Understanding the Concept of Finance & Financial Management

Understanding the Concept of Finance & Financial Management

Introduction

In an economy, commercial entities play a very critical role in the development of society and social welfare. All organizations are working day in and day out in order to achieve their specific goals. The nature of all businesses is different from one another, but one thing is common in all of them, and that is requirement of finance. The required money, to manage an organization is called capital, and the cost incurred to acquire such capital is termed as cost of capital. In this assignment, we are going to elaborate various concepts of finance or financial management.

Discussion

Question # 1

Process of Financial Planning

For a business, planning of financial future is most important. All successful aspect of one's life is based upon a proper planning. Financial planning is very important because it can save the life and future viability of employees and business itself. It helps in crafting the long term and short term goals of an organization. A proper financial planning gives a detail roadmap regarding the budget and expenses associated with a particular activity and identification of transactions related to future financial could help the management in designing the overall strategy of an organization.

A business can only be able to achieve its goal if extensive planning is done before starting a business. Planning is to be done about all the aspects involved in a business, will it be financial, operational or marketing aspect. (Binsbergen, J.H, Graham, J.R. and Yang, J, (1990)). The main objective of financial planning in a business is to identify the path of the business that will lead it towards a successful business in the world. Process of effective financial planning may vary from industry to industry or company to company. But in general it composed of 6 steps that are shown in the figure given below.

Working Capital Management

Working Capital is defined as “the difference between current assets and current liabilities” Collier (2007 p. 83). Hence, Working Capital Management (WCM) is managing current assets and current liabilities and financing the current assets. Working Capital (WC) plays an important role in companies' profitability, risk, and value (Bhunia and Das 2012). Studies that were done in different countries have shown that WC has a significant impact on profitability and liquidity of firms. This suggests that a properly managed WC yields a higher rate of return.

Working capital management efficiency is imperative for firms specifically in the manufacturing sector, where a major part of assets is composed of current assets. This may therefore; directly affect the profitability and liquidity of firms. Firms are likely to fail and may face bankruptcy where working capital management is not given due consideration. Excessive levels of current assets may result in low levels of returns such as return on investment (ROI) for firms. In contrast, firms with a lesser amount of current assets might be facing difficulties in maintaining smooth operations

Financial Instruments

Financial instruments ...