While financial management deals with a wide array of decisions, we can group them in three main areas: investing, financing, and working capital. Every decision we take in the context of financial management will have to include these three aspects. Let’s consider the following real-life scenario:

Last year, Boeing announced its decision to open a new $750 million manufacturing plant in South Carolina. This decision required Boeing to assess the potential investment return on the project and evaluate how this project compares to other potential investments. This process – planning, assessing, and managing long-term investments – is capital budgeting. Capital budgeting decisions require determining the revenues, costs, and cash inflows of a project, determining the required return of the investment, and prioritizing among a number of potential alternatives.

At the same time, Boeing needed to consider the financing side. How will the construction of the new plant be financed, for instance? The financing decision deals with how to obtain the needed funds to undertake a project; the potential sources of funds; and the assessment of the costs and terms of every option. But further, it deals with the optimal mix of debt and equity – the capital structure. How much should be borrowed through loans and bonds? Should the firm issue new stock? How would increased borrowing affect the price of the stock? Each potential source of funds needs to be assessed and the right combination of funding established.

The last issue: working capital. Working capital deals with the planning and management of short-term assets and short-term liabilities. Decisions under working capital include how much inventory to keep on hand, and how to manage accounts payable and accounts receivable, credit policies, short-term loans, etc. Working capital decisions are important because the firm