Financial management is the important topic of the business. It is the backbone of any success in the business. This is the way business plans for the growth, acquire financing to apply the plan and distribute the profit earned to the shareholders. In order to better understand financial management, we need to divide it into three key decisions of financial management as follows:
Investment decisions
From time to time, entities need to invest in fixed assets or have to buy another entity. Fixed assets are acquired to grow internally and are called internal growth strategies. On the other hand, if the entity decided to buy another entity, it is called external growth strategy.
But the truth is that it has limited amount of funds available which it cannot use on every project it wants to undertake. So, it has to rationalize the projects using the available sources.
The decision of disinvestment also comes under this topic as any business unit of the entity not performing well needs to be disposed off. The cash raised as a result of disposing this unit is utilized somewhere else for the betterment of the entity.
Financing decisions
As we have discussed above that in order to carry out the investment decisions, entity needs the fund. The fund can be raised within the entity with the internal funds. However, if the funds are not sufficient internally, then entity has to depend over the debt or loan. One thing should be kept in mind that debt is not a free thing as entity has to pay interest amount. So, the finance manager should also keep in mind this factor while comparing the option to raise funds from banks or financial institution.
Dividend decisions
The third important decision in the financial management is the distribution of the profit to the shareholders. This decision involves how much amount is to distribute to the shareholders and whether the entity has the sufficient cash available to pay the dividend. The finance manager should keep in mind that profit and cash is two different things and distributing dividends without paying attention to the available cash, may cause severe liquidation issues in the entity.
Entity has to decide how much portion of profit it can distribute and how much it keeps in reserves for future investment. This again links to the first decision, that is, Investment decision. So, it is like a cycle which gets repeated in the life of the entity.