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Key Financial Management Concepts - Coursework Example

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The paper "Key Financial Management Concepts" discusses that in general, the nature of financial decisions serves to determine the course of a particular investment ranging from sources of funds to the distribution of company profits through dividends. …
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Download file to see previous pages There are four key concepts in financial management and they include the nature and goal of financial decisions, the time value of money, the concept of risk and return, and the evaluation of a firm. This paper explores each of these concepts in detail and shows their importance in the daily operations of an organization. Financial management thus entails managing the finance for the day-to-day running of a particular firm. It includes the obtaining of money for the organization, use of the money in the company’s assets and their efficient management and generation of surplus money as well as its distribution. Owing to the various hindrances in conducting these activities, financial decisions are necessary to meet adequately the goals of the organizations (Keown, et al., 2007).
Bannerjee states that financial decisions take a three-tiered design that comprises investment decisions, financing decisions and dividend decisions. Investment decisions entail the identification of assets in which the company can invest its resources. These assets could take the form of land and buildings or computers, which are tangible assets or long-lived assets. In order to achieve the effective running of these assets as well as the goal of the firm, investment should occur in short term or current assets like an inventory as well as a cash balance. For long-lived assets, the decision-making involved is a capital budgeting or capital expenditure decision. For current assets, the decision-making is working capital management. The risk element for capital expenditure decisions is high since they involve a longer time and a larger amount of money.
Risk, in this case, refers to the probability of the actual outcome being different from the targeted outcome. Financing decisions entail finding out how to finance the investments, the source of finance as well as the possible outcomes of choosing such sources. Choices could include the use of financial markets to raise capital through the giving of securities to investors. Dividend decisions involve determining how to distribute company profits. This entails deciding how much to pay to the shareholders and how much to keep for future projects. These three decisions albeit different, are interrelated and serve to complement one another (Bannerjee, 2008). ...Download file to see next pagesRead More
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