The basic goal of finance is to create wealth in any form of business to meet the operating sources (working capital) or non-operating sources (long-term asset financing). Finance is all about profitability and the bottom-line of any business concern. Since the inception or formulation of business, it has been engaged in acquiring tangible and intangible assets (both real and financial). In simple words, finance in business is deduced to the valuation of assets.
Typically, any firm comprises two types of assets; Short-Term Assets and Long-Term Assets. Any asset with a lifespan of less than a year is a short-term asset (such as inventory and receivables), usually expensed out through Cost of Goods Sold (COGS). On the other hand, an asset having a lifespan of greater than a year falls under the ambit of the long-term asset (such as plant, equipment, machinery, long-term investment regarding shares, deposits, and equity in associated companies).
When firms speak of finance, they normally are domiciled into four broad categories; investments, financing, repayment or payout, and risk management. First, about investment, the firm wants to assess what kind of projects it wants to invest in. Then, how will the sources be funded or financed to complete the project?
What is the scope of a payout regarding yield, profit, or return? Is there any risk associated with the project in which the firm is about to invest? How to mitigate or minimize the element of risk. These are the four questions that the owner needs to answer and, at the same time, secure (comfortable and at ease) before a financial decision is made.
The above four categories are dependent on the industry in which the firm is involved, and hence the dimension of their finance will change subsequently. Thus, for example, an organization involved in manufacturing, trading, or services or industries such as banking, FMCG, insurance companies, brokerage houses, automotive assemblers, etc., their financial decision-making will be unique and distinguished from others.
About financial management, the aim would explain the role of a finance manager, the objective and importance of cash flow and valuation, and asset approaches.
The primary aim of a finance manager is to manage the cash flow (inflow and outflow). Generally, the finance manager acts as an intermediary between the investor (individual and corporations) and the firm’s operations. In addition, the finance manager is responsible for seeing that the operating needs are financed from operating sources only to avoid any mismatch.
Depending upon the agreement between the finance manager of the firm and a third party contract, what are terms or services procured to provided, either cash, credit, and a partial mix of both? It is essential when the finance manager accounts for expenses that occurred regarding account receivables, purchase of inventory, and account payables.
The finance manager needs to consider the terms of the period for payment or receipt, such as 30 days, 60 days, and 90 days. In essence, they are responsible for cash management, credit management, capital expenditure management, and financial planning.
Concerning goals on a macro level, they are also responsible for creating value-for-money for the firm’s shareholders. As earlier stated, a finance manager acting as a bridge to shareholders must have complete knowledge and awareness concerning an investment decision, valuation of securities, and risk associated with the financial contracts.
In simple terms, the cash flow of the firm comprises many facets. First, the cash is raised by investors by plowing in more equity, loan subordination, or selling financial assets (such as bonds, shares, stocks, and warrants). It could also be in regards to investment in tangible and intangible assets (brand name). Cash generated from operations.
In essence, the sales are deduced through working capital imputations, such as how many products were sold, the cost of goods sold, the operating expenses, and operating income. Then, while calculating cash flows, we added the non-expense amount back into the net profit (such depreciation and amortization) to see how much cash was generated.
It is vital to remember that an increase in accounts receivable and inventory decreases cash and needs to be deducted regarding operating needs. To put it simply, it is a cash outflow. Simultaneously, an increase in accounts payable is an increase in cash inflow. It is how the working capital cycle is assessed in a cash flow statement.
Last but not least, it is inherent that the finance manager should also match the cash flows by repayment of financial obligations (such as loan payments along with interest). But, on the other hand, it is at the discretion of the top management that how the investment is paid out, either regarding dividend payments or resort to capital gains).
Thirdly, with regards to the valuation of assets (tangible and intangible) is ascertained by their cash flows, as it incorporates both the traits of the time value of money and risk premium. The valuation of assets, usually adopted by finance managers, is my matching principle, such as Current Assets should always be financed through Current Liabilities. Given that they manage the firms’ cash flow effectively by incorporating the elements of time and risk, it is easy to evaluate the price of an asset to be traded at the prevalent market price.
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