We explain what financial administration is, its purpose and importance, as well as its general characteristics, risks and benefits.
What is Financial Administration?
It is called financial management or corporate finance. a branch of management sciences dedicated to the analysis and improvement of monetary investment decisions made by companies, as well as the tools available to evaluate them.
Broadly speaking, financial administration It is focused on maximizing shareholder valueand to do so, it studies business financial decisions based on the short and long term, in pursuit of a strategy that allows for improved management of cash, stocks and dividends.
Usually Corporate finance is associated with investment bankingdedicated to meeting the capital needs of different companies. That is why financial management has the power to revive, grow and even acquire businesses.
See also: Capital markets.
Origin of financial administration
In the business world that emerged as a result of the Industrial Revolution and capitalism, financial management became an essential part of the economy and business and became a separate area of study in the early 20th century.
Until then, knowledge on the subject was limited to the registration of capital market procedureswithout analytical methods and mechanisms of understanding and dissemination that would make corporate financial history a theoretical area.
You may be interested in: History of administration.
Purpose of financial administration
The very purpose of financial administration is to understand, improve and enhance the management that companies make of their economic assets, through a series of basic concepts and mechanisms of registration and analysis, in order to build better asset and liability managementas well as better planning over time.
This is a very important area of study. closely linked to the disciplines of administration and the business world, such as accounting, law, enterprise architecture and others, from which it extracts tools and to which it provides a missing perspective.
Importance of financial management
When we refer to business relations, proper financial management corporate becomes a central issue in the fate of the matter.
Investments are the heart of a country’s economic growthsince new projects generate employment, wealth and mobilize both the public and private economic machinery.
This means that capital management and proper project planning is vital. so that companies not only achieve their short and medium term objectivesbut rather position themselves for the future within the financial field.
Areas of study of financial administration
Broadly speaking, financial administration deals with the valuation of assets and the analysis of financial decisions that tend to create value (which should be the direct objective of the company’s management).
However, this is approached from different possible angles such as: the corporate legal structure, financial and investment modelsmergers and acquisitions, corporate social responsibility, tax management, investment banking, financial leverage, corporate restructuring and, of course, the all-important topic of risk and profit.
Risk and benefit of financial management
These two concepts are central to financial management and are defined as the possibility that the final result may differ from that initially expected (risk) and some unfavorable event occurs, and the possibility that the final results will provide anticipated or unexpected growth and profits (benefit).
Without risk there is no benefit, that’s why It is often said that “he who does not bet does not win” and that investment is the spirit of corporate growth.
There is also talk of three types of risk:
- Systematic risk. Also called non-diversifiable or inevitable, it is linked to elements or motivations external to the financial system, such as politics.
- Non-systematic risk. Called diversifiable, avoidable or idiosyncratic, it has to do with the dynamics of the market as a whole and can be reduced through diversification.
- Total risk. The sum of the two previous risks will result in the total.
Other key concepts
Other important concepts in the financial world have to do with:
- Opportunity costs. Since there are always investment opportunities to choose from, opportunity cost is the result of the rate of return on the best available investment alternative. It is the loss that the company is willing to assume by not choosing the best alternative use of its capital.
- Correct financing. A principle in the matter dictates that short-term investments should be paid for with short-term funds, and long-term investments, with similar funds.
- Leverage. The strategic use of debt can serve to increase profits by employing the resources of a third party, in a process called leverage that increases the investment risk, but also the company’s dividends.
- Diversification. Investors prefer to diversify their invested capital, that is, not to bet everything on a single project, so that failures are offset by successes and their finances are always stable.
Role of a financial manager
Financial managers are Those in charge of carrying out decisions in corporations relevant to financial administration.
It is a vital role in the success of companies and business operations since their decisions can mean increased shareholder valuethat is, business growth or, on the contrary, its decline.
The best financial managers are those concerned with dividends per share and not exclusively with total earnings.
The usual tasks of a financial manager are:
- Plan the company’s products and markets.
- Propose innovation, research, exchange and sales strategies.
- Organize, train and select your business executives.
- Obtain funds at low cost and high yield.
- Adjust all of the above to the environment, competition and trends that the company faces.
Short and long term
Short-term decisions and techniques, from a corporate finance perspective, have to do with the necessary balance between assets and liabilities to provide the business structure with stability and survival.
Long-term decisions, on the other hand, are those that have to do with capital investment and growth: Which projects should receive funding?whether they should receive it in equity or from debt (leverage), and when and how to pay dividends to shareholders.
Parts of corporate finance
Three sets of decisions make up a company’s corporate finances:
- Investment decisions. How and where to invest your real assets (tangible and intangible).
- Financing decisions. How and where to get money for the company’s innovations and projects.
- Management decisions. What operational and financial strategies to apply based on the performance of the company as an organized whole.
Financial management today
Times of technological change such as the one that began at the end of the 20th century represent a paradigm of challenges to financial administration, given that the business landscape must adapt to a constantly changing human universe and demand for the new.
Investments in the digital world, in new technologies or in ambitious industrial projects Demand the best strategic use of the company’s financesand that means having more capable financial managers.