FINANCIAL MANAGEMENT

Scope of Financial
Management

The

term

"financial

management"

refers

to

management of money, the

life-blood of business

Financial Management involves

the

application

management

of

general

principles

particular financial operation

to

Objectives of Financial
Management

Maximization of shareholders
wealth

Maximization of Profitability

Evolution of Financial
management

Traditional Phase

Transitional phase

Modern Phase

Traditional Phase

The focus of financial management was mainly on certain episodic

events like formation, issuance of capital, major expansion, merger,
reorganization and liquidation in the life cycle of firm. The approach
was mainly descriptive and institutional. The instruments of financing,
the institutions and procedures used capital markets, and the legal
aspects of financial events formed the core of financial management.
Financial management was viewed mainly from the point of view of
the investment bankers, lenders, and other outside interests.

Transitional
Phase

It began around the early 1940s and continued

through

the

early

1950s.

The

nature

of

financial management during this phase was

similar to that of traditional phase, greater
emphasis was placed on the day-to-day
problems faced by financial managers in
the areas of fund analysis, planning, and
control. In this phase the main focus

accelerated pace of development with the

infusion of ideas from economic theory and
application of quantitative methods of
analysis. The central concern of financial
management is considered to be a rational
matching of funds to their uses so as to
maximize

the

wealth

of

current

shareholders. The approach of financial

Role of Finance Managers

Estimating the requirement of funds

Decision regarding the capital structure

Investment decisions

Dividend decisions

cash management

Evaluating financial performance with respect to return on

investment

Financial negotiations with banks, financial institutions and

public depositors

Keeping touch with stock exchange quotations and behaviour of

share prices, etc.

Financial Management
Decisions

Financing

Investment

Dividend

Working capital
management

Financing
Procurement of funds, inter alia, includes:

Identification of finance sources

Cultivating sources of funds and raising funds

Determination of finance mix

Allocation of profits between dividends and retention of profits i.e.

internal Fund generation

Investment
The investment of long term funds is made after a careful
assessment of various projects through capital budgeting
and uncertainty analysis

Only those investment proposals must be accepted which

are expected to yield at least so much return as is adequate
to meet cost of financing

Investment proposals should, therefore, be evaluated in

terms of both expected return and risk

Dividend policy
Important factors that generally determine the dividend policy of a
firm are:

Dividend payout ratio

Stability of dividends
Tax consideration, Legal, contractual, internal
constraints and restrictions

Capital market considerations

Inflation, etc

Working Capital Management

Management will use a combination of policies and techniques

for the management of working capital

Cash management

Inventory management

Debtors management

Short term financing

Capital Budgeting
Capital budgeting is the planning process
used

to

determine

investments

such

firm's

as

new

long

term

machinery,

replacement machinery, new plants, new

products, and research and development
projects

Capital Structure

Capital structure of a business enterprise has to be

viewed with respect to the risk, cost and capital
aspect

Risk is one of the major considerations which help the

finance manager in determining the capital structure

A firm has an option to go for either equity or debt as

a source of funds, each of them having its own merits
and demerits

To sum up

Objections to Profit
Maximization
THE TERM PROFIT IS VAGUE AND IT CANNOT BE PRECISELY
DEFINED.

IT

MEANS

DIFFERENT

THINGS

FOR

DIFFERENT

PEOPLE. SHOULD WE CONSIDER SHORT-TERM PROFITS OR

LONG-TERM PROFITS? DOES IT MEAN TOTAL PROFITS OR
EARNING PER SHARE? SHOULD WE TAKE PROFITS BEFORE TAX
OR AFTER TAX? IGNORES TIME VALUE OF MONEY

Wealth-maximization

wealth maximizations is the single substitute for a

stockholders utility. When the firm maximizes the
stockholders wealth, the individual stockholder can
use this wealth to maximize his individual utility. It
means that maximizing stockholders wealth the firm is
operating

consistently

towards

maximizing

stockholders utility.
Stockholders current wealth=(No. of shares owned)*(Current stock price per share)