Firms use fixed as well as current assets which involve a huge investment. Acquiring and holding assets that do not earn minimum return do not add value to the shareholders. Moreover, the wrong decision regarding the purchase and disposal of fixed assets can cause a threat to the survival of the firm.
The firm also requires current assets for its operation. They absorb a significant amount of a firms resources. Excess holdings of these assets mean inefficient use and inadequate holding exposes the firm into higher risk. Financial management helps to decide what level of current assets is to be maintained in a firm and how to finance them so that these assets are utilized efficiently.
- Financial Management Helps Deciding Sources Of Financing
Firms collect long-term funds mainly for purchasing permanent assets. The sources of long term finance may be equity shares, preference shares, bond, term loan etc. The firm needs to decide the appropriate mix of these sources and amount of long-term funds; otherwise, the firm will have to bear the higher cost and expose to higher risk. Financial management (capital structure theories) guides in selecting these sources of financing.
- Financial Management Helps Making Dividend Decision
The dividend is the return to the shareholders. The firm is not legally obliged to pay a dividend to the shareholders. However, how much to pay out of the earning is a vital issue. Financial management (dividend policies and theories) helps a firm to decide how much to pay a dividend and how much to retain in the firm.
The importance of this management is not limited to the managers who make decisions in the firm. Proper financial management will help firms to supply better product to its customers at lower prices, pay a higher salary to its employees and still provide a greater return to investors.