Question

List and briefly describe the three areas of financial management. Also, answer what the primary goal of financial management is?

Answer 1

A] The three areas of financial management are:

1] Investing:

Decisions are to be taken with regard to the amount of assets that the firm has to acquire and their composition.

2] Financing:

This deals with the sources from which the funds required for investment are got; whether equity or debt?

3] Distribution of dividends/Repurchasing of shares:

Once profits are made, the firm has to decided how much of the profits it will give back to the shareholders in the form of dividends or repurchase of shares, the balance being retained for further investment.

Practically, all the three decisions are taken simultaneously.

There cannot be any investing without finance and there is no need for finance without any investment in view. Further, when financing is required and profits are available, the extent of retention is part of financing.

B] The primary goal of financial management is maximization of owners'/shareholders' wealth. It should be ensured while taking decisions in the above three areas.

Answer 2

Three areas of financial management are:

• Investment decisions – This area of financial management looks at decisions pertaining to where to invest. This area looks at generating highest possible returns on investments and the investments can be both long term as well as short term in nature.
• Financial decisions and dividend decisions– This area of financial management looks at identifying various sources of funds and then determines the best source of fund given its cost and its risks. Different sources of funds like debt, equity, etc. have different costs and risks level and this area aims at optimizing that. Dividend decisions looks at distribution of profits of a company i.e. should the profits be retained or should it be paid out in the form of dividends.
• Working capital decisions - This area of financial management looks at short term financial management and looks at current assets and current liabilities to determine optimal level of inventory, granting of credit and credit terms for customers, amount of cash to be carried etc.

The primary goal of financial management is to ensure efficient acquisition, allocation and usage of funds of a company so as to ensure creation of maximum wealth for the shareholders of the company.