How Do I Choose the Best Financial Management Framework?
Financial management is concerned with the maintenance of capital and the growth in the value of wealth. An ideal financial management framework not only preserves existing finances, it also uses investment and financial analysis to make more money. Several factors go into choosing an ideal financial management framework. These factors include the size of the company, the type of organization, the funds available and the business’ overall financial goals.
Profit maximization is one framework option. Under profit maximization financial management framework, finance managers are concerned with the efficient use of capital within a given time frame. This framework option is a good choice for businesses that are concerned with short-term growth and routine wealth maintenance.
Maximization of shareholder wealth is another financial management option. The shareholder wealth maximization process is for corporations that have public or private investors who receive regular dividends. Finance managers attempt to have the largest amount of revenues go to the stockholders’ equity portion of the business account. This might be an ideal option for companies that have recently “gone public” by offering stocks in the commodities market.
Different types of business structures have different financial management framework needs. Examples of business structures include sole proprietorships, partnerships and corporations. A sole proprietorship is often a small business with a financial management framework designed to cut costs and keep the business operative. General partnerships function similarly to sole proprietorships, except that there is more then one owner. Corporations often use profit maximization or maximization of shareholder wealth financial management techniques.
A corporation’s financial manager usually will be the person who recommends the financial management framework and implements any financial management techniques. Types of financial managers include vice presidents for finance, also known as chief financial officers (CFO). A CFO typically reports to the company’s chief executive officer (CEO). Other financial executives include the company’s treasurer and the controller.
Much of the business finance management will depend on the current market circumstances. Corporations finance initial endeavors through cash received from selling securities such as stocks. Securities might not sell if the market is deficient because of a bad economy or poor public opinion of the company. In these cases, the financial management framework might need to change, possibly from a maximization of shareholder wealth tactic to a profit maximization technique.
Risk is another factor of financial management. Businesses risk wealth in order to make wealth. Types of risks include investment, purchasing other businesses and buying commodities such as securities or debt. The overall financial framework and market circumstances must be considered when contemplating capital risk.
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