Financial Management is the provision of funds, protection of funds and the effective use of funds in management. Finance represents money, funds and capital. Financing is the process of providing the needed funds.
Strong Financial Management is essential for businesses to survive changes. If we want to build a strong financial structure, we must first determine the factors that affect it. These factors include: Changes in consumer behavior | Economic crises | Competition conditions | Technological Developments.
The general purpose of enterprises is to make profit and to maximize the market value of the enterprise. Therefore, it is possible to gather the basic decisions required for Finance Management under 3 headings:
Investment is the allocation of capital to the production of goods and services. Finance managers are expected to make investment-related decisions at first. Their managers need new assets in order to continue their operations. Financial managers should consider 4 conditions for a good investment:
When making investment decisions, financial managers should pay attention to short-term investments as well as long-term investments. Managers should identify fixed and current assets and decide what investments should be made.
Finance managers are expected to make financial decisions. Businesses meet their capital needs by borrowing or through equity (capital). Finance managers determine their capital needs from the source of profitability and risk factors. Borrowing is a commonly used resource option. Bank loans and Commercial loans are borrowing instruments.
Asset Structure, Profitability, Size, Risk Degree, Liquidity Degree, Borrowing Cost, Tax Policy, Market Developments and Macroeconomic Factors are the structures that affect the financing decision. The financial manager should consider all aspects of the business and the conditions of the business and establish a capital structure suitable for the business.
This is the most recent decision of the finance manager. “How much of the profit will remain in the enterprise?” And “How much will be distributed as dividends?” This is the part where the questions are answered. Decisions are made regarding the distribution of profits between the partner, investor and the enterprise.
They use Financing Resources to finance their investments and capital and provide the funds they need. Financing resources required for Finance Management are divided into two:
The capital or intangible economic values of the entrepreneurs and partners are called equity for the establishment of the enterprise.
Thanks to equity financing, profits in non-interest activities will remain entirely in operation. The ability of companies to borrow from outside is related to equity. Equity provides security for creditors in return for their receivables. Examples of equity include money, property, building, patent right, business name, brand, etc. assets.
Foreign Resources is the capital that the company borrows from the persons, institutions and organizations outside of its business for a certain interest. This capital is provided in the form of loans from banks and other financial institutions. Funds provided by foreign sources are divided into short-term liabilities and long-term liabilities according to the payment period.
The Financing Through Borrowing option offers a more cost-effective and more flexible method of financing between businesses, but the risk level is high.
Short Term Foreign Resources
These are the debts that the enterprise should pay within maximum one year. Should a significant portion of the entity’s total assets consist of current assets, it should choose short-term funds.
Funds used in short-term financing:
Long Term Foreign Resources
Long-term liabilities, on the other hand, are foreign sources with a payback period of more than one year and they are used as financial resources mostly in fixed assets. As a guarantee of payment, real estates are generally given as collateral.
Funds used in long-term financing:
One of the important topics in Finance Management is the use of Funds. The fund includes cash, demand deposits, cash equivalents and assets that may act as money if necessary. The use of funds by businesses is in two ways:
They are assets that have been converted into cash for more than 1 year, used in multiple production processes and have no commercial purpose but held for use only. Within the fixed assets; land, building, machinery, such as the establishment or subsequent development of the enterprise seized and used for a long time. Intangible assets such as brand name, trade name, patent rights are also included in fixed assets.
Investments in non-current assets are provided by capital increase from equity and through sale of non-current assets or from equity. Foreign sources are obtained from long-term external sources (bank investment loans, leasing, bond issues, etc.).
They are assets which are converted to cash within 1 year and held for sale continuously within the framework of the activities of the enterprises. Bank and cash in cash, semi-finished and finished goods, short-term receivables and prepaid expenses enter the market as goods / services. This capital returns to business again as money.
When the sum of current liabilities is deducted from the total of current assets, the result is Net Working Capital.
Net Working Capital = Current Assets – Current Liabilities
Net working capital is the capital that keeps the enterprise alive until the products obtained as a result of production activities are converted into money.
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