The management of a firm’s finances is extremely important to its success. Your
ID: 2764533 • Letter: T
Question
The management of a firm’s finances is extremely important to its success. Your firm may bring in $1B in sales but if the firm is mismanaged, it may suffer a net operating loss (a net income of less than $0). What is financial management and why is it so important to the success of a business? Businesses require funding to operate and grow and there are several method by which they can obtain capital. As a business owner; describe how your financing needs (both short and long term) might change as your company expands and identify various funding options as your company grows from a small business to a large global firm.
Explanation / Answer
1. Financial Management is very important to the success of a business. There are many aspects of financial management. Only ensuring sales revenue will not solve the purpose of maximization of shareholders' wealth.
There are aspects like controlling the cost of sales and managing operating expenses is a crucial financial management task. This ensures that the operations of the company are producing required return to the investment. Another crucial aspect is managing the liquidity of the business. Proper cash flow planning and working capiatl management is very important to keep the business sustainable.
Another crucial aspect of financial management is the Managenement of long term fund requirements for capital expansion. Securing finance at the correct cost at required time is very important function of the financial management.
2. Source of Fund: When a business starts , it is generally funded by equity from the investors and may be samm funding from bank.A Start up may get funding from Venture Capital firms also depending on its project viability.
As the compnay grows and the Financial Statements becomes stronger, it can utilize its retained earning as a source of fund. Apart from internal accrual , the company becomes eligible for commercial loans from banks like term loans and working capital loans.
Whenthe firm approaches the growth phase, it may decide to go for equity funding or debt funding or a mix of debt & Equity , depending on its optmum capital structure. It can go for IPO and listing for securities to tap the security market . For debt issue it can go for Bond issue or debenture issue of a duration as per its cash flow projections.
When the firm grows further to become a Global firm , it can always get access to global investment market by Global Equity issue or Issue of ADRs and GDRs in International Market. As the firm grows more and more options for investment opens up to it for tapping the financial market for investments.
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