Financial Management: Importance and Purpose

This assignment provides an explanation of financial management, its purpose, and how it plays a crucial role in a company's operational efficiency. The report highlights that financial management helps to properly use and allocate funds, reducing the cost of capital and increasing the value of the firm. It also discusses three key factors: investment, financing, and dividend decisions, which are essential for retaining shareholders and maximizing business wealth.

FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Evaluating purpose of financial management.........................................................................1
2. Critically evaluating 3 main decision from the view of stake holder's...................................2
3. Clearly explaining how the factors within each decision may affect financial position of
shareholders.................................................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial management is the process of conducting planning, organising, directing and
controlling all the financial related business activities for utilising funds of the enterprise
(Lankoski, Smith and Van Wassenhove, 2016). This report will articulate the purpose of
financial management with its three main decision from a view point of stake holder's
perspective. Further, critical evaluation will be developed on factors within each which affect
financial position of the shareholder.
MAIN BODY
1. Evaluating purpose of financial management
Figure 1Purpose of financial management
(source: financial management-meaning, objective and functions, 2019)
Basically, the purpose of financial management is to maximise the value of corporate.
However, it always creates a conflict between owners of business and providers of funds as
creditor. However, it is true that view of stakeholder is considered as important part of firm's
corporate social responsibility which generally implies that a firm will better able to achieve
shareholder goals if it has goal of achieving shareholder wealth maximization. The advance goal
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of FM generally compared to profit maximisation (Gartenberg, Prat and Serafeim, 2019). That is
why it can be said that survival of company is generally considered as an important consideration
for developing financial decision of company. In order to make firm's investment and financial
decision rationale, it is worked as profit maximisation and wealth maximisation. It generally
ensures regular and adequate supply of funds through which optimum funds will get utilised.
2. Critically evaluating 3 main decision from the view of stake holder's
The following explanation will help in understanding each financial decision effectively:
Investment decision:
It is analysed that one of the main finance functions in terms of financial management is
to allocate capital for a long term assets (Finkler, Smith and Calabrese, 2018). In simple words,
this process is generally considered as capital budgeting. Two main aspects which included in
this decision includes evaluation of new investment in terms of profitability and to prevail
investment in the entity. However, there is some risk in investment which stakeholder has to
consider where the liquidity and profitability will reflect the cost of capital of company. It is true
that if entity has high liquidity, profitability and sound health wealth, shareholders will directly
develop their economic decision for investing in capital of company.
Financing decision:
It generally considered as important for shareholders in making wise decision about
when, where and how a business acquire its funds, it is because a firm will able to achieve more
profit when there is an estimation that share of organisation will get expands which is a complete
sign of development for firm which helps in boosting investor’s wealth. It refers to important
crucial decision which generally made by financial manager regarding financing-mix of
organisation (Harrison and van der Laan Smith, 2015). It is the type of planning which is concern
with borrowing and allocating of funds which require in investment decision. Form the view
point of stakeholder; they generally focus the type of risk which is concern in getting return of
shareholder. It generally provides base line to shareholders for developing economic decision of
investing in the company or not. It is because this is the main factor through which entity will
able to attract more shareholders where they invest only on the basis of company to meet its
financial obligation and debts.
Dividend decision:
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It is the type of decision under which two aspects are involved which financial manager
has to think. It generally refers to a profit which is distributed by entity for its shareholders. The
main factor through which an entity will able to retain shareholder on long term basis is with its
dividend distribution policy (Bhimani, 2017). Here, manager think upon whether to distribute all
profit to shareholder or to provide part of it and retain other for business operations. However, it
involves the decision regarding risk-return trade-off state which majorly affect stakeholder view
regarding whether to continue investment or to stop it.
3. Clearly explaining how the factors within each decision may affect financial position of
shareholders
The following explanation will clearly analyse the factor that is investment, financing and
dividend decision which affect the financial position of shareholders.
Factors Affects
Investment decision It is true that shareholders need to receive full benefits of their
investment and for that they need clear and fair information
through which they will able to develop effective and efficient
decision. Such information will fully reflect in the financial
statements of entity (Stockenstrand, 2017). Shareholder’s need
such financial statement in order to make informed decision about
their own equity investment and if entity did not attend effective
profit during the year then it will affect their return through which
their financial position gets affect.
Financial decision Main factor which affects the financial position of shareholder
because of this kind of decision is the solvency of the firm. It is
because solvency ration will indicate whether entity has sufficient
cash flow to meet its long term and short term liabilities or not
(Diouf and Boiral, 2017). If entity did not have lower solvency
ratio then will not able to attend maximum profit through which
shareholder will not able to get their expected return which
directly influence their position. Bad solvency of firm directly
influence the ability of business to survive in market and for
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shareholders, this decision helps them in analysing ability of
company to pay its debt and if sufficient income is not generated
by company then it will affect the financial position of
shareholders.
Dividend decision It is true that when a firm earns more profit than it will able to
distribute more dividend to its shareholders. However, future
income is very important which directly affects dividend policy of
company. Shareholders generally invest in company with the
expectation of earning adequate return, rather than this, they only
invest for getting regular income and if entity did not achieve
effective profitability then it will directly affect value of
shareholders and their financial position (Fraser, Bhaumik and
Wright, 2015).
CONCLUSION
From the above report it can be concluded that financial management plays an important
role in company. Through such management entity will able to properly use and allocate funds
through which its operational efficiency gets increases. When funds used properly, it will help in
reducing the cost of capital through which value of firm gets increases and shareholders will get
attracted. In this report, explanation has been provided on the purpose of financial management
where it is analysed that its basic purpose is to maximise wealth of business. Other than this,
three factors that is investment, financial and dividend decision gets evaluated where it is
analysed that it plays an important role in retaining shareholders in the business.
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REFERENCES
Books and Journals
Bhimani, A. (2017). Tech start-ups need a different approach to financial management. LSE
Business Review.
Diouf, D., & Boiral, O. (2017). The quality of sustainability reports and impression
management: A stakeholder perspective. Accounting, Auditing & Accountability
Journal. 30(3). 643-667.
Finkler, S. A., Smith, D. L., & Calabrese, T. D. (2018). Financial management for public,
health, and not-for-profit organizations. CQ Press.
Fraser, S., Bhaumik, S. K., & Wright, M. (2015). What do we know about entrepreneurial
finance and its relationship with growth?. International Small Business Journal. 33(1). 70-
88.
Gartenberg, C., Prat, A., & Serafeim, G. (2019). Corporate purpose and financial
performance. Organization Science.
Harrison, J. S., & van der Laan Smith, J. (2015). Responsible accounting for
stakeholders. Journal of Management Studies. 52(7). 935-960.
Lankoski, L., Smith, N. C., & Van Wassenhove, L. (2016). Stakeholder judgments of
value. Business Ethics Quarterly. 26(2). 227-256.
Stockenstrand, A. K. (2017). Financial Reporting Issues and Their Connection to Strategy and
Management Control Aspects in Swedish Banks 1998-2012. Bank Regulation: Effects on
Strategy, Financial Accounting, and Management Control. 257-283.
Online
Financial Management- meaning, objectives and functions. (2019). [Online]. Available through
<https://www.managementstudyguide.com/financial-management.htm>
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