An organization requires financial management for various activities. For examples: approving loans or credit lines, hiring employees, building customer’s relationship, creating company’s credit rating, adjustment in budgets, managing cash inflow and outflow activities, risk management and more.
One of the essential primary types of financial management decision is to build and increase the valuation of an organization. Here we will see the what are the primary three types of financial management decisions and examples where all are working towards achieving common goal.
What are the Three Types of Financial Management
A great financial report of any organization mostly depends on how various types of financial management decisions are undertaken. It is wisely said that a well financial managed company will always have a solid balance sheets and great books of accounts which you might like to revisit it multiple times. Let us see the three types of financial management decisions which every company need to take it seriously and every action requires a perfect timing to take place.
This is the most basic type of financial management is financing decisions. Financial decisions that are made in connection with the raising of funds. Identifying multiple sources of funding, as well as the amount of money to be raised from long- and short-term sources, is part of the process.
As part of the financing decision, the financial management evaluates the cost of capital and financial risks associated with various choices, and then determines the percentage of money to be obtained from shareholders’ funds and borrowed funds. A company can raise long-term finance in two ways: through the use of shareholder cash or through the use of borrowed capital.
The second most popular financial management types is investment decision. Investment decisions are financial decisions made by management to allocate funds to various assets with the goal of generating the greatest potential returns for the investors. It entails analyzing a variety of potential investment possibilities and picking the most advantageous ones. Investment decisions might be made for the long run or for the short term.
Dividend decisions are financial decisions that are made in relation to the distribution of a company’s share of earnings to its shareholders in the form of dividend payments. Whenever possible, dividend choices should be made with the broader goal of maximizing shareholder value in mind. Choosing the amount of profit (after tax) to give to shareholders as dividends and the amount of profit to maintain in the firm for future growth is what the dividend choice entails, as the name implies. These are the 3 types of financial management.
Types of Financial Management Decisions
Here are some of the additional types of financial management decisions which is also considered as important for an organization. Let us go further on it.
Treasury and Capital Budget Management
Capital budgeting is the planning procedure used to decide if a company’s fixed assets, for example, new plant, new machinery; new research projects are worth of allocating funds through the organization capitalization structure (equity, debt or profit earnings). Numerous formal strategies are utilized in capital budgeting.
For example: Profitability index, Payback period, Net present value, Real options valuation, accounting rate of return, internal rate of return, Equivalent annual cost and more. These management teams are likewise accountable for raising funds and investing funds. In the event that an organization merge with another organization or expands, team will facilitate the financial needs for merger or expansion.
Capital Structure Management
In corporate finance, capital structure is the manner in which a company finances through a mix of debt or equity securities. Debt financing comes as bond issues, while equity comes from retained earnings or as a stock. Short-term debt financing, for example, working capital necessities is likewise viewed as a major aspect of the capital structure.
Here financial management team is responsible for capital structure of a company’s short-term debts, long-term debts, equities, preferred stocks and more. At the point when team refer to capital structure, they are probably considering a company’s debt-to-equity ratio, which gives understanding into how healthy organization is financially or how risky organization is financially.
Working Capital Management
Working capital management of an organization refers to managing bookkeeping methodology and accounting strategies intended to keep track of current assets, current liabilities, cash flow, inventory turnover ratio, working capital ratio and much more.
The basic role of working capital management is to ensure the organization dependably keeps up adequate liquid cash to meet its short-term debts and operational cost. This is one of the types of financial management where team need to maintain working capital management to smoother company’s operational cycle, and also to improve the company’s earnings.
Financial Planning, Analysis and Control Management
Financial planning is the undertaking of deciding regarding how a business will accomplish its key objectives and targets. More often an organization makes a Financial Plan after the vision and mission have been set. The Financial Plan describes each and every activities and exercises needed to accomplish these goals.
Financial analysis is the way toward analyzing businesses, budgets, projects and other finance related matters to decide their execution, suitability and performance. Regularly, financial examination is utilized to break down whether a company is steady, liquid or sufficiently productive to permit any investments. Financial controls are procedures, arrangements and methods that are actualized to manage finances.
Financial controls framework give an instrument to management to screen the accomplishment of operational goals and objectives. These types of financial management decisions are undertaken by teams who are more often not responsible for the bookkeeping office, the budget division and the audit related work.
Insurance and Risk Management
Insurance and risk mostly have a similar objective towards minimizing the organization’s risk; however distinctive strategies are implemented to accomplish these objectives. Risk management team are accountable for minimizing the organization’s risk factors that are threat for their business operations. For example: flood, fire or any other natural disasters.
These types of financial management are mostly responsible to build techniques to enable the organization to stay in profitable without any affect, by natural disaster or changes in the price due to currency difference. At the same time, taking best insurance plan with right benefits and proper protection amount for an organization is also important, to limit the organization’s threats against risk or lawsuits.
Every business is different, every business has different ideas and every business has its unique style to perform operations. But one thing is common across all is company that is finance, and success of any business is depend on finance. So here we have over-viewed various types of financial management decisions which a company need to undergo to achieve its goals.
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Financial Management Basics For Beginners
- Chapter 1: What is Financial Management with Examples
- Chapter 2: Importance of Financial Management
- Chapter 3: Objectives of Financial Management
- Chapter 4: Functions of Financial Management
- Currently Reading: Types of Financial Management
- Chapter 6: Nature and Scope of Financial Management
- Chapter 7: Investment Valuation and Project Valuation Methods and Techniques
- Chapter 8: Goals of Financial Management
- Chapter 9: Financial Management Process
- Chapter 10: Financial Management Notes
- Chapter 11: Financial Management for Startups
- Chapter 12: Financial Management for IT Services
- Chapter 13: Financial Management Quiz - Question and Answers
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