Financial Management

Financial management is two way process in which finance manager obtain funds and money at low cost and risk and use it in higher earning project at minimum risk. Expert says that it is science to earn maximum return at minimum risk and control. In financial management, following decision is taken technically.

Ist To Get Funds from Different Sources:-

This decision is very helpful for development of company. You know that if you start even a small business, you need fund for paying capital and revenue expenditures. But you have to give its cost. You have also to take the risk of its repayment; it may possible that at the time of repayment, you have no money in your pocket. It is the risk of solvency. You also have to see who will control your business after taking fund. We explain our views to make understand to you.

→ If you choose share capital as the source of funds:

Suppose, you have issued new shares and get fund as share capital, at that time, we can analyze its cost, risk and control with following ways:-

(a) Cost

Cost of acquiring share capital is high than acquiring debt because its cost is dividend and dividend is not deducted out of profit as indirect expenses. It is division of net profit after tax. If we get debt, we pay interest before tax, it means we have to pay tax high, if we get share capital and pay dividend. Thus cost of this source of funds is high.

(b) Risk

Risk means probability of loss in future. But, you have chosen this source, you will find no risk because we do not repay to shareholders. We only repay balance amount at the time of winding up of company.

(c) Control

If company issues new share to new shareholders instead of existing shareholders for getting funds from new shareholders, it will reduce the control of existing shareholders.

→ If you choose bond or debenture or take loan:

At that time, company’s cost will reduce but risk of repayment will increase. If company has no liquidity at the time of repayment company will be liquidated.

There are also many other sources but these sources have also some strength point and weak point. Before choosing best source deep analysis is needed.


2nd Decision  Effective Utilization of Funds

Effective utilization of funds is just decision to maximize the return on investment of funds. If finance manager is not capable to increase the return by investing fund in profitable assets or other profitable projects, company’s business will stop just in two day. So, finance manager should not know only basics of capital budgeting, other investment decisions and investment analysis but also should do deep study more than two years in same field for becoming perfect in it.

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