the medium and long term, funding may be required for
significant additions to the productive capacity of the business or to make
(2) Financial Control
Financial control is a critically important activity to
help the business ensure that the business is meeting its objectives. Financial
control addresses questions such as:
• Are assets being used efficiently?
• Are the businesses assets secure?
• Do management act in the best interest of shareholders
and in accordance with business rules?
(3) Financial Decision-making
The key aspects of financial decision-making relate to investment,
financing and dividends:
• Investments must be financed in some way –
however there are always financing alternatives that can be considered. For
example it is possible to raise finance from selling new shares, borrowing
from banks or taking credit from suppliers
• A key financing decision is whether profits earned
by the business should be retained rather than distributed to shareholders
via dividends. If dividends are too high, the business may be starved of funding
to reinvest in growing revenues and profits further.
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