Assignment # 3

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Course: Engineering Management
Submitted To: Sir Nabi Ahmad
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Submitted By: Muhammad Talha Iqbal
Registration Number: UW-16-ME-BSc-003

Department of Mechanical Engineering

Wah Engineering College
University of Wah
 Assignment 3

Questions:
1- Objectives of Financial Management.
2- Role and scope of Financial Management

1. Objectives of Financial Management

The main objectives of financial management are:
1.1 Profit Maximization
The main objective of financial management is profit maximization. The finance manager tries
to earn maximum profits for the company in the short-term and the long-term. He cannot
guarantee profits in the long term because of business uncertainties. However, a company can
earn maximum profits even in the long-term.
1.2 Wealth Maximization
Wealth maximization (shareholders' value maximization) is also a main objective of financial
management. Wealth maximization means to earn maximum wealth for the shareholders. So,
the finance manager tries to give a maximum dividend to the shareholders. He also tries to
increase the market value of the shares. The market value of the shares is directly related to the
performance of the company. Better the performance, higher is the market value of shares and
vice-versa. So, the finance manager must try to exploit shareholder's value.
1.3 Proper Estimation of Total Financial Requirements
Proper estimation of total financial requirements is a very important objective of financial
management. The finance manager must estimate the total financial requirements of the
company. He must find out how much finance is required to start and run the company. He
must find out the fixed capital and working capital requirements of the company. His
estimation must be correct. If not, there will be shortage or surplus of finance. Estimating the
financial requirements is a very difficult job. The finance manager must consider many factors,
such as the type of technology used by company, number of employees employed, scale of
operations, legal requirements, etc.
1.4 Proper Mobilization
Mobilization of finance is an important objective of financial management. After estimating the
financial requirements, the finance manager must decide about the sources of finance. He can
collect finance from many sources such as shares, debentures, bank loans, etc. There must be a
proper balance between owned finance and borrowed finance. The company must borrow
money at a low rate of interest.
1.5 Proper Utilization of Finance
Proper utilization of finance is an important objective of financial management. The finance
Manager must make optimum utilization of finance. He must use the finance profitable. He
must not waste the finance of the company. He must not invest the company's finance in
unprofitable projects. He must not block the company's finance in inventories. He must have a
short credit period.
1.6 Maintaining Proper Cash Flow
Maintaining proper cash flow is a short-term objective of financial management. The company
must have a proper cash flow to pay the day-to-day expenses such as purchase of raw
materials, payment of wages and salaries, rent, electricity bills, etc. If the company has a good
cash flow, it can take advantage of many opportunities such as getting cash discounts on
purchases, large-scale purchasing, giving credit to customers, etc.
1.7 Survival of Company
Survival is the most important objective of financial management. The company must survive
in this competitive business world. The finance manager must be very careful while making
financial decisions. One wrong decision can make the company sick, and it will close down.
1.8 Creating Reserves
One of the objectives of financial management is to create reserves. The company must not
distribute the full profit as a dividend to the shareholders. It must keep a part of it profit as
reserves. Reserves can be used for future growth and expansion. It can also be used to face
contingencies in the future.
1.9 Proper Coordination
Financial management must try to have proper coordination between the finance department
and other departments of the company.
1.10 Create Goodwill
Financial management must try to create goodwill for the company. It must improve the image
and reputation of the company. Goodwill helps the company to survive in the short-term and
succeed in the long-term. It also helps the company during bad times.
1.11 Increase Efficiency
Financial management also tries to increase the efficiency of all the departments of the
company. Proper distribution of finance to all the departments will increase the efficiency of
the entire company.
1.12 Financial Discipline
Financial management also tries to create a financial discipline. Financial discipline means:

 To invest finance only in productive areas. This will bring high returns (profits) to the
company.
 To avoid wastage and misuse of finance.
1.13 Reduce Cost of Capital
Financial management tries to reduce the cost of capital. That is, it tries to borrow money at a
low rate of interest. The finance manager must plan the capital structure in such a way that the
cost of capital it minimized.
1.14 Reduce Operating Risks
Financial management also tries to reduce the operating risks. There are many risks and
uncertainties in a business. The finance manager must take steps to reduce these risks. He must
avoid high-risk projects. He must also take proper insurance.
1.15 Prepare Capital Structure
Financial management also prepares the capital structure. It decides the ratio between owned
finance and borrowed finance. It brings a proper balance between the different sources of.
capital. This balance is necessary for liquidity, economy, flexibility and stability.

