Financial management

The essentials

Financial management is concerned with the optimal procurement as well as the usage of finance. It aims to reduce the cost of funds, keep risk under control and ensure that funds are used effectively. Every business decision has financial consequences, so financial management affects the whole organisation.

Key points

• Primary objective: maximisation of shareholders' wealth, which means maximising the market price of the company's equity shares. A decision is good if it increases the value of shares.
• Role of financial management: it influences the size and composition of fixed assets, the amount and composition of current assets, the amount of long-term and short-term financing, the break-up of long-term financing into debt and equity, and all items in the profit and loss account, such as interest and depreciation.
• Other aims include ensuring availability of sufficient funds at reasonable cost, ensuring effective use of funds and ensuring safety of funds.
• The future of a business depends greatly on the quality of its financial decisions.

Exam tips

• Remember that the objective is wealth maximisation, measured by the market price of shares, not simply profit maximisation.
• Questions may ask how a financial decision affects the balance sheet or the profit and loss account.

Common mistakes

• Equating wealth maximisation with profit maximisation. Wealth maximisation considers risk and timing of returns through the share price.
• Thinking financial management deals only with raising funds. It also covers using them well.