What is Finance?

Finance is defined as the management of

money and includes activities such as
investing, borrowing, lending, budgeting,
saving, and forecasting. There are three
main types of finance: (1) personal,
(2) corporate, and (3) public/government

Financial evaluation of a project is

analysis of a project for checking whether
project is profitable or not before taking
project in hand. We also review the
project by investigating its cost, risk and
return. If we have lots of alternatives
projects, then we select best project on
the basis of financial evaluation. In simple
words, we uses following tools for
financial evaluating of a project
1) Evaluate the Cost of Project
2) Time Value of Investment in Money
3) NPV
4) IRR

Financial management may be defined as

the area or function in an organization
which is concerned with profitability,
expenses, cash and credit, so that the
"organization may have the means to carry
out its objective as satisfactorily as
possible;" [1] the latter often defined as
maximizing the value of the
firm for stockholders.

Scope of Financial Management

Some of the major scope of financial

management are as follows: 1. Investment
Decision 2. Financing Decision 3. Dividend
Decision 4. Working Capital Decision.
1. Investment Decision:
The investment decision involves the
evaluation of risk, measurement of cost of
capital and estimation of expected benefits
from a project. Capital budgeting and
liquidity are the two major components of
investment decision. Capital budgeting is
concerned with the allocation of capital and
commitment of funds in permanent assets
which would yield earnings in future.
2. Financing Decision:
While the investment decision involves
decision with respect to composition or mix
of assets, financing decision is concerned
with the financing mix or financial structure
of the firm. The raising of funds requires
decisions regarding the methods and
sources of finance, relative proportion and
choice between alternative sources, time of
floatation of securities, etc. In order to meet
its investment needs, a firm can raise funds
from various sources.
3. Dividend Decision:
In order to achieve the wealth maximisation
objective, an appropriate dividend policy
must be developed. One aspect of dividend
policy is to decide whether to distribute all
the profits in the form of dividends or to
distribute a part of the profits and retain the
balance. While deciding the optimum
dividend payout ratio (proportion of net
profits to be paid out to shareholders).
4. Working Capital Decision:
Working capital decision is related to the
investment in current assets and current
liabilities. Current assets include cash,
receivables, inventory, short-term
securities, etc. Current liabilities consist of
creditors, bills payable, outstanding
expenses, bank overdraft, etc. Current
assets are those assets which are convertible
into a cash within a year. Similarly, current
liabilities are those liabilities, which are
likely to mature for payment within an
accounting year.

The objectives of financial management are

given below:
1. Profit maximization
Main aim of any kind of economic activity is
earning profit. A business concern is also
functioning mainly for the purpose of
earning profit. Profit is the measuring
techniques to understand the business
efficiency of the concern
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 maximize
shareholder’s value
4. Proper mobilization
Mobilization (collection) 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.
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.
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. A healthy cash flow
improves the chances of survival and
success of the company.
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.
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.
9. Proper coordination
Financial management must try to have
proper coordination between the finance
department and other departments of the
company.

Financial Management Functions:

1. Financial Planning and Forecasting

It is the financial manager’s responsibility to
plan and estimate the business’s financial
needs. He needs to provide details
regarding the amount of money that would
be required to purchase different assets for
the company.
2. Determination of capital composition
Once the Planning and Forecasting have
been made, the capital structure has to be
decided. The mix of debt and equity used to
finance the company’s future profitable
investment opportunities is referred to
as capital structure.

3. Fund Investment
The financial manager has to ensure that
funds made available to the business are
used adequately to grow the business. The
cost of acquiring the said fund and value of
the returns need to be compared and
balanced.
4. Maintain Proper Liquidity
Cash is the best source for maintaining
liquidity. The business requires it to buy raw
materials, pay salaries, and tackle other
financial needs of the company.

5. Disposal of Surplus
Selling surplus assets and investing in
more productive ways will increase
profitability and therefore increase the
ROCE.
6. Financial Controls
Financial control may be construed as
the analysis of a company’s actual results,
approached from different perspectives at
different times, compared to its short,
medium, and long-term objectives and
business plans.
What are financial goals?
Financial goals are the personal, big-picture
objectives you set for how you’ll save and
spend money. They can be things you hope
to achieve in the short term or further down
the road. Either way, it’s often easier to
reach your goals if you identify them in
advance.
Examples of financial goals
 Paying off debt.
 Saving for retirement.
 Building an emergency fund.
 Buying a home.
 Saving for a vacation.
 Starting a business.
 Feeling financially secure.
Think about what’s important to you as you
begin to set goals. It’s completely normal to
have several goals, and for them to change
over time.

Wealth Maximization
Wealth maximization is a modern approach
to financial management. Maximization of
profit used to be the main aim of a business
and financial management till the concept
of wealth maximization came into being. It
is a superior goal compared to profit
maximization as it takes broader arena into
consideration. Wealth or Value of a
business is defined as the market price of
the capital invested by shareholders.