The assignment delves into the crucial role of financial management in organizations, emphasizing its influence on shareholder wealth. It examines factors influencing investment decisions, dividend policies, and the relationship between risk, return, and debt utilization.
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Table of Contents INTRODUCTION...........................................................................................................................1 Assessment.......................................................................................................................................1 1. Critically assess the purpose of financial management and the application of three major financial decisions. Also, the factors of each decision that affects the shareholder's financial position........................................................................................................................................1 CONCLUSION................................................................................................................................4 REFERENCES................................................................................................................................5
INTRODUCTION Financial management is a systematic process of planning and controlling the finance of the company. It is done to achieve the objectives of the company. It is concerned with the allocation of resources, effective utilization of resources and generating large profits towards attaining the goalseffectivelyandefficiently.Thepresentstudydescribesthepurposeoffinancial management and the different decisions like financing, investment and dividend decisions made as per the perspective of the shareholders. Furthermore, it also explains about the factors within the decisions that impact the shareholder's financial position. Assessment 1. Critically assess the purpose of financial management and the application of three major financial decisions. Also, the factors of each decision that affects the shareholder's financial position. a. Explaining the purpose of financial management.ï‚·Wealth maximization-The foremost purpose of financial management is to maximize the wealth of the shareholders. It means increasing the value of the shares held by the shareholders by optimum utilization of capital so that higher profits can be generated (Karadag,2015). Wealth maximization is superior to profit maximization as the former aims in the growing success of the organization in future while the latter reflects the short term benefit that is gained by the enterprise.ï‚·Ensuring funds availability- For smooth functioning of the firm, timely availability of funds is an important aspect and objective of financial management in the business. To survive with a sound financial position, funds must be managed efficiently so that management does not face scarcity of resources.ï‚·Optimal capital structure- A perfect balance between the equity share and debentures enable the enterprise in achieving the optimal capital so that wastage of resources, time and money can be avoided. The balance will be maintain by not issuing too much of shares and enhancing control over the capital cost. ï‚·Ensuring security of funds- The essential purpose of financial management, to ensure the safety of funds by creating the reserves. Minimum possible risk should be attached to the investments made (Rossi, and et.al., 2019). Reserves such as general reserve, capital reserve and sinking funds are created for fulfilling this purpose. 1
b. Evaluating the different types of decisions. Financing Decision- These decision relates with the best possible use of funds in the corporate. The decisions made in relation to the liabilities and the equity of the stockholders such as decisions regarding issue of bonds, equities etc. Financing decisions are concerned with the capital structure of the company. The decisions in terms of the asset-mix or the composition of the asset's comes under the purview of these decisions. It plays a crucial and important role for the corporate and the shareholders for creating a proper mix between the debt and the equity so which leads to optimal structure of capital. In the context of financing decisions, Shareholders decides how much cash to reinvest in the business, versus pay out to them, and how the cash should be reinvested (Weir, and Langa, K., 2018). On a broader perspective, shareholders have to define how quickly they want to grow the business, with what level of risk, and with what source of capital. Investmentdecision-Itisthemostimportantfinancialdecisionthatreflectsthe identification of the asset held by the company and the risk associated with those assets as perceived by the investors. Since, the cost is involved in the funds so it is essential to utilize the resources properly for achieving the wealth maximization goal. It helps the shareholders in making the short-term and long-term decisions effectively and efficiently. Short-term decision includes management of working capital where shareholders makes decision about the current asset and current liability for managing its day to day operations. On the other hand, long term investment decisions involves the capital budgeting decisions which enables the shareholder in deciding the expenses in capital investment. These capital expenditures are made in expectation of getting higher returns in the long run. Shareholders assess the investment proposals in terms of the profitability, cost and risk attached with various projects. Investment decision is vital not only for establishing new units but also for diversifying and expanding the present units (Aversano, and et.al., 2019). This decision ensures liquidity, profitability and sound structure of organization. 2
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Dividend decisions- The third most important and major financial decision which states the distribution of the profits to the investors and the shareholders who contribute to the capital of the firm. Dividend refers to the part of profit that is distributed among the shareholders as per the proportion of their shareholding. It acts as the reward on the investments made by the shareholders or members in the share capital of the corporate. Dividend decisions are concerned with composition of the profits that is to be disbursed among the members. Decisions are made in respect of the whole or partially distribution and retaining of profits so that further investments can be made in the profitable projects to facilitate higher returns to the shareholders. Higher the rate of dividend, higher will be the market value of the shares which in turn leads to wealth maximization (Tulli, Gallegati, and Weinrich, 2019). The enterprise also consider the decisions regarding stability of the dividend, cash dividend and stock dividend. c. Analyzing the forces within each of the decision that affect the shareholder's financial position. There are various factors that affects the financial decisions, which in turn impact the position of the shareholders such as- Factors of financing decision- As financial decision deals with the equity-debt mix of the capital structure, so if the use of debt is more by the company then it has to bear more interest rates which in turn impacts the risk-return trade-off of the shareholders. On the other side, if the market value of the enterprise is increasing by the growing amounts, a sound financial wealth of the shareholders can be attained. Factors of investment decision- The risk factor in the investment decision plays a crucial role in evaluating the expected return on the long term assets. It involves the decision regarding the purchase of asset and utilization of funds that are obtained from the sale of assets (Karadag, 2015). If the company makes more use of funds than allocating them in profitable projects, becomes less productive and profitable and leads to less return to the shareholders. FactorsofDividenddecisions-Thefactorslikeearnings,developmentopportunityand dependability on income comes under the consideration of this decision. Highly stable earnings of the enterprise indicates stable returns to the shareholders in the foreseeable future while unstable earnings leads to non-payment of dividends to the members which in turn reflects the unsound or unstable financial position of the shareholders. 3
CONCLUSION From the above report it is concluded that Financial management is the essential era of every organizationasitdealswiththemanagementoffinance.Througheffectivefinancial management, company can build optimum decision in relation to the utilization of funds so that larger profits can be ascertained and wealth can be maximized of the shareholders. This in turn helps in enhancing the image of the enterprise at a large pace. 4
REFERENCES Books and journals Aversano, N. and et.al., 2019. Integrated Popular Reporting as a Tool for Citizen Involvement in Financial Sustainability Decisions. InFinancial Sustainability of Public Sector Entities(pp. 185-205). Palgrave Macmillan, Cham. Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A strategic management approach.EMAJ: Emerging Markets Journal.5(1).pp.26-40. Rossi, F. M. and et.al., 2019. Financial Management and Public Sector Accounting in an Age of Reforms: Developments and Changes in Public Sector Financial Management. InPublic Administration in Europe(pp. 235-246). Palgrave Macmillan, Cham. Tulli, V., Gallegati, M. and Weinrich, G., 2019. Financial conditions and supply decisions when firms are risk averse.Journal of Economics.pp.1-31. Weir, D. and Langa, K., 2018. How Well Can Medicare Records Identify Seniors with Cognitive Impairment Needing Assistance with Financial Management?.University of Michigan Retirement Research Center (MRRC) Working Paper, WP.391.p.4. 5