Question: State four ways in which business finance is of importance to a financial manager in making investment decisions
Business finance is a discipline and an area of study; a branch in business management that allows managers and aspiring business leaders to learn about how to manage finances to meet short term and long term goals of a company. The reasons why business finance is important for a financial manager in making investment decisions are highlighted below:
1) Capital Allocation
Business finance is important in making investment decisions because it helps managers in capital allocation. With the knowledge of business finance, managers can determine the amount of capital needed for a particular investment.
2) Risk Management
Business finance also gives managers the knowledge they need for effective risk management in a business context. Finance managers can use their knowledge gained from studying business finance to evaluate risks involved in business. Techniques such as cost-benefit analysis and scenario analysis can help managers to manage risks effectively.
3) Cost of Capital
Financial managers also use business finance to determine cost of capital. Every entity needs to know how much it needs to run a project or a business. Knowledge of finance allows financial managers to calculate the cost of capital effectively and establish the return that the business should earn to meet shareholders’ needs.
4) Cash Flow Management
Lastly, business finance is of importance because it helps financial managers with cash flow management. Business finance management is important because it helps managers to calculate projected cash flows and manage cash effectively to meet the company’s financial obligations, operational needs, and investment opportunities.
This question was featured in KNEC past paper for Diploma in Business Management – unit, business finance. Find more KNEC past papers, revision questions and answers on our website.