2. Role and scope of Financial Management

2.1 Role of Financial Management

Finance is an essential and indispensable part of any organization. It is difficult for
organizations, whether profit-making or otherwise, to sustain themselves for long without
proper finances. Not just that, the efficient management of these financial resources is essential
to be sustainable and viable in the long-run.
Financial management helps organizations to do so. Financial management refers to the
effective and efficient planning, organizing, directing and controlling of financial activities and
processes of an organization. This includes but is not limited to fund procurement, allocation of
financial resources, utilization of funds, etc. Considering the importance of the finance function
in organizations, the demand for professionals with these skills has always been steady. Today,
it is possible for even non-finance professionals and entrepreneurs to learn finance concepts
through a certified financial analyst course.
Following are some of the major roles of financial management:
2.1.1 Financial Decisions and Controls
Financial management and financial managers play a crucial role in making financial decisions
and exercising control over finances in the organization. They make use of techniques like ratio
analysis, financial forecasting, profit and loss analysis, etc.
2.1.2 Financial Planning
The finance managers are responsible for the planning of financial activities and resources in
the organization. To this end, they use available data to understand the needs and priorities of
the organization as well as the overall economic situation and make plans and budgets for the
same.
2.1.3 Capital Management
It is the responsibility of financial management to estimate the capital requirements of the
organization from time to time, determines the capital structure and composition and makes
the choice of source of funding for the capital needs.
2.1.4 Allocation and Utilization Of Financial Resources
Financial management ensures that all financial resources of the organizations are used and
invested effectively and efficiently so that the organization is profitable, sustainable and viable
in the long-run.
2.1.5 Cash Flow Management
It is extremely important for organizations to have sufficient working capital and cash flow to
meet their operational expenses and emergencies. Financial management tracks account
payable and receivable to ensure there is sufficient cash flow available at all times.
2.1.6 Disposal Of Surplus
The decisions on how the surplus or profits of the organizations is utilized is taken by the
financial managers of the organizations. They decide if dividends should be distributed and how
much as well as the proportion of profits that must be retained and ploughed back into the
business.
2.1.7 Financial Reporting
 Financial management maintains all necessary reports related to the finance of the
organization and uses this as the database for forecasting and planning financial activities.

2.1.8 Risk Management

Sound financial management prepares the organization to forecast risks, put in place mitigation
plans as well as to meet unforeseen risks and emergencies effectively.

2.2 Scope of Financial Management

The introduction to financial management also requires you to understand the scope of
financial management. It is important that financial decisions take care of the shareholder
interests.
Further, they are upheld by the maximization of the wealth of the shareholders, which depends
on the increase in net worth, capital invested in the business, and plowed-back profits for the
growth and prosperity of the organization.
2.2.1 Core Financial Management Decisions
In organizations, managers in an effort to minimize the costs of procuring finance and using it in
the most profitable manner, take the following decisions:
2.2.2 Investment Decisions
Managers need to decide on the amount of investment available out of the existing finance, on
a long-term and short-term basis. They are of two types:

 Long-term investment decisions or Capital Budgeting mean committing funds for a long
period of time like fixed assets. These decisions are irreversible and usually include the
ones pertaining to investing in a building and/or land, acquiring new plants/machinery
or replacing the old ones, etc. These decisions determine the financial pursuits and
performance of a business.
 Short-term investment decisions or Working Capital Management means committing
funds for a short period of time like current assets. These involve decisions pertaining to
the investment of funds in the inventory, cash, bank deposits, and other short-term
investments. They directly affect the liquidity and performance of the business.
2.2.3 Financing Decisions
Managers also make decisions pertaining to raising finance from long-term sources (called
Capital Structure) and short-term sources).
They are of two types:
  Financial Planning decisions which relate to estimating the sources and application of
funds. It means pre-estimating financial needs of an organization to ensure the
availability of adequate finance. The primary objective of financial planning is to plan
and ensure that the funds are available as and when required.
 Capital Structure decisions which involve identifying sources of funds. They also involve
decisions with respect to choosing external sources like issuing shares, bonds, borrowing
from banks or internal sources like retained earnings for raising funds.
2.2.4 Dividend Decisions
These involve decisions related to the portion of profits that will be distributed as dividend.
Shareholders always demand a higher dividend, while the management would want to retain
profits for business needs. Hence, this is a complex managerial decision.
 REFERENCES
 https://kalyan-city.blogspot.com/2011/09/objectives-of-financial-management.html
 https://www.toppr.com/guides/business-environment/business-functions/financial-
management/
 https://talentedge.com/articles/role-financial-management-organization/