Finance and Financial Management
By: idtbusiness | Posted: 30th January 2007
Finance and financial management encompass numerous business and governmental activities. In the most basic sense, the term finance can be used to describe the activities of a firm attempting to raise capital through the sale of stocks, bonds, or other promissory notes.
Financial management, in the broadest sense, can be defined as business activities undertaken with the goal of maximizing shareholder wealth, utilizing the principles of the time value of money, leverage, diversification, and an investment's expected rate of return versus its risk.
In today's business environment, corporate finance addresses issues relating to individual firms. Specifically, the field of corporate finance seeks to determine the optimal investments that firms should make, the best methods of paying for those investments, and the best ways of managing daily financial activities to ensure that firms have adequate cash flow.
Financial management influences all segments of corporate activity, for both profit-oriented firms and nonprofit firms. Through the acquisition of funds, the allocation of resources, and the tracking of financial performance, financial management provides a vital function for any organization's activities.
The discipline of finance and financial management has three basic components. First, there are financial instruments. These instruments—stocks and bonds—are recorded evidence of obligations on which exchanges of resources are founded. Effective investment management of these financial instruments is a vital part of any organization's financing activities.
Second, there are financial markets, which are the mechanisms used to trade the financial instruments. Finally, there are banking and financial institutions, which facilitate the transfer of resources among those buying and selling the financial instruments.
Finance studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects. Finance management could include administration and supervision of the flow of monetary sources and resources in a company, organization, enterprise and even of individuals.
An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income.
The lender can find a borrower, a financial intermediary, such as a bank or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary receives the difference.
In the case of a company, managerial finance or corporate finance is the task of providing the funds for the corporations' activities. It generally involves balancing risk and profitability. Long term funds would be provided by ownership equity and long-term credit, often in the form of bonds.
These decisions lead to the company's capital structure. Short term funding or working capital is mostly provided by banks extending a line of credit.
Financial management is similar to the financial function of the Accounting profession. However, Financial Accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.
Copyright 2007 Ismael D. Tabije
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Tags: business environment, stocks and bonds, financial institutions, diversification, stocks bonds, financial performance, rate of return, financial instruments, time value of money, value of money, financial management, allocation of resources, promissory notes, investment management, corporate finance