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Financial management explains financing function of the organization to improve it’s owners

wealth. Financial management is the back bone of any organization because it explains about the
arrangements of funds for organization business activities and allocation of that funds in a
effective way taking in to account the trade of between risk and return

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

The objectives or goals or financial management are-

(a) Profit maximization,

(b) Return maximization, and


(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

(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

3. Goal of Wealth Maximization. Frequently, Maximization of profits is regarded a 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.

Responsibilities of financial management

(1) Financial Planning. The main responsibility of the chief financial officer in a large concern
is to forecast the needs and sources of finance and ensure the adequate supply cash at proper time
for the smooth running of the business. He is to see that cash inflow and outflow must be
uninterrupted and continuous. For this purpose, financial planning is necessary, i.e., he must
decide the time when he needs money, the sources of supply of money and the investment
patterns so that the company may meet its obligations properly and maintain its goodwill in the
market. The financial manager is also to see that there is no surplus money in the business which
earns nothing.

(2) Raising of Necessary Funds. The second main responsibility of the financial officer is to see
the nature of the need, i.e., whether finances are required for long-term or for short-term. He
must assess the alternative sources of supply of finance taking into view the cost of raising funds,
its effect on various concerned parties, i.e, shareholders, creditors, employees and the society,
control and risk in financing and elasticity in capital structure etc.
(3) Controlling the Use of Funds. The financial manager is also responsible for the proper
utilization of funds. Assets must be used effectively so as to earn higher profits; inflow and
outflow of cash must be controlled in a manner so as to meet the current as well as future
obligations; unnecessary expenditure should be curtailed and there should be left no possibility
for misappropriation of money.

(4) Disposition of Profits. Appropriation of profits is one of the main responsibilities of the
financial manger. He is to advise to the top executive as how much of the profits should be
retained in the business as reserves for future expansion; how much to be used in repaying the
debts; and how much to be distributed to the shareholders as dividend. On the basis of the advice
given by the financial mange, the resolutions regarding depreciations, reserves, general reserves
and distribution of dividends are carried out in the meeting of the board of directors of the

(5) Other Responsibilities. Over and above, the responsibilities sated above, there are certain
other responsibilities of the financial manger. These are:

(a) Responsibility to owners. Shareholders or stock-holders are the real owners of the concern.
Financial manger has the prime responsibility to those who have committed funds to
theenterprise. He should not only maintain the financial health of the enterprise, but should also
help to produce a rate of earning that will reward the owners adequately for the risk capital they
(b) Legal Obligations. Financial manager is also under an obligation to consider the enterprise
in the light of its legal obligations. A host of laws, taxes and rules and regulations cover nearly
every move and policy. Good financial management help to develop a sound legal framework.

(c) Responsibilities of Employees. The financial management must try to produce a healthy
going concern capable of maintaining regular employment at satisfactory rate of pay under
favourable working conditions. The long term financial interests of management, employees an
owners are common.
(d) responsibilities to Customers. In order to make the payments of its customers' bill, the
effective financial management is necessary. Sound financial management ensures the creditors
continued supply of raw material.
(e) Wealth Maximization. Prof. Soloman of Stanford University has argued that the main goal
of the finance function is wealth maximization. The other goals may be achieved automatically.
In the light of the above discussion, we can conclude that the main responsibility of the financial
manger is not only to maintain the financial health of the organisation but also to increase the
economic welfare of the shareholders by utilizing the funds in an effective manner.

Financial planning

Financial planning is a continuous process of directing and allocating financial resources

to meet strategic goals and objectives.Financial planning Planning is very necessary for the
smooth running of the business. A business cannot be carried on without planning. Planning
means deciding in advance what is to be done.

Planning is done for each functional area of management. Each functional manger plans for
his area of management and acts accordingly. The planning of each area should be linked to the
objectives of the organisation.
Financial management, being one of the branches of the management also needs
planning. Financial planning is necessary for the control of inflow and outflow of cash so that
necessary funds may be made available as and when they are required. The highest earnings can
be assured only through sound financial plans. A faulty financial plan may ruin the business
completely. So, sound financial planning is necessary to achieve the long term and the short-term
objectives of the firm and to protect the interest of all parties concerned, i.e., firm, creditors,
shareholders and public.

Characteristics of a sound financial plan

(1) Simplicity. The capital plan of a company should be as simple as possible. By 'simplicity' we
mean that the plan should be easily understandable to all and it should be free from
complications, and/or suspicion-arising statements. At the time of formulating capital structure
of a company or issuing various securities to the public, it should be borne in mind that there
would be no confusion in the mind of investors about their nature and profitability.

(2) Foresight. The planner should always keep in mind not only the needs of 'today' but also the
needs of 'tomorrow' so that a sound capital structure (financial plan) may be formed. Capital
requirements of a company can be estimated by the scope of operations and it must be planned in
such a way that needs for capital may be predicted as accurately as possible. Although, it is
difficult to predict the demand of the product yet it cannot b an excuse for the promoters to use
foresight to the best advantage in building the capital structure of the company.

(3) Flexibility. The capital structure of a company must be flexible enough to meet the capital
retirements of the company. The financial plan should be chalked out in such a way that both
increase and decrease in capital may be feasible. The company may require additional capital for
financing scheme of modernisation, automation, betterment of employees etc. It is not difficult to
increase the capital. It may be done by issuing fresh shares or debentures to the public or raising
loans from special financial institutions, but reduction of capital is really a ticklish problem and
needs statesman like dexterity.

(4) Intensive use. Effective us of capital is as much necessary as its procurement. Every 'paisa'
should be used properly for the prosperity of the enterprise. Wasteful use of capital is as bad as
inadequate capital. There must be 'fair capitalisation' i.e., company must procure as much capital
as requires nothing more and nothing less. Over-capitalisation and under capitalisation are both
danger signals. Hence, there should neither be surplus nor deficit capital but procurement of
adequate capital should be aimed at and every effort be made to make best use of it.

(5) Liquidity. Liquidity means that a reasonable amount of current assets must be kept in the
form of liquid cash so that business operations may be carried on smoothly without any shock to
therm due to shortage of funds. This cash ratio to current ratio to current assets depends upon a
number of factors, e.g., the nature and size of the business, credit standing, goodwill and money
market conditions etc.

(6) Economy. The cost of capital procurement should always be kept in mind while formulating
the financial plan. It should be the minimum possible. Dividend or interests to be paid to share
holder (ordinary and preference) should not be a burden to the company in any way. But the cost
of capital is not the only criterion, other factors should also be given due importance.

Process of financial planning

Financial Planning is a roadmap to realise and achieve financial goals of the organisation. The process of
financial planning involves identifying the financial goals of the organization , based on the it’s financial
position and risk profile charting out a feasible plan to a achieve those goals. 1 Determine current
financial situation

Financial planning involves the following steps to achive the objectives of the organization.

1 Determine current financial situation

2 Develop financial goals

3 Identify alternative cources of action

4 Evaluate alternatives

5 Create and implement your financial action plan

6 Review and revise the financial plan