Financial management is related to the management of the financial resources of the company. The company’s finances include the generation of cash and investments from lenders. The companies often hire accounting staff for managing finances, or they outsource the firm for getting financial guidance.
The businesses need proper management of the finances for its success. It is the duty of the owner of the business or the chief financial officer.
In other words, it is the study of the assets and liabilities of the company and the management of those assets also comes under this.
CONCEPTS COVERED UNDER FINANCE MANAGEMENT
Financial management covers a wide range of topics in it. Here is the elaboration of some of the important topics:
Arbitrage means to purchase and sell an asset from dissimilar platforms instantaneously, but there is a slight advantage of the difference in prices. Before starting the whole process, the quantity should be the same. The main output of the trade is the difference in prices. It does not involve any risk, and there are huge profits expected out of it.
The actual or virtual flow of money is referred to as the cash flow. The central bank makes the payment from one account to another. Certain payments are predictable but are uncertain. Thus it needs the cash flows. These are basically connected with the interest rate, value concept and liquidity.
Debt is the obligation to pay money borrowed from someone. The organisations or the individuals that intend to make a huge purchase but are short of money tend to borrow it from another party. It is an agreement that the borrower party is agreed to lend money, and the borrowing party agrees to pay it back within the stipulated time.
Bankruptcy is the status of the person, a firm or an organisation who is not capable of paying off the debts to the creditors. The court legally imposes it, and most of the times the debtor initiates it. The person when becomes unable to repay the debts outstanding is known as bankrupt. Then there is the measurement and evaluation of the assets of the debtors and used in paying debts.
The willingness and the capability to start and run a business venture bearing the risks involved in profit earning. The entrepreneurship is joined with the factor land, labour, capital, makes up a strong business venture. But it also requires risk-taking and innovation having a pro-active approach being an important part of succeeding in the global marketplace.
The money is borrowed at some cost known as the interest rate. These are usually expressed as X% of the total amount. It represents the return on investments made in the banks or the assets such as bonds offered by the government. There are two types of interest rates:
Return on saving
Cost of borrowing
Investment means to allocate your money in such a way that it provides you with monetary benefits after a period. In finance, it is typically about the investment in financial assets. The benefits that the investment gives are known as returns. It mainly consists of the interest rates or dividends or both in combined form.
The definition of leverage is the strategy used to increase the gains and minimise losses of investment through credits, fixed costs or other tools that facilitate the growth of the final return, which can be positive or negative.
It must be clarified that a greater degree of leverage also represents a greater financial risk since although profits are considerably increased, the leverage effect can also lead to a greater amount of losses.
The concept of leverage comes from lifting or moving something with the help of a lever. There is a certain similarity between the literal and financial meaning of the word since leverage uses fixed costs or debt as a lever to increase investment options.
Liquidity is the degree to sell a security or asset in the market, having no impact on the prices of the assets. The liquidity of the market refers to the sale and purchase of assets at static prices. In accounting, the liquidity is used to measure the comfort of meeting the financial obligations by using the liquid assets.
These are the measures that can predict the risk of investment and instability. It composes the modern portfolio theory which is the methodology for the assessment of the performance of the stock funds.
It is the return value on the investment made. It can also be expressed as a change in the value of the dollar in an investment over a period.