What is financial management?

Financial management, also known as corporate finance, delves into the world of managing a company's finances. It's essentially the art and science of planning, acquiring, and utilizing financial resources to achieve a company's goals. Here's a breakdown of this crucial field:

What are the main features of financial management?

  • Strategic Focus: Financial management decisions align with the company's overall strategy, ensuring financial resources support long-term objectives.
  • Risk-Return Trade-off: Financial managers weigh potential risks associated with financial decisions against the expected return on investment.
  • Financial Analysis: Financial statements, market data, and various analytical tools are used to assess the company's financial health, performance, and risk profile.
  • Financial Planning and Budgeting: Creating financial forecasts and budgets helps companies plan for future financial needs and allocate resources effectively.

What are important sub-areas of financial management?

  • Capital Budgeting: The process of evaluating potential investments in projects or assets, considering factors like expected cash flows, risk, and cost of capital. This ensures funds are directed towards the most promising opportunities.
  • Capital Structure: Determining the optimal mix of debt and equity financing used by a company. Financial managers aim to balance risk and return while minimizing the cost of capital.
  • Working Capital Management: Managing a company's short-term assets and liabilities, including inventory, cash flow, and accounts receivable/payable. Efficient working capital management ensures a company has sufficient resources for day-to-day operations.
  • Dividend Policy: Decisions regarding the distribution of profits to shareholders in the form of dividends. Financial managers consider factors like company growth plans, profitability, and shareholder needs.
  • Mergers and Acquisitions (M&A): Financial management plays a vital role in evaluating potential M&A opportunities, negotiating deals, and ensuring financial viability after a merger or acquisition.

What are key concepts of financial management?

  • Time Value of Money: Recognizing that a dollar today is worth more than a dollar tomorrow. Financial decisions consider future cash flows when evaluating investments and financial obligations.
  • Net Present Value (NPV): A financial metric used in capital budgeting to assess the profitability of an investment by considering the present value of all future cash flows.
  • Internal Rate of Return (IRR): The discount rate that makes the net present value of an investment equal to zero. It helps evaluate the profitability of an investment.
  • Weighted Average Cost of Capital (WACC): The average cost of capital a company uses to finance its operations, considering both debt and equity.
  • Leverage: Using debt financing to magnify potential returns (and risks) on equity investments. Financial managers aim to find the optimal leverage level to maximize shareholder value.

Who are influential figures in financial management?

  • Alfred Sloan (1875-1966): Former CEO of General Motors, known for his pioneering work in financial management, particularly his focus on divisionalization and return on investment (ROI).
  • Benjamin Graham (1894-1976): The "Father of Value Investing," his book "The Intelligent Investor" emphasizes the importance of intrinsic value and long-term investment strategies, influencing corporate financial decision-making.
  • Michael Milken (born 1946): A controversial figure known as the "King of Junk Bonds," his aggressive use of high-yield debt financing significantly impacted corporate finance practices in the 1980s.
  • Eugene Fama (born 1939): A Nobel laureate and pioneer of efficient market theory, his work has influenced how financial managers view market information and investment strategies.

Why is financial management important?

Effective financial management is crucial for a company's success:

  • Profitability and Growth: Sound financial decisions ensure a company has the resources it needs to operate efficiently, invest in growth opportunities, and maximize profits for shareholders.
  • Solvency and Risk Management: Financial management helps companies maintain solvency (ability to meet financial obligations) by managing debt levels and mitigating financial risks.
  • Strategic Decision-Making: Financial analysis and forecasting provide insights that inform strategic decisions about product development, market expansion, and resource allocation.
  • Valuation: Financial management decisions significantly impact a company's financial health and ultimately its valuation.

What are applications of financial management in practice?

Financial managers work in various roles within a company:

  • Chief Financial Officer (CFO): The head of the finance department, overseeing all financial activities, including capital budgeting, risk management, and financial reporting.
  • Financial Analyst: Analyzes financial data, performs financial modeling, and provides recommendations to support investment and strategic decisions.
  • Corporate Treasurer: Manages a company's cash flow, oversees banking relationships, and is responsible for short-term financing.

Image

Access: 
Public

Image

This content refers to .....
Business and Economics - Theme
Join WorldSupporter!
Search a summary

Image

 

 

Contributions: posts

Help other WorldSupporters with additions, improvements and tips

Add new contribution

CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
Image CAPTCHA
Enter the characters shown in the image.

Image

Spotlight: topics

Check the related and most recent topics and summaries:
Activities abroad, study fields and working areas:

Image

Check how to use summaries on WorldSupporter.org

Online access to all summaries, study notes en practice exams

How and why use WorldSupporter.org for your summaries and study assistance?

  • For free use of many of the summaries and study aids provided or collected by your fellow students.
  • For free use of many of the lecture and study group notes, exam questions and practice questions.
  • For use of all exclusive summaries and study assistance for those who are member with JoHo WorldSupporter with online access
  • For compiling your own materials and contributions with relevant study help
  • For sharing and finding relevant and interesting summaries, documents, notes, blogs, tips, videos, discussions, activities, recipes, side jobs and more.

Using and finding summaries, notes and practice exams on JoHo WorldSupporter

There are several ways to navigate the large amount of summaries, study notes en practice exams on JoHo WorldSupporter.

  1. Use the summaries home pages for your study or field of study
  2. Use the check and search pages for summaries and study aids by field of study, subject or faculty
  3. Use and follow your (study) organization
    • by using your own student organization as a starting point, and continuing to follow it, easily discover which study materials are relevant to you
    • this option is only available through partner organizations
  4. Check or follow authors or other WorldSupporters
  5. Use the menu above each page to go to the main theme pages for summaries
    • Theme pages can be found for international studies as well as Dutch studies

Do you want to share your summaries with JoHo WorldSupporter and its visitors?

Quicklinks to fields of study for summaries and study assistance

Main summaries home pages:

Main study fields:

Main study fields NL:

Follow the author: Business and Economics Supporter
Work for WorldSupporter

Image

JoHo can really use your help!  Check out the various student jobs here that match your studies, improve your competencies, strengthen your CV and contribute to a more tolerant world

Working for JoHo as a student in Leyden

Parttime werken voor JoHo

Statistics
860