Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.
Scope/Elements

1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions. 2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. 3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:

a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.
Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be1. To ensure regular and adequate supply of funds to the concern. 2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. 3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. 5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.
Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise. 2. Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.

3. Choice of sources of funds: For additional funds to be procured, a company has many choices likea. Issue of shares and debentures b. Loans to be taken from banks and financial institutions c. Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing. 4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible. 5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways: a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. b. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company. 6. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc. 7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting
Meaning of Financial Management Financial Management is that specialised function of general management which is related to the procurement of finance and its effective utilisation for the achievement of common goal of the organisation.

It includes each and every aspect of financial activity in the business. Financial Management has been defined differently by different scholars. A few of the definitions are being reproduced below:Financial Management is an area of financial decision making harmonizing individual motives and enterprise goals. Weston and Brigam. Financial Management is the application of the planning and control functions to the finance function.- Howard and Upton. Financial Management is the operational activity of a business that is responsible for obtaining and effectively, utilizing the funds necessary for efficient operations.- Joseph and Massie. From the above definitions, it is clear that financial management is that specialised activity which is responsible for obtaining and affectively utilizing the funds for the efficient functioning of the business and, therefor, it includes financial planning, financial administration and financial control. Functions of Financial Management Finance function for the sake of convenience may broadly be classified into groups i.e., executive finance function and incidental finance function. Postini Alternative

The executive finance function is so termed because it requires some administrative skill in planning, execution and control. On the other hand incidental finance function is so called because it does not require any specialized administrative skill and for the most part it covers routine work, mainly clerical that is necessary to carry into effect the executive decisions. We shall discuss hereunder both the finance functions of finical management in detail. Executive Finance Functions Executive finance functions include all those financial decisions of importance which require specialized administrative skill. Postini Alternative Some of the executive functions are given below:(i) Financial Forecasting. The first and foremost functions of financial management is to forecast the financial needs of the concern. In the initial stage, it is done by promoters but in a going concern, it is generally performed by the executive chief or by the officers of the finance-department in a large scale enterprise. In estimating the financial requirements of the concern, help of various budgets i.e., sales budget, production budget etc., profit and loss account and Balance Sheet is sought. (ii) Establishing Asset-Management Policies. In order to estimate and arrange for cash requirements of an enterprise, it is very necessary to decide how much cash will be invested in non-cash assets, i.e., fixed assets, and also the kind and coverage of insurance that a company will carry. Establishing a sound asset management policy is a pre-requisite to successful financial Management. No doubt the financial manager in deciding about the asset-management policies seeks cooperation of marketing executive in making decisions involving the carrying of inventories of finished goods and credit policy etc. and that of the production manager in making decision concerned with the carrying of inventories of raw materials and factory supplies, purchases etc. (iii) Allocation of Net Profit. How to allocate the net profits of the concern is the another problem before the financial manager. After paying all taxes, the available net profits of the concern can be allocated for three purposes- (a) For paying dividends to the shareholders of the comp nay as a return upon this investment. (b) for distributing bonus to the employees and company's contribution tooth profit sharing plans, and (c) retention of profits for the expansion of business. As far as, the second alternative is concerned, the amount to be paid to employees is generally fixed by statutes or on contractual basis and therefore, there is no problem in allocating profits for that purpose. But a considerably attention is to be paid in so far as first and third alternatives are concerned namely the dividends to be distributed to the shareholders and the amount to be retained for future expansion plans. (iv) Cash Flows and Requirements. It is the prime responsibility of the financial manager to see that an adequate supply of cash is available at proper time for the smooth running of the business. A good financial executive should ensure that cash inflow and outflow must be continuous and uninterrupted. Inflow of cash originates in sales and cash outflows or cash requirements are closely related to volume of sales. Here the financial manger is to decided how much cash e must retain to meet the current obligations so that there would be no idle cash balance earning nothing for the company. But there is a dilemma because inflow of cash is not precisely predictable and seldom offset one another. Therefore, the financial manager must maintain a balance between inflow of cash and outflow of cash. (v) Deciding Upon Borrowing Policy. Every organisation plans for the expansion of the business for which he requires additional resources. Personal resources being limited the case must be arranged by borrowing money either from commercial bank, and other financial institutions or by floating new debentures or by issuing new shares. The financial manger, at this juncture, will take a decision about the time when the funds from outside sources are needed, the source from which they are to be received, how log they will be needed an from what source they will be repaid. Obviously, it is a very important function of financial manager. (vi) Negotiations For New outside Financing. Finance function does not stop with the decision to undertake outside financing; it extends towards carrying on negotiations from the outside financing agencies to arrange for it. Finances are needed by an establishment to meet its short-term and long-term requirements. The financial manger must assess short and long term financial requirements of the organisation an start negotiations for raising these funds. It requires considerable planning because the sources are to be tackled in advance keeping in view the alternative sources and sounded in a manner that in case one fails, the other should be available. He must keep open the credit lines. (vii) Checking upon Financial Performance. The Financial manager is under an obligation to check the financial performance of the funds invested in the business. It requires retrospective analysis of the operating period to evaluate the efficiency of financial planning. An unbiased assessment of financial performance shall be great value to the business in improving the standards, techniques, and procedures of financial control. We have already discussed the executive finance functions in the foregoing paragraphs. Now we shall discuss the various incidental finance functions. Postini Alternative

