1.6:
Financial Management Decisions
Financial management involves decisions related to the financial resources of an organization to achieve its objectives.
There are three main types of decisions in financial management.
These include capital budgeting, financing, and working capital management.
Capital budgeting relates to investment decisions in long-term assets like purchasing new equipment or expanding operations.
Financing decisions focus on raising funds through stocks, bonds, or loans to finance investments or operations.
Working capital management decisions involve managing the day-to-day finances of a company, such as cash flow, inventory levels, accounts receivable, and accounts payable.
For example, a shoe manufacturing company plans to buy new machinery, which requires capital budgeting decisions.
So, the company analyzes the potential costs and returns on new investments.
As a part of its financing decision, it plans to take a loan from a bank.
In terms of working capital management, the company needs to manage its inventory levels and cash flow carefully.
With effective financial management decisions, the manufacturing company can successfully improve its business operations.
1.6 Financial Management Decisions
Financial management is crucial for optimizing an organization's resources to meet its goals. It involves three main types of decisions: capital budgeting, financing, and working capital management.
Capital budgeting focuses on long-term investments. For instance, the costs, potential profits, and risks of developing a new app are evaluated by a software company to decide if it is a good investment.
Financing decisions determine how to raise the needed funds, such as through issuing shares, obtaining loans, or using savings. For example, when a telecom company issues new shares to finance network expansion, it must consider the costs and effects on shareholders.
Working capital management includes daily financial activities, like managing cash, inventory, and payments. A manufacturing firm must balance having enough raw materials for production without holding too much inventory, planning production, and managing supplier terms.
Effective financial management involves careful analysis and planning, ensuring decisions align with the company's goals. It maintains financial stability, supports growth, and improves efficiency, helping organizations navigate challenges and seize opportunities.