Question

why is it important to understand the Strategic Allocation of Financial resources is significant for advancing Gods purpose for business on earth

Answer 1

Two basic functions of financial management.

1. procurement of funds

2.effective utilisation or allocation of funds.

Procurements of funds,

Funds can be obtained from different sources having different characteristics in terms of risk, cost and control. The funds raised from the issue of equity shares are the best from the risk point of view since repayment is required only at the time of liquidation. however,it is also the mostly costly source of finance due to dividend expectations of shareholders. On the other hand, debentures are cheaper than equity shares due to their tax advantage. However, they are usually riskier than equity shares.there are thus risk,cost,and control considerations which a finance manager must consider while procuring funds. The cost of funds should be at minimum level for that a proper balancing of risk and control factors must be carried out.

2.effective utilisation or allocation of funds,

The finance manager has to ensure that funds are not kept idle or there is no improper use of funds. The funds are to be invested in a manner such that they generate returns higher than the cost of capital to the firm. Besides this, decisions to invest in fixed assets are to be taken only after sound analysis using capital budgeting techniques. Similarly, adequate working capital should be maintained so as to avoid the risk of insolvency.

If funds are not allocated efficiently, cost of capital is more than the return on equity so there a huge loss to shareholders, investor's, creditors and at last to the company.

Therefore funds should be allocated in a most effective and efficient manner to avoid the financial risk.