The language of every business is money. Managing a business successfully entails managing its finances. Financial management in business deals with how money flows in and out of the business. It is the process of procuring and utilizing funds to achieve the financial objectives of a business. It involves the process of obtaining funds from various sources, using these funds to acquire assets, and finally, sharing the profit realized from the business with the owners or retaining it in the business.
Financial management of all kinds of businesses deals with basically three key decisions: Investment, financing, and dividends.
1. investment decisions
Investment decisions comprise asset acquisition which includes Costs of purchasing and installing an asset plus any resulting gain or loss when the asset is disposed of and the working capital including current assets needed to keep the business running.
2. Financing Decisions
Financing decisions are all about the various ways the business raises funds. Here the capital structure of the business is determined. Capital structure is the combination of equity and debt that make up the finances of the business. Equity is money invested by owners while debt is money borrowed from lenders such as banks. These decisions depend on the source of funds, cost of funds, the length of time the funds are required, and then the returns the funds are expected to generate. The best mix of debt and equity should be decided in such a way as to increase the profitability of the business.
3. Dividend Decision
Dividend refers to return on equity. It is the portion of profit or retained earnings the business pays to its owners or shareholders. At the end of every financial year, the company declares what it has earned from its operations (profit). The decision then is been made at this stage about profit distribution; what portion of the profit is to be shared in form of dividends and what portion of it is to be re-invested into the business (retained earnings).
Functions of Financial Management
1. Capital Estimation
2. Capital structure Determination
3. Evaluation and selection of sources of funds
4. Allocation and control funds
5. Distribution profits or surplus
5. Monitoring of financial activities