Objective of Financial management

Financial Management is not one of those subjects in which one can read a textbook and then do it, that is why is worth studying. Room for learning with everyday experience, dynamic, creative, luck, everything counts. One would argue that there is no creativity in financial world, I respectfully disagree there is as much amount of new products and investment tools created in this sector than any other product in different field if not more.As an Entrepreneur or a Financial Manager objective for detailed study and great deal of emphasis on this subject can boil down to two simple reasons.

• What investments should we make in &

• How should we pay for them

All said and done it’s easy to say this than to practically apply it in our life. It’s like saying to an Investor Buy low and sell High; the problem is how to do it? This can only be solved by knowing what options we have and which is the best one for both the questions, as I said just by reading some books and getting information wouldn’t solve the problem but it will increase your capability to solve it for sure.

What investments should we make in?

The first part of the problem is also called firms Investment decision or Capital Budgeting decision. As a firm we have plenty of options to invest in starting from Reinvesting in your own business, Mergers & Acquisition, tangible, intangible assets etc. Obviously the decision of what to investing would depend on lot of factor which would be the next topic of our discussion.

How should we pay for them?

Other Part of the problem being how we should pay for them also called Financing Decisions, weather raising loan is preferred for a certain investment or raising money through Equity. One might argue what’s the difference and what are the criteria? Raising Loan brings in inherent risk to the company that the debt raised has to be paid back with interest, but then why not raise all the money through Issuing equity shares, well that can be done but fundamentally strong company does not all ways prefer that, as Investor you and I consume the risk of any company getting defaulted and hence would expect higher return than what we get as a risk free return from the market (bank deposits 8.5 % typically in INDIA) because of this risk-return matrix company do realize that if it keeps on issuing shares to raise money in the market it will not only have to pay-back investor a higher return but also would reduce the value of the company (as number of shares in the market for a company increases i.e. supply increases the demand for the shares falls down hence the value of firm).
Beware not all company are fundamentally strong that is why while analyzing we typically look at the percentage of shares held by its promoters we can find it in the shareholding pattern by stock listing exchange. We can’t deny the fact that there were, are and will be companies and promoters who’s intentions are not in the best of interest of their shareholders and they would typically raise money only through equity capital.
A mix of debt and equity is preferred by all corporates, depending upon the business they are in ideally lower the business risk higher financial risk a company can afford to take. Businesses such as Power generation, Oil refinery etc. which can have a steady flow of income can have a higher Debt in their balance, while businesses such as IT would typically have lower debt capital.