MANAGING AND ACQUIRING ASSETS
Financial managers must plan carefully to invest in, finance, and manage assets efficiently They must project future cash flows and then assess the likely effect of these flows on the financial condition of the firm. On the basis of these projections, they must plan for adequate liquidity to pay bills and other debts as they come due. These obligations may make it necessary to raise additional funds. In order to control performance, the financial manager needs to establish certain norms. These norms are then used to compare actual performance with planned performance.
Decisions regarding the management of assets must be made in accordance with the underlying objective of the firm: to maximize shareholder wealth.
We shall explore ways of efficiently managing these current assets in order to maximize profitability relative to the amount of funds tied up in the assets. Determining a proper level of liquidity is very much a part of this asset management. The optimal level of a current asset depends on the profitability and flexibility associated with that level in relation to the cost involved in maintaining it. In the past, the management of working capital (current assets and their supporting financing) dominated the role of financial managers. Although this traditional function continues to be vital, expanded attention is now being paid to the management of longer-term assets and liabilities.
Capital budgeting is considered with the acquisition of fixed assets. Capital budgeting involves selecting investment proposals whose benefits are expected to extend beyond one year. When a proposal requires an increase or decrease in working capital, this change is treated as part of the capital budgeting decision and not as a separate working capital decision. Because the expected future benefits from an investment proposal are uncertain, risk is necessarily involved.
Changes in the business-risk complexion of the firm can have a significant influence on the firmâ€™s value in the marketplace. Because of this important effect, attention is devoted to the problem of measuring risk for a capital investment project. In addition to risk, an investment project sometimes embodies options for management to alter previous decisions. Therefore, the effect of managerial options on projects desirability is studied. Capital is apportioned according to an acceptance criterion. The return required of the project must be in accord with the objective of maximizing shareholder wealth.
A major facet of financial management involves providing the financing necessary to support assets. A wide variety of financing sources is available. Each has certain characteristics as to cost, maturity, availability, claims on assets, and other terms imposed by the suppliers of capital. On the basis of these factors, the financial manager must determine the best mix of financing for the firm. Implications for shareholders wealth must be considered when these decisions are made.
The capital structure or permanent long-term financing make up of a firm is another important aspect to be looked into by the finance manager. . The concept of financial leverage from a number of different angles in an effort to understand financial risk and how this risk is interrelated with business or operating risk is also to be reviewed by the top management along with the CFO. In addition, the retention of earnings as a source of financing has to be analyzed before making a decision. Because this source represents dividends forgone by stockholders, dividend policy very much impinges on financing policy and vice versa.
Various sources of short-term financing and the sources of long-term financing are explored to reveal the features, concepts, and problems associated with alternative methods of financing.
A Mixed Bag
Some of the more exotic financing instrument options convertibles, and warrants along with Mergers, strategic alliances, restructurings, and remedies for a failing company have to be explored. Growth of a company can be internal, external or both and domestic or international in flavor. The multinational firm has come into prominence it is particularly relevant that growth through international operations has to be studied by the Finance Manager as a means of augmenting the financial health and make a recommendation to the Board of Directors about various alternatives in this regard.
To conclude Financial management involves the acquisition, financing, and management of assets. These three decision areas are all interrelated: the decision to acquire an asset necessitates the financing and management of that asset, whereas financing and management costs affect the decision to invest. Together, these decisions determine the value of the firm to its shareholders. Mastering the concepts involved is the key to understanding the role of financial management by the concerned manager.