Financial management objectives

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1 Introduction

The purpose of this chapter is to explain the nature of financial management and its importance, both for profit making and for not-for-profit organisations.

2 The nature and scope of financial management

The role of the Financial Manager is to make the right decisions in order to achieve the objectives of the company in the future.

The four key areas that the Financial Manager is concerned with are as follows:

1. The raising of long-term finance:

The company needs finance for investment and in order to expand. Finance can be raised from shareholders or from debt – it is the job of the Financial Manager to be aware of the different sources of finance and to decide which source to use.

1. The investment decision:

Decisions have to be made as to where capital is to be invested. For example, is it worth launching a new product? Is it worth expanding the factory? Is it worth acquiring another company?

It is the Financial Manager’s role to decide on which criteria to employ in making this kind of investment decision.

1. The management of working capital:

In order for the company to operate, it will have to accept a certain level of receivables and it will have to carry a certain level of inventory.

Although these are needed to operate the business successfully, they require long-term investment of capital that is not directly earning profits.

Receivables and inventory are just two components of working capital (working capital = current assets less current liabilities) and it is a job of the Financial Manager to ensure that the working capital is managed properly i.e. that it is high enough to enable the company to operate efficiently, but that it does not get out of control and end up wasting money for the company.

1. The management of risk:

One of the roles of the Financial Manager is to manage the risk due to changing exchange rates if the business trades abroad, and to manage the risk due to changes in interest rates if the business borrows or deposits money.