Managerial finance
Encyclopedia
Managerial finance is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique.

The difference between a managerial and a technical approach can be seen in the questions one might ask of annual reports. One concerned with technique would be primarily interested in measurement. They would ask: are moneys being assigned to the right categories? Were generally accepted accounting principles GAAP
Gaap
In demonology, Gaap is a mighty Prince and Great President of Hell, commanding sixty-six legions of demons. He is, according to The Lesser Key of Solomon, the king and prince of the southern region of Hell and Earth, and according to the Pseudomonarchia Daemonum the king of the western region and...

 followed?

One concerned with management though would want to know what the figures mean.
  • They might compare the returns to other businesses in their industry and ask: are we performing better or worse than our peers? If so, what is the source of the problem? Do we have the same profit margins? If not why? Do we have the same expenses? Are we paying more for something than our peers?
  • They may look at changes in asset balances looking for red flags that indicate problems with bill collection or bad debt.
  • They will analyze working capital
    Working capital
    Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...

     to anticipate future cash flow problems.


Managerial finance is an interdisciplinary approach that borrows from both managerial accounting and corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...

.

Sound financial management creates value and organizational agility through the allocation of scarce resources amongst competing business opportunities. It is an aid to the implementation and monitoring of business strategies and helps achieve business objectives.

The Role of Managerial Accounting

To interpret financial results in the manner described above, managers use Financial analysis
Financial analysis
Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project....

 techniques.

Managers also need to look at how resources are allocated within an organization. They need to know what each activity costs and why. These questions require managerial accounting techniques such as activity based costing.

Managers also need to anticipate future expenses. To get a better understanding of the accuracy of the budgeting process, they may use variable budgeting
Variance (accounting)
In budgeting , a variance is the difference between a budgeted, planned or standard amount and the actual amount incurred/sold...

.

The Role of Corporate Finance

Managerial finance is also interested in determining the best way to use money to improve future opportunities to earn money and minimize the impact of financial shocks. To accomplish these goals managerial finance uses the following techniques borrowed from Corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...

:
  • Valuation
    Valuation (finance)
    In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets or on liabilities...

  • Portfolio theory
  • Hedging
    Hedge (finance)
    A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...

  • Capital structure
    Capital structure
    In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80...

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