The primary objective of financial management is to maximize shareholder wealth. Capital generation is critical in this respect because financial managers maximize the amount of shareholder equity by generating capital. However generating capital is a question of asset planning and management. Financial managers have to manage their assets in such a way as to maximize the return to shareholders. When it comes to managing assets, financial managers have two tools at their disposal: capital budgeting and working capital management. Capital budgeting allocates resources in long term assets while working capital management ensures efficient and effective resource allocation to current assets.
Maximization of shareholder wealth is achieved through maximization of profits. Profit maximization entails developing a competitive edge for expanding market share. The management of a company wants to implement many projects from time to time in order to develop a competitive edge. However organizational resources are finite. As a result it is the responsibility of financial managers to apply capital budgeting techniques so that only those projects which are projected to have the highest returns receive funding. The NPV method and the IRR method are frequently used in this respect. Working capital management is also very critical as it is related to improving the cash position of the company.
Financial managers have to measure the performance of the company from time to time in how efficiently and effectively financial resources are being allocated. To do so, budgetary controls are put in place so that when there are variances between projections and the actual, problem areas can be immediately located. Preparation of master budgets requires managerial decision making. In financial accounting there is no maneuverability because the management has to follow the generally accepted accounting principles rigidly. In managerial accounting however, which is for internal reporting, the need is to develop costing methods which accurately reflect the level of resource being consumed by each activity. As a result, personnel who have a deep understanding of the process chains involved have to analyze how each organizational activity should be given a cost figure that neither underestimates nor overestimates profits. Therefore when it comes to managing and controlling company finances, managers have to not only manage assets for maximum returns to shareholders but also implement budgetary controls and conduct risk analysis to ensure sound investment decisions.
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