Final answer:
Financial management is key to acquiring and using funds effectively in a firm, with various options like borrowing or selling stock, each with its own advantages and trade-offs.
Step-by-step explanation:
Financial management is the art and science used to determine the most effective ways to acquire and use funds to achieve the firm's goals. Firms engage in various activities that involve spending money today in the hope of future profits, such as purchasing machinery, constructing new plants, or initiating research and development projects. The imperative for a firm is to choose the right mix of financing options, whether it's through early-stage investors, reinvesting profits, borrowing through banks or bonds, or selling stock. All these methods have their pros and cons.
For instance, borrowing could mean committing to scheduled interest payments regardless of income levels, whereas selling stock entails relinquishing some control of the firm and becoming answerable to shareholders and a board of directors. A firm's decision on how to access financial capital impacts its control over operations and its financial flexibility.