Understanding Financial Management: A Practical Guide
Guideline Answers to the Concept Check Questions
Introduction to Financial Management
1. What is financial management?
Financial management is an integrated decision-making process concerned with acquiring, financing, and managing assets to accomplish some overall goal within a business entity. Finance is one of the key functions within any organization.
2. How do the roles of the firm’s treasurer and controller differ?
The treasurer is responsible for handling external financial matters, such as managing cash and credit, capital budgeting, raising funds, and financial analysis and planning. The controller’s responsibilities mainly deal with internal matters, which are accounting in nature. These activities involve cost accounting, taxes, payroll, and management information systems as well as preparing financial statements, budgets, and forecasts.
3. What are three broad classifications of decisions within financial management? How are they related?
Financial management involves three major types of decisions: (1) long-term investment decisions, (2) long-term financing decisions, and (3) working capital management decisions, which are short-term in nature. These decisions concern the acquisition and allocation of resources among the various activities of a firm. Investment decisions typically affect financing decisions and vice versa. Although all these decisions are important, investment decisions are typically the most important because they affect a firm’s growth and profitability.
4. How does the notion of a risk-return tradeoff affect the behavior of financial managers?
When making financial decisions, managers should assess the potential risk and rewards associated with their decisions. The assumption is that most managers are risk-averse. Such managers should only be willing to accept higher levels of risk if they expect to receive higher...