Investing and Financial Activities Management
Financial management is concerned with managing the financial resources in efficient and effective manners in order to enhance the value of an individual or an organization by maximizing the profit and ensuring the liquidity. Financial Management is an operational activity that involves financial planning, forecasting of financial resources, and the arrangement of finance and efficient utilization of funds by managing the risk associated with these activities.
There are only two methods of raising funds; it can be raised either through the equity or by mean of taking a loan. This financing can further be divided into internal resources and external resources. Internal resources include rising the funds by the existing members or investing further in the company by issuing the shares and retaining the profit of the company i.e. not distributing the profit to the owner and refinancing in the company for its growth. The external resource includes issuing the shares to new shareholders or taking a loan to finance the activities of the company.
Financial Management has broadly three major categories including, investment management, financing activities, and asset management. Investing activities involve the decision making regarding the ongoing projects based on their future prospects as well as evaluating the different investing opportunities based on the rate of return and risk associated with the project. This activity is also termed as capital budgeting. Investing decisions involves capital allocation to long-term assets for enhancing the value of the firm to maximize the wealth of shareholders or owners. Investing activities also involve the management of working capital for financing the day to day operating activities of an organization.
The cost of obtaining the finance is the key factor in determining or selecting the investment opportunities. On the basis of capital cost, the required rate of return is determined and the investments projects whose rate of return meet or exceeds the desired rate of return, are selected for investment by analyzing the risk associated with each opportunity.
In financing decision, the most critical decision is to design the capital structure of the firm. That area of financial management evaluates, what should be the composition of capital? What would be the leverage level that is best suits to the company or that minimize the cost of capital? The efficient financial management finds out the balance between equity and debt. Although the cost of debt capital is less expensive than the equity capital but it creates more exposures to risk of insolvency that the company becomes more vulnerable if something goes wrong and be not able to meet its payments, resultantly shareholders demand higher returns by reason of extra risk involved due to higher leverage of the company. Consequently, the loan cheapness offset by the higher demand for return of the shareholders.
The designing of the dividend policy is also a very critical portion of the financial management. Retaining all the profit for reinvesting is best for the company’s growth but it may dishearten to the shareholders who are expecting the dividend to which they have invested in the company. That makes the company less attractive to the investors. So the balance is necessary here too.
The financial management is also the name of managing the balance receipts/receivables and payments/payables in order to minimize the risk and liquidity.
The ultimate objective of the financial management is to maximize the wealth of shareholders and minimizing the cost of capital by limiting the risk exposure.