Good Morning Peter, how are you doing today asked Thomas?
Not good at all replies Peter! Exams are closing in and I don't even understand this tough financial management module.
Oh I see chanted Thomas. Maybe I can help you with some clarifications.
Please help me clarify as I am getting more and more confused as I read the book "Fundamentals of Financial Management".
OK, look at it this way. If you win a million dollars in the lottery, would you spend it all on cars asked Thomas?
Not at all responds peter.
Infact, I will split the money into 4 parts and I will do the following:
- First and foremost, I would invest two hundred and fifty thousand dollars into a high yielding investment portfolio that will be yielding returns every 90 days.
- Secondly, I will inject another quarter of a million into a business idea that I have always wanted to start. I would buy all the equipment I need to start the business.
- Thirdly rather than buy cars, I will start a school where I would hire and teach people how to drive cars and then start a car rental company or lease my cars to a taxi-sharing company like Uber.
- Finally, I would use the last quarter of a million dollars to buy a dream house where my family and I would live and I will support my friends and families with the remaining money.
That is so apt and Interesting Thomas answered.
Really? Peter exclaimed.
You just sounded like a financial manager, because you already had all your financial decisions figured out.
So how can you say that you are struggling with financial management? Thomas asked.
Infact let me remind you that James Van Horne and John Wachowicz defined Financial Management as a concern that deals with the acquisition, financing and management of assets with some overall goal in mind.
In my opinion, your response about how you split your lottery money into four parts shows that you have already thought through what you would do if you had a million dollars. So, you are already conversant with financial management.
Well Thomas, it's not that easy. I could quickly come up with these answers because they are my personal dreams.
How can I apply this to a corporate setting in the workplace asked Peter?
Well, I agree with you that itâs not that easy Thomas responded. However, that is the role that a financial manager now plays in order to make that dream a reality.
The financial manager has to raise funds, invest in assets and effectively manage assets in order to guarantee the success and profitability of the firm and ultimately help grow the economy as well.
Hmm! Thomas, you know you are right. However, you just sounded like an economist. Are you insinuating that Financial Management is a subset of Economics Peter asked?
I am not insinuating anything. I just want you to note that financial managers have to make 3 major decisions on the job. They include:
- They must make the right investment decisions.
- They must make the right financing decisions.
- They must make the right asset management decisions.
Therefore, the 5 As of Financial Managers includes:
- Anticipate the financial needs of the company.
- Acquisition of Finance from Multiple Sources.
- Allocation of collected finance for purchase of fixed and current assets.
- Appropriation of profits and reserves among shareholders and stakeholders.
- Assessment of all financial activities to ensure compliance in the company.
Wow! Peter exclaimed. You have just shared the missing piece of the puzzle with me. "Which would be what?" asked a surprised Thomas.
That means that financial management is about:
- Profit Maximization
- Wealth Maximization
- Proper Estimation of Total Financial Requirements
- Proper Mobilization and Utilization of Finance
- Maintaining Proper Cash Flow
- Survival of the Company
- Creating Reserves
- Financial Discipline and Fiscal Prudence
- Reduced Cost of Capital
- Reduced Operating Risks
- Preparing Capital Structure and Capital Expenditure
- Proper Coordination and Increased Efficiency.
Thank you very much, Thomas. You just set me on a path to understanding financial management.