We explain what financial management is, its purpose, and its importance is. In addition, its general characteristics, risks, and benefits.
What is Financial Administration?
Financial management or corporate finance is called a branch of management sciences dedicated to the analysis and improvement of monetary investment decisions made by companies , as well as the tools available to evaluate them.
Broadly speaking, financial administration has as its goal the maximization of shareholder value , and for this it studies business financial decisions based on a short and long term, in pursuit of a strategy that allows improving the management of cash, stocks and dividends.
Corporate finance is usually associated with investment banking , dedicated to meeting the capital needs of different companies. This is why financial management has the power to revive, grow and even acquire businesses .
Origin of financial administration
In the corporate world that emerged as a result of the Industrial Revolution and capitalism , financial management became an essential part of economics and business and became a separate area of study in the early 20th century .
Until then, knowledge on the subject was limited to the recording of capital market procedures , without analytical methods and understanding and dissemination mechanisms that made corporate financial history a theoretical area.
Purpose of financial administration
Financial administration is closely linked to the business world.
The very purpose of financial administration is to understand, improve and enhance the management that companies make of their economic assets, through a series of basic concepts and recording and analysis mechanisms, to build a better management of assets and liabilities , as well as better planning over time.
It is an area of study very closely linked to the disciplines of administration and the business world, such as accounting, law , business architecture and others, from which it extracts tools and to which it provides a missing perspective.
Importance of financial management
When we refer to business relations, the correct management of corporate finances becomes a central issue in the destiny of the subject.
Investments are the heart of a country’s economic growth , since new projects generate employment, wealth and mobilize both public and private economic machinery.
This means that capital management and proper project planning is vital for companies not only to achieve their short- and medium-term goals , but also to position themselves for the future in the financial field.
Financial Management Study Areas
The analysis of financial decisions considers the risks and benefits.
Broadly speaking, financial management deals with the valuation of assets and the analysis of financial decisions that tend to create value (which must be the direct objective of the company’s management).
However, this is addressed from different possible angles such as corporate legal structure, financial and investment models , mergers and acquisitions, corporate social responsibility, tax management, investment banking, financial leverage, restructuring. companies and, of course, the very important issue of risk and benefit.
Risk and benefit of financial management
These two concepts are central in financial management and are defined as the possibility that the final result differs from what was initially expected (risk) and some unfavorable event occurs, and the possibility that the final results provide expected or unexpected growth and profits (profit). ).
Without risk there is no benefit, that is why it is often said that “who does not bet does not win” and that investment is the spirit of corporate growth.
Likewise, there are three types of risk:
- Systematic risk. Also called non-diversifiable or unavoidable, it is linked to elements or motivations external to the financial system, such as politics .
- Unsystematic risk. Called diversifiable, avoidable or idiosyncratic, it has to do with the dynamics of the market as a whole and it is possible to reduce it through diversification.
- Overall risk. The sum of the two previous risks will result in the total.
Other key concepts
Investors prefer to diversify their invested capital.
Other important concepts in the financial world have to do with:
- Opportunity costs. Since there are always investment opportunities to choose from, the opportunity cost is the result of the rate of return on the best investment alternative available. It is the loss that the company is willing to assume for not choosing the best alternative use of its capital.
- Correct financing. A principle in the matter dictates that short-term investments must be paid with short-term funds, and long-term investments with similar funds.
- Leverage. The strategic use of debt can serve to increase profits by using the resources of a third party, in a process called leverage that increases the investment risk, but also the company’s dividends.
- Diversification. Investors prefer to diversify their invested capital, that is, not to bet everything on a single project, so that failures are offset by successes and their finances are always stable.
Role of a financial manager
Financial managers are those in charge in corporations of carrying out decisions pertaining to financial administration.
It is a vital role in the success of companies and commercial operations since their decisions can mean an increase in the value of shareholders , that is, business growth or, on the contrary, its decrease.
The best financial managers are those concerned with dividends per share and not exclusively with total earnings.
The usual tasks of a financial manager are:
- Plan the company’s products and markets.
- Propose innovation , research, exchange and sales strategies.
- Organize, train and select your business executives.
- Obtain funds at low cost and high yield.
- Adjust all of the above to the environment, competition and trends facing the company.
Short and long term
Long-term decisions are about investment and growth.
Short-term decisions and techniques, from the perspective of corporate finance, have to do with the necessary balance between assets and liabilities to provide the business structure with stability and survival.
Instead, the long-term decisions are those that have to do with capital investment and growth: which projects should receive financing , whether they should receive it in equity or from debt (leverage), and when and how to pay dividends. to shareholders.
Parts of corporate finance
Three sets of decisions make up the corporate finances of a company:
- Investment decisions. How and where to invest your real assets (tangible and intangible).
- Financing decisions. How and where to get the money for the company’s innovations and projects.
- Directive decisions. What operational and financial strategies to apply according to the performance of the company as an organized whole.
Financial management today
Digital investments demand the best strategic use of company finances.
Times of technological change such as the one that began at the end of the 20th century represent a paradigm of challenges for financial management, given that the business landscape must adapt to a human universe that is constantly changing and in demand for the new.
Investments in the digital world, in new technologies or in ambitious industrial projects require the best strategic use of the company’s finances, and that means having more capable financial managers.
The above content published at Collaborative Research Group is for informational and educational purposes only and has been developed by referring to reliable sources and recommendations from technology experts. We do not have any contact with official entities nor do we intend to replace the information that they emit.