ncidental Finance functions are those functions of clerical or routine nature which are necessary for the execution of decisions taken by the executives. Some of the important incidental finance functions are:(a) supervision of cash receipts an disbursements an safeguarding of cash balance. (b) Proper custody and safeguarding of the important and valuable papers, securities and insurance policies. (c) Taking care of all mechanical details of financing. (d) Record-keeping and reporting. (e) Cash planning an credit management. Objectives of Financial Management Finance functions-both executive and incidental-are there in an organisation to achieve certain financial objectives. Postini Alternative

The objectives or goals or financial management are- (a) Profit maximization, (b) Return maximization, and (c) Wealth maximization. We shall explain these three goals of financial management as under: (1) Goal of Profit maximization. Maximization of profits is generally regarded as the main objective of a business enterprise. Each company collects its finance by way of issue of shares to the public. Investors in shares purchase these shares in the hope of getting medium profits from the company as dividend It is possible only when the company's goal is to earn maximum profits out of its available resources. If company fails to distribute higher dividend, the people will not be keen to invest their money in such firm and persons who have already invested will like to sell their stocks. On the other hand, higher profits are the barometer of its efficiency on all fronts, i.e., production, sales an management. A few replace the goal of 'maximization of profits' to 'fair profits'. 'Fair Profits' means general rate of profit earned by similar organisation in a particular area. (2) Goal of Return Maximization. The second goal of financial management is to safeguard the economic interest of the persons who are directly or indirectly connected with the company, i.e.,shareholders, creditors and employees. The all such interested parties must get the maximum return for their contributions. But this is possible only when the company earns higher profits or sufficient profits to discharge its obligations to them. Therefore, the goal of maximization of returns are inter-related. 3. Goal of Wealth Maximization. Frequently, Maximization of profits is regarded a the proper objective of the firm but it is not as inclusive a goal as that of maximising it value to its shareholders. Value is represented by the market price of the ordinary share of the company over the long run which is certainly a reflection of company's investment and financing decisions. The log run means a considerably long period in order to work out a normalized market price. The management ca make decision to maximize the value of its shares on the basis of day-today fluctuations in the market price in order t raise the market price of shares over the short run at the expense of the long fun by temporarily diverting some of its funds to some other accounts or by cutting some of its expenditure to the minimum at the cost of future profits. This does not reflect the true wort of the share because it will result in the fall of the share price in the market in the long run. It is, therefore, the goal of the financial management to ensure its shareholders that the value of their shares will be maximized in the long-run. In fact, the performances of the company can well be evaluated by the value of its share.

MBA financial management subject covers four modules for almost 30 hours, it will explores the scope of financial management, the long-term financial decisions, the investment decisions and the financing and the dividends decision. Topics include objectives of financial managenent, financial markets, money markets, time value of money, future value and compounding, present value and discounting, investment evaluations criteria, significance cost of capital, concept of leverage, theories of capitalization, forms of dividend, and other related topics for financial mangement. Module I: Introduction Financial Management Ithis module will explores the introduction to Financial Management, Financial Process, Scope

of Financial Management, Goals of the firm (Profit Maximum vs Wealth Maximum), Objectives of Financial Management in contemporary business environment Module II: Long-term Financing Decisions This module will cover the topic , Financial Markets, Money Markets, Capital Markets (Capital market Institutions), Types of Issue, Types of share capital, Debentures, Relative merits and demerits, Stock Indices (Sensex, Nifty) Module III: Investment decisions This module will explorese the Time value of money, Future value and compounding, Present value and discounting, Concept of Return and Risk, CAPM Model, Concept of value, Nature and Types of investment decision, Investment evaluation criteria (NPV, IRR, Payback, Discounted payback), Significance of Cost of Capital, Determining components of cost of capital Cost of Debt, Preference Share Capital, Equity share capital, Cost of Retained earning. Module IV: Financing and Dividend decision This module contains Concept of Leverage, Types of Leverage, Capitalization, Theories of capitalization, Over and under capitalization, watered stock/capital. Capital Structure Theories Relevance and irrelevance theories; Dividend policies, Factors determining dividend policy, Forms of dividend, Theories of dividend Relevance & Irrelevance (Traditional, Walters Model, Gordons Model, M & M Model).