Chapter 1 - Financial Management Functions and Its Environment

Financial Management

The process of making strategic decisions to achieve financial goals efficiently, involving planning, organizing, and controlling financial resources.

Investment Decisions

Decisions regarding allocating funds to long-term assets or short-term working capital to meet organizational objectives.

Finance Decision

Determining the best sources of funds to raise for investment, including short- or long-term options.

Dividend Decision

Deciding how to allocate cash funds to shareholders and the impact of these decisions on the company's value.

Management Accounting

Focuses on providing information and analysis to internal management for decision-making and planning.

Financial Accounting

Primarily emphasizes the preparation of financial statements for both internal and external users.

Commercial Objectives

Goals related to broader business operations, not exclusively monetary, that contribute to overall success.

Financial Objectives

Objectives tied specifically to monetary aspects, focusing on profitability, liquidity, and financial health.

Corporate Strategy

The highest level of strategy concerning decisions made by top management to guide the entire organization.

Agency Theory

Describes the agency relationships where one party (agent) acts on behalf of another (principal), often leading to conflicts.

Corporate Governance

The system by which companies are directed and controlled, with boards of directors responsible for governance.

Profitability Ratio

Measures a company's ability to generate profit relative to its revenue, assets, or equity.

Liquidity Ratio

Assesses a company's ability to meet its short-term obligations with short-term assets.

Solvency Ratio

Evaluates a company's ability to meet long-term obligations and indicates financial health.

Activity Ratio

Measures how efficiently a company uses its assets and resources to generate revenue.

Value For Money (VFM)

Refers to achieving economy, efficiency, and effectiveness in utilizing resources.

Economy (in VFM)

Obtaining inputs or resources at the lowest possible cost while maintaining quality.

Efficiency (in VFM)

Using resources effectively to maximize output relative to the resources used.

Effectiveness (in VFM)

The extent to which an organization achieves its objectives and impacts its mission positively.