Financial Management is the practice of how companies acquire money, known as the financing decision, and how they use money, known as the investment decision.
Financial management focuses primarily on the firm’s long-term financing and investment decisions, where long-term refers to at least one year. The long-term financing it receives comes from creditors who lend for more than one year and, of course, from the owners, also known as the stockholders. The stockholders’ investment is often called equity. The stockholders can, of course, sell their stock to others, but the shares themselves have an infinite life. The study of how companies decide on how much capital to acquire, how much of it should be debt and how much of it should be equity, and how much should be returned to shareholders in the form of dividends or repurchases of shares is called the financing decision.
Financial managers acquire this money and put it to work investing in the assets of the firm. The decision to invest in assets is called, appropriately, the investment decision.
The money acquired and invested is often called capital. Put simply, these funds are just the firm’s financial resources or, its money.
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Last updated: January 9, 2011