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Efficient methods of production and specialization of labor can exist only if there is an effective means of paying for raw materials and final products. Businesses can obtain the money needed to buy capital goods, such as machinery and equipment, only if a mechanism has been established for making savings available for investment. Similarly, federal and other governmental units, such as state and local governments and tax districts, can carry out their wide range of activities only if efficient means exist for raising money, for making payments, and for borrowing.
Financial institutions, financial markets, and investment and financial management are crucial elements of the financial environment and well-developed financial systems. Financial institutions are intermediaries, such as banks, insurance companies, and investment companies that engage in financial activities to aid the flow of funds from savers to borrowers or investors. Financial markets provide the mechanism for allocating financial resources or funds from savers to borrowers. Individuals make decisions as investors and financial managers. Investors include savers and lenders as well as equity investors. While we focus on financial managers, we recognize that individuals also must be continuously involved in managing their personal finances.
Investment management involves making decisions relating to issuing and investing in stocks and bonds. Financial management in business involves making decisions relating to the efficient use of financial resources in the production and sale of goods and services. The goal of the financial manager in a profit-seeking organization should be to maximize the owners’ wealth. This is accomplished through effective financial planning and analysis, asset management, and the acquisition of financial capital.