## Scope & Objective of Financial Management — Introduction
### Why a business needs financial management
When an entrepreneur starts a new venture, the decisions naturally fall into four stages:
| Stage | Decision | Key focus |
|---|---|---|
| 1 | Which assets (premises, machinery, equipment) to buy | Assets |
| 2 | Total investment required to buy those assets | Investment (total cost of assets) |
| 3 | Cash needed for daily operations (raw material, salaries, wages) | Working capital (funds for daily operations) |
| 4 | Sources to finance the total investment (share capital, bank loans, financial institutions) | Financing (source of funds) |
These four stages collapse into the three core decisions of financial management.
### The Three Core Financial Decisions
1. Financing Decision — Where do we get the money from?
2. Investment Decision — Where do we invest the money?
3. Dividend Decision — How much do we distribute to shareholders to keep them satisfied (vs. retain for growth)?
### Objective
The goal of financial management is to efficiently acquire and allocate funds so as to generate profit/dividends for the owners — by making sound investment, financing and dividend decisions.
### Meaning of Financial Management
> Financial management is the activity of planning and controlling a firm's financial resources — acquiring, financing and managing assets to achieve the business goal, mainly to maximize shareholder wealth.
Key words: Planning & Control · Financial Resources · Shareholder Wealth
### Definitions
Definition 1 (Functional view): Financial management involves forecasting, planning, organizing, directing and controlling the financial activities of a business to meet its financial objectives.
Definition 2 (Phillippatus): Financial management deals with the managerial decisions that result in the acquisition and financing of both short-term and long-term credits for the firm.
### Two Basic Aspects of Financial Management
1. Procurement of funds — raising money.
2. Effective use of funds — deploying that money to achieve business objectives.