Question

What are the three basic questions addressed by a financial manager? Describe in detail.

Answer 1

The three basic questions addressed by a financial manager are capital structure ,ca pital budgeting and working capital management.

Capital Structure

Capital Structure refers to the amount of debt and equity used by a firm to finance its assets and fund its operations.Its often referred to as debt to equity.Debt and equity are often used by a firm to finance capital expenditures,acquisitions,business operations and other investments.There are various pros and cons associated with using debt and equity,and a finance manager will have to find the optimum combination of both.Cyclical industries are often not suited for debt owing to unpredictabilty with regard to cash flow which in turn causes uncertainity with regard to debt repayment.Industries like banks use business models that require large of amount of debts.

Capital Budgeting

Capital Budgeting is the process of making capital investments or capital expenditures(long term investment decisions).It is a decision making process that helps a firm to evaluate the viability of Capital investment and whether it's worth undertaking.Capital investments are long term in nature and require a cash outlay at the beginning with expectation of future benefits.Capital budgeting involves various stages like identificatiom evaluation, selection ,financing ,implementation and subsequent monitoring of the project to ensure it remains within the capital budget.

Woking Capital Management

Working Capital management refers to decisions made regarding Current Assets (short term assets) and the funds needed to support those assets.Working Capital management policies can be classified into 3 types . Aggressive working capital management , conservative working capital management and moderate working capital management.In aggressive working capital management policy, the focus is on high profitability potential but it comes at the expense of high risk and low liquidity due to higher levels of lower cost short term debt and less long term financing.In a conservative working capital managemnt policy,the focus is on low risk low return working capital investment and financing.In this policy a large proportion of capital is placed in liquid assets as a result profitabilty takes a hit. In a moderate working capital management policy, the focus will be on the utilization of risk and return and financing strategies that match life(maturity) of assets with maturity of financing.

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