Introduction
Managerial finance refers to the financial management of an organisation and unit of a business that deals with the overall finance. Though it means decision making that incorporates the use of financial concepts together with quantitative tools to increase the worth of the enterprise. Managerial finance in contrast is a subdiscipline of corporate finance that involves the practical or even operational management of a business’s finances.
Managerial finance as we have seen earlier is a critical factor in business organisations. This forms the basis of making financial decisions for an organisation so as to appropriately and prudently use resources containing risks and meet financial objectives. Managerial finance also has goals that include the enhancement of the value of shareholders equity and ratios of working capital.
Financial Management Functions
Investment Decision
A major use of managerial finance is in the investment decision which refers to the authorised use of capital to finance activities that are expected to generate returns. This process is commonly referred to as capital budgeting and is essential in the formulation of strategies for a firm in the long run. Capital budgeting is the process of analysing different possible investments that might be available to a firm in an effort to ascertain the feasibility and potential of each of them.
Investment appraisal tools are employed in evaluating investment opportunities with regard to their feasibility. Common techniques include
Payback Period
This method determines the time it takes to make back the initial investment that has been made in the project. Although it is simple in its calculation it fails to take into account the concept of differentiation between the money being invested at different times and the profitability of the project on the whole.
Net Present Value (NPV)
NPV seeks to determine the variance between the present value of the net cash inflow which can be expected from the project in future periods. NPV also reflects the value of money now as opposed to the future and thus a positive NPV shows that the investment is going to be profitable.
Internal Rate of Return (IRR)
IRR is the rate of return that will make the Net present value of an investment equal to zero. It reflects the forecasted percentage of return for the project and is employed in the evaluation of the projects. The field of investment decisions is exercised under conditions of Risk and often uncertainty. Managerial finance also presupposes consideration of such risks and expectations in managerial decisions.
Sensitivity analyses scenario analyses or simulation models can be employed to assess the effects of existing volatility in the investment results.
Financing Decision
Another area of management finance that has been recognized to be very vital is financing decisions. They include the choice of the proportion of debts equities and other securities that should be raised in order to finance the operations of the firm and its investments. The aim is to achieve the right capital structure which means the ratio of debt and equity of the firm.
Capital Structure and Leverage
Capital structure directly counters the overall cost of capital as well as the financial risk of the firm. More use of debt also known as leverage enhances the returns to shareholders but at the same time enhances the firm’s Risk. Thus managerial finance seeks to strike the best balance in all these so as to attain the best capital structure.
Cost of Capital
The cost of capital is the rate of return that is expected from investments which a firm needs to keep its market value intact and mobilise capital. It refers to the cost associated with the funds arising from debt equity and other sources. Consequently there is a great appreciation of the nature and value of the cost of capital as a tool of financing.
Sources of Financing
There are various domestic sources through which the firms can source the funds including the following
Debt Financing
In this category we have funds obtained through extra banking facilities such as bank loans or issues of bonds. Debt financing has the advantage of taxes but incurs financial risk in that there are mandatory interest payments.
Equity Financing
Selling new stocks or new shares of common or preferred stock. As a form of financing equity financing does not need to be repaid. However it means giving up control and it tends to be more expensive than borrowing.
Hybrid Financing
Hybrid securities such as convertible bonds and preferred stocks provide the aspect of flexibility in financing.
Dividend Decision
Dividend decisions encompass a firm’s decision whether or not to distribute profits to its shareholders or plough them back into its operations. The dividend policy is a very strategic aspect of the firm’s overall financial management bearing an influence on shareholder value.
Dividend Policy Theories
Residual theory raises the proposition that paying of dividends should be from the remaining profits once all the profitable investment opportunities have been undertaken.
Dividend Irrelevance Theory
This theory was postulated by Modigliani and Miller in the early 1960s and it holds that the dividend policy does not impact the firm’s value since shareholders can obtain their preferred policy on dividends by selling their stocks when possible.
Bird In Hand Theory
According to this theory people choose certain returns over uncertain gains in the future and therefore firms that have stable dividend policies are held with higher value.
Factors Influencing Dividend Decisions
Rating Dividend decisions depend on certain factors like profitability growth of the firm the cash flow of the company the effect of taxation conditions in the market and the preferences of the shareholders.
Working Capital Management
This report established that working capital management is crucial in the maintenance of the firm’s liquidity and operations. It concerns the administration of present day resources with the aim of satisfying current account and operating expenses.
Importance of Working Capital
Working capital refers to the liquidity that is required so that the firm is able to meet its immediate obligations purchase stocks and meet miscellaneous expenses. The result therefore is the emergence of liquidity complications and financial strain that was considered in the concepts of working capital management section.
Management of Current Assets
Maintaining the appropriate amount of cash is required by the firm so that it can pay its various liabilities with less keeping too much cash that can be employed in other productive activities.
