Financial Management Principles

The process of choosing which projects to invest in using limited resources. Focus on projects with a positive net present value and a return exceeding the cost of capital.

Determining the best mix of debt and equity to finance investments. Maximizes the value of investments.

Deciding how much profit to pay out to shareholders and how much to reinvest in the company. Aims to maximize shareholder wealth.

A measure that reflects the profitability of a project compared to the cost of capital. A positive net present value indicates a profitable investment.

The cost of obtaining capital for a project or investment.

The use of debt financing to increase the potential return on equity. The risk is that higher debt levels can also lead to higher financial risk.

The mix of debt and equity used to finance a company's assets. The optimal mix is determined by balancing risk and cost of capital.

The overall financial health and performance of a company. It involves analyzing factors like profitability, liquidity, and solvency.

The finance function is crucial for supporting other business functions like production, marketing, purchasing, and personnel to achieve organizational goals.

Investors expect a reasonable return on their investments, and businesses aim to maximize their wealth by managing financial resources effectively.

Financial management analyzes the risk-return relationship for owners, considers the timing of cash flows, and assesses the risk associated with those flows.

Accounting provides the systematic recording, summarizing, and reporting of financial transactions, while financial management utilizes this information for decision-making.

Financial management interprets and analyzes accounting information using various tools like financial ratios, pro forma statements, and cash flow statements.

Financial management is a distinct and specialized function, even though it often interacts with accounting.

Financial statements, such as the income statement, balance sheet, statement of changes in equity, and cash flow statement, provide valuable information for managerial decision-making.

Financial managers use accounting information to analyze the company's financial position and make informed decisions.

Internal financial statements that provide detailed information beyond published financial statements.

A method of evaluating investments that focuses on the net cash flows generated by a project, comparing it to alternative investments.

The process of finding and allocating resources to maximize value for the firm and its owners.

The responsibility of finance managers to find the most efficient and least expensive sources of funds.

The act of investing funds in the most efficient mix of assets to maximize returns.

The process of analyzing financial data and applying various techniques (like capital budgeting) to make informed decisions about investments.

A system of accounting where departments or units are responsible for their own finances.

The process of centralizing or decentralizing the finance function based on the strategic decisions of top management.

The study of how individuals and firms make economic decisions, aiming to find the most efficient operating strategies based on their data.

Financial managers must understand how economic and financial principles affect the profitability of a company.

Financial managers analyze the effects of changes in supply, demand, and prices on a company's performance.

The process of controlling production costs, aiming for low costs to set competitive prices and maintain profitability.

The ability to strategically adjust to changes in demand, resulting in increased sales and maximized market opportunities.

The ability to determine the optimal time to issue various financial instruments, like stocks or bonds, based on market conditions.

Understanding the macroeconomic environment involves analyzing broader economic factors like interest rates, inflation, and unemployment.

Financial managers have a responsibility to act ethically and avoid personal gain that could harm the firm.

Financial managers must balance maximizing profits with considering social and environmental factors.

Investing in social programs, like employee training or community outreach can benefit the firm in the long run through increased productivity and positive relationships.

Shareholders delegate the task of running a firm to financial managers, who act as agents of the company.

The primary goal of financial managers is to maximize the value of equity shares for the firm's owners.

The way investors perceive the actions of managers is critical in determining the success of the firm.

Motivating managers with share options linked to performance encourages them to make decisions that benefit the firm.

Finance plays a key role in guiding both long-term strategic decisions and day-to-day operations of a business.

Goals set by top management, outlining the company's overall aspirations in broad terms.

The process of setting measurable and specific targets that can be tracked and evaluated for progress towards overall objectives.

Conflicts arising from different stakeholders having different priorities and interests related to the firm's goals.

A long-term planning approach focused on the entire organization, taking into account environmental changes and setting targets for the future.

The process of planning, forecasting, securing, and managing financial resources to ensure the company's survival and success.

The process of setting objectives and targets that can be measured to assess the company's performance and progress towards its goals.

The process of converting non-financial objectives into measurable financial targets, providing a framework for financial planning and control.

The ability of financial management to ensure the firm has the financial resources and strategies to navigate challenges and compete effectively in the market.