Financial Management: Purpose, Decisions, and Shareholder Value

This report provides a comprehensive overview of financial management, emphasizing its purpose and the critical decisions it encompasses. It begins by defining financial management and its importance in the context of organizational operations, highlighting its role in maximizing shareholder wealth. The report then delves into the core decisions within financial management: investment, financing, and dividend decisions, analyzed from a shareholder's perspective. Investment decisions are examined based on expected returns, profitability, and cash flows, while financing decisions focus on fulfilling financial obligations and the impact of ownership dilution. Dividend decisions are also considered, linking them to both investment and financing strategies. The analysis underscores the interconnectedness of these decisions and their collective impact on shareholder value, concluding that financial management is equally crucial for both the corporation and its shareholders. The report references several academic sources to support its findings, providing a well-rounded understanding of the subject.

FINANCIAL
MANAGEMENT

Table of Contents
INTRODUCTION...........................................................................................................................1
FINANCIAL MANAGEMENT: PURPOSE AND DECISIONS...................................................1
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Finance is a fundamental requisite of any economic activity. Organizations of diverse
sizes and nature are engaged in carrying out their day-to-day operations based on the influx and
efflux of cash-flows at a given point of time. From a shareholder perspective, this report provides
a critical analysis of purpose of financial management and the key factors affecting the decisions
made thereof.
FINANCIAL MANAGEMENT: PURPOSE AND DECISIONS
Traditionally, the concept of finance has been mainly classified into two categories viz.
Private Finance and Public Finance. While Private Finance is related to any monetary
transactions incurred or received by an individual, business or a not-for-profit organization, in
the form of expenditures or income respectively, Public Finance involves government and other
similar authoritative bodies (Brigham and Houston, 2012). Financial Management is the
effectual planning, organizing and directing the utilization of an organisation's monetary
resources that are involved in generation of cash flows. The purpose of this discipline is to
enable the management of the business to make informed decisions, specifically those which
maximize the wealth or economic welfare of their shareholders. Hence, from the given statement
one can say that the success or failure of an organisation depends on how well they manage their
financial resources.
Although Financial Management is an important factor for all economic activities, it
should not be taken as a sole contributor to the success of the business. This is because an
organisation is a set of different activities and functions combined together. In present scenario,
this field of study has developed as a means of fund sourcing or a mere chronological recording
of important business transactions to one related to asset management and channelization of
monetary resources which affect the decision making process in a critical manner. A company
needs to be agile as well as financially sound in order to survive in an organisation. Hence,
availability of finance and the ability to effectively apportion or utilize the finance are two main
requirements for an organisation to survive. In order to ensure proper circulation of finance is,
thus, of utmost importance. Looking from Shareholders' Perspective, the scope of financial
management can be classified into three main decisions viz. Financial, Investment and Dividend
Decision (Danielson, Heck and Shaffer, 2015). As the shareholders are an important part of the
1

organization, it is important for the business to look after their interests. Hence, a shareholder
expects that by investing or associating with an organisation they are able to increase their
wealth as a business is expected to be the primary instrument with a focus to maximise long-term
shareholder value.
As far as Investment Decisions are concerned, a shareholder tends to base these by
looking at the difference between expected returns and the actual ones. If the actual returns are
derived more by a shareholder, he or she will tend to associate themselves for a longer period of
time as long as they are able to derive this benefit (Finkler, Smith and Calabrese, 2018). On the
basis of this behaviour, one can conclude that the governing factor for a shareholder while
undertaking an investment decision is affected by the degree of profitability, cash-flows and
investment criteria they assume in regards to a certain business investment opportunity. The
underlying investment decision factors that tend to affect the financial position of shareholder's
include organisational performance in the market and type of projects taken up by them. These
are important as a business would be moulded by the opportunities it harnesses over the course
of its life. If shareholders' do not agree with such activities they would tend to disconnect
themselves with an entity. Here, the motive of a corporation and shareholder can be demarcated
easily even though the criteria chosen by the two parties to invest in potential financial gain
opportunities are almost same.
On the other hand, Financing Decisions are those which relate to how and when the
shareholder is able to fulfil its financial obligations by investing in the business. Just like a
corporation, shareholder's too have certain obligations that need to be fulfilled within a stipulated
period of time. Hence, a shareholder may perceive an investment opportunity as a source of
finance in the form of income derived from that business (Hao, 2014). By receiving such
financial gains, a shareholder may be able to use them as additional finances to pay off their
personal debts or obligations. Again, the governing factors here would be the returns received,
number of shares held by them, dilution of ownership and other internal policies that are
formulated by the business in regards to this class affect the financial position of shareholders. It
is worthy to note that, for a business, these criteria act as the basis of financial decisions too. An
enterprise tends to take up external finances which do not result in excessive dilution of
ownership or adversely affect the internal policies with a motive to have adequate working
capital flow in the business.
2

Lastly, Dividend Decisions from shareholder's perspective are also based on similar
criterion as they are closely linked with both investment as well as financing decisions. The
factors affecting these are again similar to the ones considered to partake in investment. An
individual or corporation or government would likely to invest in a business entity if they feel
that the returns or yield received on them are high and the financial viability is good in terms of
opportunities undertaken by them (Patel, 2014). Any change in any of these factors would result
in a decline of financial position of the shareholder too as they are directly proportional to the
shareholder's interests.
CONCLUSION
As evaluated above, one can say that shareholder's behaviour while considering an
investment, financing or dividend decision is similar to that of a corporation. Largely these
decisions are affected by organisational performance, projects undertaken and the degree of
ownership they have in an enterprise. On the basis of this one can say that financial management
is equally important to shareholders as it is to a corporation.
3

REFERENCES
Books and Journal
Brigham, E. F. & Houston, J. F. (2012). Fundamentals of financial management. Cengage
Learning.
Danielson, M. G., Heck, J. L. & Shaffer, D. (2015). Shareholder theory–how opponents and
proponents both get it wrong.
Finkler, S. A., Smith, D. L. & Calabrese, T. D. (2018). Financial management for public, health,
and not-for-profit organizations. CQ Press.
Hao, Q. (2014). Institutional shareholder investment horizons and seasoned equity
offerings. Financial Management. 43(1). pp.87-111.
Patel, B. (2014). Fundamentals of financial management. Vikas Publishing House.
4