Inventory Management
Studying the relationship between the appropriate inventory level necessary to ensure customer request satisfaction and the cost of stocks. Production techniques such as the Just in Time (JIT) inventory can then be used to replace or minimise inventory.
Receivables Management
UT can enhance its cash flow position by assuring that all receivables are collected on time. There are receptive credit policies receptive ageing schedules and receptive collection efforts when it comes to managing receivables.
Financial Planning
There is little doubt that at the heart of the financial success of the firm financial planning will play a crucial role in getting the results that are set out for it. It comprises the prediction of the financial needs of an organisation in the future the preparation of the budgets to finance those needs and the preparation of the strategies to finance those needs.
Importance of Financial Planning
Finance guarantees that the firm possesses adequate capital to achieve the laid objectives and cope with volatilities. It can be used to establish the link between financial resources and the strategic goals and aims of firms thus enhancing their decision making system.
Budgeting
Budgeting is the practical process of developing a plan for income and expenditure over a certain period. Budgets act as a guide to how one is to deal with funds and how goals are to be met.
Risk Management in Finance
Understanding Financial Risk
Financial Risk can be defined as the exposure one can have to loss or financial imbalance through one means or the other. Risk management is an important element of managerial finance due to its impact on the achievement or otherwise of the firm’s financial objectives.
Types of Financial Risk
Market Risk
Losses that occur because of fluctuation in effective cost or price for a given security or financial product. Market risk on the other hand depends on the general economic climate the operation of polity and the mood in the market.
Credit Risk
A possibility that a borrower will fail to meet all their contractual obligations and may result in a loss on the side of the lender. Credit risk is a relatively high risk for banks lenders and firms offering credit facilities to their clients.
Liquidity Risk
The probability that a given firm will be unable to honour its short term liabilities because it lacks an adequate amount of cash or near cash. Liquidity risk therefore results in financial exploitation or in some instances business failure.
Portfolio Management
Portfolio management refers to choosing and administering a set of investment securities with the aim of reaching predetermined investment goals given a certain level of Risk and returns.
Portfolio Theory
Harry Markowitz laid down the foundations of portfolio theory which strongly supports diversification as a way of managing risks. This implies that for an equivalent rate of return overall Risk can be diversified away if a portfolio of assets exists.
Modern Portfolio Theory (MPT)
Issues like the efficient frontier are added to the portfolio theory by MPT whereby the efficient frontier is a set of portfolios that provide the highest expected returns for every level of Risk. Indeed MPT also presents the risk free asset and the capital market line that aids in staking out the right proportion between risks and the risk free asset.
Capitals Markets and Managerial Finance
Overview of Capital Markets
Capital markets are helpful in managerial finance by offering firms an opportunity to issue securities and attract investors and investors to place their money. Capital markets therefore involve the buying and selling of shares or both equities that are useful in financing various undertakings in the business world.
Role of Capital Markets
An industry of capital formation allows firms to obtain the requisite funds for growth and expansion by floating securities. They also facilitate market liquidity in that investors can easily enter and exit most securities with little problem. The effective operation of capital markets is important for the growth and sustainability of the economy as well as for the stability of the financial system.
Types of Capital Markets
Primary Market
The first market is the initial selling of securities to its subscribers which includes both domestic and foreign investors. Companies float equities or debentures through new offers to the public either in the form of IPOs or through private placements.
Secondary Market
Secondary market refers to the market where securities are bought from and sold to the investors. They can offer market making and spacing where users are given the opportunity to buy and sell securities at prevailing market prices.
Securities role in Managerial Finance
Stocks are capital assets that are executable in markets that show equity ownership or borrowed capital in financial processes. Managerial finance is affected by the existence and exercise of securities through decision making in the capital structure cost of capital and strategic placement of the firm.
Stocks Equity or shares are securities that signify ownership in a particular company and grant the owner a right that allows them to receive a proportionate share of the company’s profits normally in the form of a dividend. Offering shares is one of the frequent methods with which companies seek equity finance but of course leads to dilution of ownership and possibly control.
Bonds
Bonds are an example of an indexable security that signifies a borrowed capital given to the firm by the investors. An advantage of bonds to investors is that they offer a fixed revenue in the form of interest whereas the firm is required to redeem a fixed sum at maturity. Debt financing is done through the issuing of bonds where the firm’s financial Risk and leverage are enhanced.
Social Responsibility in Finance
The main concept in finance called social responsibility has to do with more comprehensive factors.
Consequence of financial choices on the society and the globe at large. This is a reorientation shift that acknowledges that firms have a role to play that is more than just generating revenues for shareholders.
Role of Corporate Social Responsibility (CSR)
More CSR activities include sustainable investment reasonable purchasing and social responsibilities that are in the financial plans. Managers recognized that businesses could improve the company’s image attract and retain customers and add value to the organisation by focusing positively on social issues that need to be addressed.
