The text discusses the fundamental concepts of financial management, including the importance of the time value of money and applicable financial instruments used by financial managers in organizations. Financial managers must understand these concepts to make the best financial decisions for the organization, as the financial world is unpredictable and presents challenges in determining the best choices. The report provides a brief overview of these concepts and suggests further analysis of their advantages and disadvantages, as well as their usage and importance within an organization. An application of these concepts to real-life companies would also be helpful.
Introduction
Making decisions on asset investments, obtainingfundsto payforthese investments, and creating value for firms are all part of financial management. Financial managers must understand these fundaments of finance in order to obtain the best financial position for an organization. The time value of money and risk are the two major drivers of finance. Finance strives to guarantee that the value of assets changes in a way that is favourable to the business or person. Financial professionals work in an unpredictable world where they must make predictions about future occurrences.
This report will focus on the two fundamental concepts: the importance of time value of money and applicable financial instruments which are implemented by financial managers in organizations.
Question 1: Explain the term financial management in detail:
Financial management is the practise of managing a company's finances in such a manner that it may be profitable while being compliant with rules. Financial management is the process of planning, organising, directing, and managing a company's financial activities, such as cash purchases and usage. Three pillars of effective fiscal governance are built on solid financial management: strategizing or determining what needs to happen financially for the organisation to fulfil its short- and long-term objectives. Assisting corporate executives in determining the best strategy for carrying out plans by providing current financial reports and statistics on key performance indicators (KPIs). Controlling, or ensuring that each department contributes to the vision while remaining on budget and on schedule. All employees know where the firm is going and have insight into progress when financial management is done well (Strutner, 2022).
These functions, in turn, can be grouped in three broad types, which are the most important part of financial management: capital budgeting, capital structure and working capital decisions. Capital budgeting is the process of planning and managing a firm's long-term activities, for example in what kind of long-lived asset the organization should invest, the business lines the company wants to enter, and the resources needed (Tse, 2017). "The essence of capital budgeting is evaluating the size, timing, and risk of future cash flows" (Paul, 2020). When making this decisions, important factors are the net present value, internal rate of return and cost of capital. Capital structure is about the financing of the firm through a mixture of debt and equity. The organisation hence evaluates how to raise cash for investments. It's important to consider the equity securities (e.g., shares), the debt securities (e.g., bonds, short- and longterm loans) and the cost of capital. Finally, working capital decisions is the amount of money available for day-to-day operation of a business and the focus is on how short-term operating cash flows should be managed. The current assets and the current liabilities are analysed (Tse, 2017).
Financial independence is one of the most important goals for every organisation. Financial Management, on the other hand, has additional reasons for being critical to a company's success.
One ofthe most prevalent reasons for businesses failing is the lack of an accurate and complete financial strategy, which causes them to make financial blunders such as overestimating sales or having a negative cash flow. In essence, the financial management process analyses financial opportunities and hazards to assist corporate leaders in staying informed and making better financial decisions based on their strengths and limitations.
Identifying safe, secure, and lucrative investment possibilities for firms to ensure continuous capital infusion is one ofthe primary roles ofthe financial management process. Investors and lenders will be hesitant to invest in your company unless you have a clear financial strategy in place. Businesses, on the other hand, can boost their image with investors by providing specific information on how they will raise funds forthe company ifthey have a solid business strategy.
A successful firm does more than just raise cash; it also optimises expenditures against sales objectives, prudently invests earnings, and avoids taxation and bank charges. Having a thorough grasp and visibility of the finances is the greatest method to optimise business expenditures. Businesses can build efficient strategies to decrease expenditures and uncover savings opportunities with the correct financial management system.
Businesses may not only assess achievement but also discover areas of weakness with proper financial management services. As a result, they are better able to analyse underperforming business sectors and implement essential improvements.
Financial management aids companies in better understanding market trends. Financial management allows corporate leaders to discover market patterns and enhance their financial decisionmaking capabilities by keepingthem aware of high-performing and low-performing regions. By monitoring effective tactics and spotting haemorrhaging strategies, the financial management method aids corporate leaders in better understanding marketing strategy (Saud, 2021).
Question 2: Discuss why financial managers need to understand the concept of the time value of
money:
"The time value of money (TVM) is one of the most fundamental concepts in finance is the time value of money" (Abhishek, 2021). This principle states that the money you have now is worth more than the money you will have in the future (Tse, 2017). To put it another way, one pound is worth more today than it would be in the future. This is due to the unknown future, inflation's influence, among other financial and economic concerns within time difference. Hence, the money in the present has the potential earning capacity if invested (Borad, 2021).
This concept is based on the notion of compound interest. Money placed in a savings account earns interest, which is added to the principle overtime, generating even more interest (Cooper, 2022). That is the power of compounding interest. If it is not invested the value of money erodes over time (Tse, 2017).
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Figure 1: Own representation according to Tse, 2017
The TVM concept is crucial in decision-making because it serves as the foundation for many other financial concepts. It is important that financial managers understand the concept of time value of money.
When comparing the amount of time it takes to earn revenue from several investment alternatives, the option that generates more money faster is frequently favoured. A snowball effect can occur when a small firm receives quick revenue from an investment that it can then reinvest. Delays in earning income from investments might lead to short-term revenue growth challenges (Borad, 2021).
The TVM helps financial managers make the better investment decision based on the following factors:
Inflation is defined as a steady increase in the price level. The money that an organisation now has greater purchasing power today than it will in five years. As a result, the value of the organization's money can only be maintained or increased over time if proper investments are made.
Risk: Because the future is unpredictable, an organisation may lose part or all its funds in the future, but they may mitigate their risk today by investing it.
Financial managers have a variety of alternatives when it comes to investing their money. However, if the investment process takes too long, this chance may be missed. Any delay will cause the value of money to depreciate (Borad, 2021).
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- Citar trabajo
- Anónimo,, 2021, Fundamentals of Financial Management. Time Value of Money and Financial Instruments, Múnich, GRIN Verlag, https://www.grin.com/document/1348599
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