Why is financial management important to an organization?

Running head: FINANACIAL MANAGEMENT FOR ORGANIZATION
FINANACIAL MANAGEMENT FOR ORGANIZATION
Name of the Student:
Name of the University:
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FINANACIAL MANAGEMENT FOR ORGANIZATION1
Table of Contents
Part A.........................................................................................................................................1
Part B..........................................................................................................................................5
Part C..........................................................................................................................................8
References................................................................................................................................11

FINANACIAL MANAGEMENT FOR ORGANIZATION2
Part A
Financial summary
Financial statements are most significant part of business concern. For stock investor’s
financial statements are essential as based on various financial report, they will decide on
multiple types of investments. Statements such as income statement, position statement, cash
flow statement and retained earnings statement reflects the company abilities to make
profitable investment decisions (Lusardi and Mitchell 2014). Financial summary assumes to
be a scorecard of the organization as investors would like to invest their funds in high-quality
companies that have stable earnings, impressive balance sheet and positive cash flows.
Mainly, International Financial Reporting Standards is used to prepare the financial summary
for any company.
Cost of capital
It deals with opportunity cost that provides an offer to invest in different areas with an equal
amount of risk. Cost of capital is the rate of return that an investor could earn by investing the
same amount of money into different investment plans (Lindner, Muellner and Puck 2016).
Market determines the cost of capital and even indicates the degree of risk perceived by
investors. Overall cost of capital is the total of all returns that are needed to compensate all
stakeholders of the company (Frank and Shen 2016). For valuation of a business, loss of
money is an essential element. The fair value of an investment cash flow is calculated by cost
of capital.
Legal implication -Corporate government and company’s law
An organization is bound to have some legal rules and regulations within which the company
needs to operate. There must be some governance rules that will reflect the efficiency of the

FINANACIAL MANAGEMENT FOR ORGANIZATION3
management and will measure the fairness and accuracy of various accounts of the company
(Sehgal and Mir 2014). Its directors, shareholders and senior management who control
corporate governance of the company. Corporate governance is mandatory regulation for
each company as it prevents various frauds and scandals related to the company. Maintaining
efficient corporate governance will protect the stakeholder’s interest and even improve the
importance and accountability of the company.
Combine two business-valuation method
Discounted cash flow is one of the significant valuation methods that is used to measure
investments by taking into consideration future cash flows (Kramna 2014). Presently,
companies practice intangible asset valuation as these assets include knowledge about
company product and services; even the research and development activities involved in the
product can be valued by considering this method (Vallejo-Alonso, García-Merino and
Arregui-Ayastuy 2015). Discounted cash flow (DCF) technique is mostly helpful to measure
the risk and uncertainty of a project. Even for recognition and measurement of impairment of
goodwill and intangible assets, the DCF method has been used. Intangible asset valuation
method can be used as a preliminary valuation tool (Kynci 2017).
Level of security for investors
Security refers to financial instruments that have some monetary value. It can be of three
types’ debt, equities, and derivatives. The equity security deals with ownership interest of the
shareholders in a company. Equity shareholders do not get regular payments; however, they
do often receive dividends. They have right to claim profit from capital gains whenever
securities are sold. They acquire voting rights in the company. Debt securities refer to capital
that is borrowed from outside. It includes government and corporate bonds, certificates of
deposit and many more other borrowings. Debt instruments are mainly issued for a fixed term