Ethical Investing
Ethical investment or SRI calls for investments in shares that are socially responsible in terms of social or environmental impacts or governance standards. Ethical investment is the practice of investing responsibly in a bid to meet specific financial objectives while at the same time pursuing ethical beliefs. This form of investment has gained a lot of traction among those investors who want to use their money more productively.
Technological Advances in Finance
Technological innovation has brought changes in the field of managerial finance by bringing in new gadgets systems and procedures that improve operations reliability and effectiveness in delivering managerial finance.
Fintech Innovations
Fintech can be described as a digital service offering financial solutions such as digital payments blockchain robotic advisors and P2P lending. Fintech is used to promote efficiency and effectiveness when making transactions reduce the costs of financial solutions and enhance the inclusiveness of financial solutions.
Big Data and Analytics
There are several ways big data and analytics are applied to financial management and analysis. One of them is intelligence information about customer behaviour market share and risks. Tools ranging from simple machine learning to artificial intelligence help make better decisions to plan for the future.
Information systems in Financial Management
Information systems deals with the management of funds and is used in managing some of the accounting activities including budgets substance estimates and other reports. They allow for the possibility of automation of financial activities access to financial data in realtime and integration of such data with the various units of an organisation.
Enterprise Resource Planning (ERP)
Integrated systems such as ERP cause all aspects of a firm including finance to be dealt with by one system. They cut out costs by consolidating each of a company’s financial data reducing errors and optimising decisions.
Financial Software
This is usually a result of the application of financial software in an organisation where items like accounting software treasury management systems and financial planning tools make financial tasks easier and reduce errors. Such tools are also crucial for various complicated financial activities and the tasks of noncompliance with legal requirements.
Ecommerce and Financial Management
Ecommerce is now an important part of companies operations and has altered financial strategies in several ways. Solutions for modern financial management need to take into account the opportunities and threats associated with online shopping digital payments and global supply chains.
Impact on Revenue Streams
Ecommerce has isolated products to additional revenue prospects since the firms are in a position to reach global markets and offer firms and services. However it also has an increased risk of fraud payment portal vulnerability and managing customer data and information security.
Challenges and Opportunities
Issues arising include the growth of competition through the rise of ecommerce compliance with laws and going digital. However it also comes with the possibility of new business development artificial intelligence big data driven solutions and cost optimizations through automation.
Effectiveness Result of the Globalization Process
Managerial finance has been impacted by the phenomenon of globalisation in the following manner.
Global Capital Markets
Sourcing for funds the world has adopted the idea of global capital markets through integration to eat firms and invest in various countries and industries. This has enhanced firms access to capital but has at the same time put them at Risk of exchange rate volatility political Risk and the legal systems in foreign countries.
Crossborder Investments
Companies are becoming more involved in cross border transactions for instance through acquisitions strategic partnerships and FDI. Such investments call for an assessment of the Global financial systems tax systems of other countries and cultural differences.
Foreign Exchange and Universal Money
Currency exchange and international finance are subtopics of the globalisation aspect of managerial finance. Currency risk should be controlled to a significant level if one is to run a firm that undertakes business in two or more countries or that trades in foreign currencies.
Exchange Rate Risk
Exchange Risk results from changes in foreign exchange prices thereby affecting the returns from international operations and investments. Some of the influential techniques that firms use to overcome exchange rate risk are forward contracts options and swaps.
International Financial Management
International financial management can therefore be defined as the finance management of global enterprises covering capital expenditure and financing decisions and management of risks. They called for familiarity with global financial markets foreign exchange and cross border policy provisions.
Global Financial Institutions
Financial institutions are international financial institutions that are responsible for availing funds and promoting trade and development.
International Monetary Fund (IMF)
The IMF was created to offer countries monetary support and advice on how to deal with some issues in their economy. It still has an important function in liberalising and regulating the world’s financial markets and in fostering economic development as well.
World Bank
Funding for the development projects in the less developed countries for infrastructure poverty alleviation and generally supporting economic development. It advocates for the stability and efficiency of financial structures and the enhancement of sustainable development in emerging economies.
Multinational Corporations (MNCs)
MNCs are companies that have operations in more than one country and their operations include management of multiple legal requirements control of exchange risks and efficient international tax planning.
Conclusion
The role of managerial finance in organisations is actually significant because it comprises a number of functions including investment financing dividend policy working capital management risk management analysis and planning. It gives the concepts and models that enable one to make sound financial decisions as shall be evident from the strategic direction of the firm goals.
Over time many factors affect the business environment which in turn calls for new challenges in managerial finance such as the impact of technology globalisation or a new set of rules governing managerial finance. These complexities make the role of a financial manager very crucial in managing the firm’s overall affairs competitiveness financial viability and strategic direction.
