June 2024

Financial Management Basics

Financial Management Basics

Financial management is an area of business that addresses the monetisation and fiscal decision makings that involves running any business enterprise. It also introduces you to the tools used by financial experts, to analyse and create these thinking steps that dictate a corporation’s financial direction.

The main objective of financial management in the private sector is to improve shareholder value and expand the corporate stake in its revenue generating processes. In principle this is fairly different from corporate finance, which studies the fiscal decisions of all organizations versus one body, the concept and analysis of corporate finance is also applicable to the financial management problems taken up by all business practices. Corporate finance is more about raising funds and making investment decisions.

Financial management can be broken down into short term and long term decision making rationale and techniques. The decisions made in Capital Investment can be equated as long term decisions as they are used for many project investments; and in many ways the use of equity or debt for financing investments, or payment of dividends to shareholders in a corporation.

On the opposite side, short term decision processes involving any balances of acquired assets and liabilities; focusing on how to manage the liquidity of the company and inventory. Short term loans and lending such as credit to customers is part of this.

Financial management is also related to decisions in investment banking by way of corporate financing. The basic function of an investment bank is to review the corporation’s fiscal requirements and deliver the necessary capital that will address the identified necessities. This is why financial management sectors are referred to corporate finance and is associated with transactions that involve capital generation for the development, acquisition and expansion of business.

Financial Management and Capital budget

Financial management focusses where to appropriate financial resources and finance emerging prospects (potential investment) in a methodology called capital budgeting. Generating the investment and allocating the necessary capital making the conclusion to estimate a long term value of the project and agree on its function, future cash flow, size and if it is the right time to act on a project.

Generally speaking each perspective’s value is estimated by employing a DCF valuation or a discount cash flow valuation process and the plan that generates the peak worth, as measured by the subsequent net present value or NPV will be nominated for financing. This creates a liberal prerequisite to estimate the extent and control of the entire incremental money stream that will be created once the project is financed.

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