Overview of Financial Management - Summary

 Overview of Financial Management

• Definition: Financial Management involves managing the financial resources of an organization efficiently to achieve its objectives. It includes planning, organizing, controlling, and monitoring financial resources.
• Objectives: The primary goal is wealth maximization, ensuring the company's market value and shareholders' wealth are maximized.
• Scope: Includes investment decisions (capital budgeting), financing decisions (capital structure), and dividend decisions.

2. Functions of Financial Management

• Investment Decisions: Focuses on where to invest funds to generate the best returns, considering factors like risk and return. This includes capital budgeting and working capital management.
• Financing Decisions: Involves determining the best financing mix (debt and equity) to finance the firm's operations.
• Dividend Decisions: Decisions on whether to distribute profits to shareholders or retain them for reinvestment in the business.

3. Financial Planning

• Importance: Financial planning ensures the availability of funds whenever required and helps in ensuring the long-term financial sustainability of the organization.
• Types: Short-term (operational) and long-term (strategic) planning.

4. Capital Structure

• Concept: Capital structure refers to the mix of debt and equity used by a company to finance its operations.
• Factors Affecting Capital Structure: Includes cost of capital, financial risk, market conditions, and management control.

5. Cost of Capital

• Definition: The cost of capital is the return expected by those who provide capital to the company (debt holders, equity holders).
• Importance: Helps in making investment and financing decisions.
• Components: Cost of equity, cost of debt, and overall weighted average cost of capital (WACC).

6. Working Capital Management

• Concept: Involves managing the short-term assets and liabilities to ensure the company can continue its operations and meet short-term obligations.
• Key Components: Inventory management, receivables management, and cash management.

7. Financial Risk Management

• Types of Risk: Market risk, credit risk, operational risk, and liquidity risk.
• Risk Mitigation: Techniques include diversification, hedging, and insurance.

8. Time Value of Money (TVM)

1. Concept: The principle that a certain amount of money today has a different value than the same amount in the future due to the potential earning capacity.
2. Applications: TVM is essential in discounting future cash flows, valuing bonds, and calculating annuities.