Long Answer
Medium difficulty • Structured explanation
Question 1
Long FormAnalyse the role and importance of Financial Management in determining the financial health of a business enterprise.
- Financial Management is concerned with optimal procurement and usage of finance. It aims to reduce the cost of funds, keep risk under control, achieve effective deployment of funds, and ensure availability of finance whenever required.
- It has a direct bearing on the financial health of a business as almost all items in the Balance Sheet and Profit and Loss Account are affected by financial management decisions, either directly or indirectly.
- It determines the size and composition of fixed assets (through capital budgeting), the quantum and composition of current assets (through working capital decisions), and the proportion of long-term versus short-term funds.
- The break-up of long-term financing into debt and equity (capital structure decision) affects interest expense in P&L, and dividend decisions affect equity capital as well as retained earnings reported in financial statements.
- Good financial management mobilises financial resources at lower cost and deploys them in the most profitable activities, thus improving the financial statements and maximising shareholders' wealth.