Financial Management

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Introduction to finance
A business organization requires finance. Finance is lifeblood of an
organization. No business organization can conduct any activity without
finance.
The concept of finance has undergone remarkable changes over a period of
time. As per traditional concept of finance, the function of finance was
concerned with acquiring finance from different sources for meeting financial
requirements. Today finance function is concerned with determination of total
financial requirement, acquiring finance from proper sources, utilization of
finance in a proper manner for purchasing assets, taking investment decisions
dividend decisions, profit maimization and wealth maimisation.
Nature of Finance function :
A process of Acquisition of funds
A process of !tilization of funds
A technique of "anaging Funds
An #ntegral $art of "anagement
Finance Function %eals with Financial Forecasting
%eals with Financial $lanning & 'ontrol
'oncerned with %ecision "aking
'o( related with other Function of an )rganization
%eals with *udgeting, +eporting and Accounting
Today a finance manager is involved in following types of decisions.
a) Investment decisions
These decisions are concerned with careful selection of profitable investments.
They cover the following areas.
- %etermination of total requirement of finance.
- ,valuation of investment proposals.
- %etermination of priority of investments.
- $urchase of fi assets.
- %etermination of investment in current assets.
- +eplacement of assets.
- -ecurity analysis and portfolio management.
b) Finance decisions
These are the decisions concerned with raising finance and its utilization.
These include the following areas.
- %etermination of sources of finance.
- %etermination of ratio between owned funds and borrowed funds.
- +aising of funds through equity shares, preference shares, debentures
and bonds.
- Arrangement of finance for working capital.
- 'onsideration of cost of capital.
- Analysis of performance of ratios.
c) Dividend Decisions
These are the decisions concerned with distribution of profit among the share
holders as dividend. They include the following areas.
- %etermination of rate of dividend to share holders on the basis of profit
available.
- %etermination of the amount of profit to be kept in business.
- 'onsideration of the effect of dividend rate on market value of shares.
d) Liuidity Decisions
These are the decisions concerned with managing day to day activities of the
business i.e working capital.
Functions of Finance Manager
The important functions of a finance manager of a modern organization include
the following.
a) !rovision of capital
A finance manager has to estimate the capital requirement of the organization
and make a provision for the same.
b) "#ort term financing
A manager has to obtain short term finance from banking companies and
financial institutions for meeting short term requirements.
c) $redit and collection
A finance manager has to eamine the credit worthiness of the customers and
take a decision for sanctioning credit to them. After sanctioning credit he has
to arrange for collection of dues from the customers.
d) Investment
A finance manager has to make arrangement for investment of surplus funds in
such a manner that higher rate of return will be obtained.
e) Insurance
.e has to arrange for insurance of the property of the company in order to
cover the risk involved. .e has to take various types of insurance policies to
cover the risks.
f) $ontrolling
A finance manager has to control the finance and see that every paisa raised is
utilized for business purpose only. .e has to use the techniques of fund flow,
cash flow, ratio analysis and budgeting for control of finance.
g) Interpretation of results
A finance manager has to compare financial performance of the company with
the standards and interpret the result of operations at all the levels. After
interpretation he has to report the same to the management for information
and decision making.
#) Ta% administration
,very company is required to pay various taes to the government. A finance
manager has to perform the function of determination of ta policies and
procedures, determination of ta liability, payment of taes etc.
&b'ectives of Financial management
These are of two types
a) !rofit Ma%imi(ation
The basic ob/ective of any activity is to earn profit. A business organization is
established for earning profit. $rofit is essential for survival and growth of any
organization. 0ithout profit no organization can face risk involved in business.
$rofit maimization as an ob/ective of financial management is essential for
achievement of social ob/ectives of an organization.
b) )ealt# ma%imi(ation
0ealth maimization is the ob/ective of financial management, which can be
achieved through profit maimization. 0ealth maimization implies
maimization of shareholders wealth. -hareholders wealth includes the value
of shareholders interest in the company. -hareholders wealth is calculated by
the following formula
-hareholders wealth 1 no of shares market value of each share
For maimization of wealth the market value of shares must be increased.
"arket value of share depends on the rate of dividend, which ultimately
depends on profits. .ence at all the stages shareholders interest must be kept
in mind while taking decisions. The decision should be taken in such a manner
that shareholders wealth is maimized.