Question

Why is the study of financial management important? What is the difference between financial management and accounting? Please answer the questions in a complete paragraph. Make sure you respond to another student's post by day 7

Answer 1

Financial management is one of the most important aspects of business. Suppose you are starting your own business. No matter what the nature of your proposed business is, and how it is organized, you will have to address the following questions:

• What capital investments should you make?
• How will you raise the money for the proposed capital investments?
• How will you handle the day-to-day financial activities like collecting your receivables and paying your suppliers?

While these are not the only concerns of financial management, they are certainly the central ones.

The primary objective of financial management is maximization of shareholder value, by

• Maintaining enough supply of funds for the organisation;
• Ensuring shareholders of the organisation to get good returns on their investment;
• Optimum and efficient utilization of funds;
• Creating real and safe investment opportunities to invest in.

Though financial management and accounting overlap in many aspects, financial management is about value maximizing through proper decision making, while accounting is about score keeping and financial reporting to the users of financial statements through the income statement, the balance sheet and the cash flow statement. It is mandatory to adhere to GAAP in accounting, while there is no such compliance norm in financial management. While time value of money plays a very limited role in accounting ( accounting for asset impairment or capital leases ), it plays a very important role in long term decision making in financial management. Accounting deals with historical data only, but financial management deals with the past, present and future.