The management of financial resources is called financial management. It guides how to find and use the best investment and financing opportunities in the continuously changing and complex environments. Financial Management is actually a basic skill that consists of certain concepts and techniques that are useful not only for business life, but also in our personal life. It is a righteous statement that “money makes the world go round”. Finance is actually the life blood of an organization, and mismanagement in finance may easily lead to bankruptcy.
There is an overall corporate strategy that is based on the finance and every project of the company, like MIS (Management Information System) etc, comes under this corporate financial strategy. So, it is also important for IT professionals to know the basics of financial management.
Financial Engineering is the latest field that covers the engineering computer science and finance. An important area of financial engineering is the designing, analysis and preparation of financial contracts in order to meet the needs of the organization. No doubt, the demand for such professionals is increasing very fast with every passing day.
Finance is the science that deals with the management of financial resources in the best possible manners. It is the comprised of further three steps.
- Money and Capital Markets.
- Financial Management.
Financial Management Core Concepts
Below are some of the important concepts and techniques that are used in financial management freely.
1- Financial Statements Analysis:
Financial statement analysis shows the health and performance of the company based upon its past performance. There are four types of financial statements that are analyzed.
- Profit & Loss Statement/Income Statement:
The income statement shows the operating efficiency and net profit for a given accounting period.
- Balance Sheet:
The balance sheet is the picture about the financial health of a company at a particular time. It shows what types of sources are used to acquire different types of assets of the company.
- Statement of Shareholder’s Equity:
This statement shows how much shares a shareholder has in a company as an owner.
- Cash Flow Statements:
Cash flow statements show the inflow and outflow of cash during any given period.
All of these financial statements reflect the accounting results of the firm for a given period of the time. It describes the effects on assets, profits and dividends over the years. The management of the company uses these statements to take their financial related decisions and make financial policies.
2- Investment Decisions & Capital Budgeting:
Investment decisions are important for an organization as there is a large portion of capital attached to them. In fact the income and success of a business primarily depend upon the density of its investments, the kinds of assets in which investment is made and the way these assets to enhance the overall value of the company.
Capital Budgeting is related to the investment in fixed assets. The term “capital” here means the fixed assets that are utilized in the production process while the term “budget” refers to the plan that contains details of expected cash inflows and outflows for some future period. Investment decisions are based on the following concepts and techniques.
- Interest Rate Formulas.
- Time Value of Money.
- Discounted Cash Flows.
- Net Present Value.
- Internal Rate of Return.
3- Risk and Return
Every investor (individual /company) wants to invest his money in an investment that will give him a maximum return. But on the other side of the investment there is some risk associated with that investment. The risk and return are interrelated and the selection of investment portfolio falls under this section. The important theories of this section are below.
- Portfolio Theory
- Capital Asset Pricing Model
4- Corporate Financing and Capital Structure
The company needs capital to expand its size. The finance department is responsible for the acquisition of funds for the company. Funds can be acquired from many ways. One way is in the form of debt and the other one is in the form of equity. The combination of debt and equity is called the capital structure of the firm. The value of a company can be enhanced through a proper combination of debt and equity. Capital structure theory contains on the following concepts.
- Cost of Capital
- Dividend Policy
- Debt Instruments
Valuation of the company or its assets is significant for financial manager as he is a primarily concerned to increase the value of the company and its shareholders. Besides this, the creditors and investors are also concerned with the valuation of the company in order to make their relevant decisions. Below are some of different factors and techniques that affect the value of a company.
6- Inventory Management and Working Capital
Inventory management and capital structure are related to the efficient management of current assets. The operating efficiency of the firm can be enhanced through effective use of Working Capital Management and inventory management.
7- International Finance:
As the world is becoming a global village and there are a lot of business opportunities throughout the different regions of the world. Therefore, there is a strong need of some international finance for the business community. Here more opportunities are available for the finance managers regarding their investment and financing areas. So, these opportunities and related threats always discuss under this area of financial management.
8- Responsibility of Financial Management
In an organization there is a hierarchy of managers at different levels, and each one is responsible for different functions. In between all these managers, the Chief Financial Officer (CFO) is responsible for the financial management of the company. He is responsible to report to the CEO while the treasurer and controller fall under the hierarchy level of CFO.