An internal management function that focuses on three main objectives: finance (raising funds from different sources), investment (deployment of funds across long-term investments in non-current assets and short-term investments in working capital), and dividends (allocation of cash funds to owners/ shareholders, and effect of dividend allocation on the value of an entity at large).
An entity, before investing in assets and operations, needs to secure funding (by means of the finance decision) from the most appropriate sources (internal vs. external, or equity vs. debt or a mixture of debt-equity). The investment decision involves the use of finance in an efficient and effective manner towards fulfillment of the entity’s goals. This involves multiple secondary functions: 1) investment appraisal (selection of right projects and collections of assets, particularly long-term assets) and 2) working capital management- i.e., management of liquidity as manifested in keeping inventory, debt collection, investment of cash balances, and payment of payables.
If both finance and investment decisions have been made properly, an entity will start to generate profits. In this respect, financial management involves an assessment of the right amount of profits (dividends) that will be paid to owners. If it is decided to retain a percentage of the profits made, then the amount retained will be reinvested to earn more returns.
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