You are on page 1of 22

FINANCIAL MANAGEMENT

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 organisation.
Financial Management is the operational activity
of a business that is responsible for obtaining and
effectively, utilizing the funds necessary for
efficient operations.- Joseph and Massie.

From the above definitions, it is clear that financial


management is that specialised activity which is
responsible for obtaining and affectively utilizing
the funds for the efficient functioning of the1
03/29/17
SCOPE OF FINANCIAL
MGMT.
1. Financial Management in New Companies: A new
company spends large amount on production and
marketing but it should not ignore proper use of its
fund by managing cash, inventory, debtors and fixed
assets
2. Financial Management in Old Companies: Old company
can survive in long run, if it is capable to pay debt
timely, to pay salary on time and to pay other daily
expenses. Because old company has good reputation in
financial market, so financial managements some part
like working capital management is very significant
along with capital budgeting
3. Financial Management in NGO: Only NGO are working
not for profit aim. Its aim is not to earn money but to
survive. For long run existence NGO need to properly
manage its cost to match its receipts

03/29/17 2
Scope of financial mgmt. Contd.
Financial management, at present is not confined to raising
and allocating funds. The study of financial institutions like
stock exchange, capital, market, etc. is also emphasized
because they influenced under writing of securities &
corporate promotion. Company finance was considered to
be the major domain of financial management. The scope
of this subject has widened to cover capital structure,
dividend policies, profit planning and control and
depreciation policies. It covers areas like:

Determining financial needs:- Funds are needed to meet


promotional expenses, fixed and working capital needs.
The requirement of fixed assets is related to types of
industry. A manufacturing concern will require more
investments in fixed assets than a trading concern. The
working capital needs depend upon scale of operations.
Larger the scale of operations, the higher will be the needs
03/29/17 3
Choosing the sources of funds:- A number of sources may be
available for raising funds. A concern may be resort to issue of
share capital and debentures. Financial institutions may be
requested to provide long-term funds. The working capital
needs may be met by getting cash credit or overdraft facilities
from commercial bands.
Financial analysis and interpretation:- The analysis &
interpretation of financial statements is an important task of a
finance manager. He is expected to know about the
profitability, liquidity position, short term and long-term
financial position of the concern. For this purpose, a number of
ratios have to be calculated.
Cost-volume profit analysis:- This is popularly known as CVP
relationship. For this purpose, fixed costs, variable costs and
semi variable costs have to be analyzed. Fixed costs are more
or less constant for varying sales volumes. Variable costs vary
according to the sales volume. Semi-variable costs are either
fixed or variable in the short-term. The financial manager has
to ensure that the income of the firm will cover its variable
03/29/17 4
Working capital management:- Working capital refers to that
part of firms capital which is required for financing short-
term or current assets such as cash, receivables and
inventories. It is essential to maintain proper level of these
assets. Finance manager is required to determine the
quantum of such assets.
Dividend policy:- The investors are interested in earning the
maximum return on their investments whereas management
wants to retain profits for future financing. These
contradictory aims will have to be reconciled in the interests
of shareholders and the company. Dividend policy is an
important area of financial management because the
interest of the shareholders and the needs of the company
are directly related to it.
Capital budgeting:- It is an expenditure the benefits of which
are expected to be received over a period of time exceeding
one year. It is expenditure for acquiring or improving the
fixed assets, the benefits of which are expected to be
received over a number of years in future. Capital budgeting
03/29/17
decisions are vital to any organization. Any unsound5
DECISIONS BY A FINANCIAL
MANAGER
FM is concerned with the acquisition, financing, and
management of assets with some overall goal in
mind.
Investment Decisions deal with questions like:
What is the optimal firm size?
What specific assets should be acquired?
What assets (if any) should be reduced or eliminated?
Financing Decisions: Determine how the assets (RHS
of balance sheet) will be financed (LHS of balance
sheet)
What is the best type of financing?
What is the best financing mix?
What is the best dividend policy (e.g., dividend-payout
ratio)?
How will the funds be acquired?
03/29/17 6
Asset Management Decisions
OBJECTIVES OF FINANCIAL MGMT.
Profit Maximization: Profit maximization is
considered as the goal of financial management. In
this approach, actions that Increase profits should
be undertaken and the actions that decrease the
profits are avoided. The term 'profit' is used in two
senses
As per first concept it refers to the amount and
share of national Income that is paid to the owners
of business. The second way is an operational
concept i.e. profitability. This concept signifies
economic efficiency. It means profitability refers to a
situation where output exceeds Input. It means, the
value created by the use of resources is greater that
the Input resources. Thus in all the decisions, one
test is used I.e. select asset, projects and decisions7
03/29/17
OBJECTIVES OF FINANCIAL MGMT.
Contd.
Wealth Maximization
Stockholders current wealth=(No. of shares owned)*(Current
stock price per share)

03/29/17 8
Wealth Maximization versus Profit
Maximization
Timing profit maximization does not take
into account the timing of earnings, while wealth
maximization does
Risk wealth maximization takes risk into
account the associated risk but profit
maximization does not
Dividend payments if profit maximization
was the goal, a firm would never pay dividends
Qualitative factors profit maximization
does not take into account future activities such
as sales growth, stability and diversification.
Stock price maximization since investors9
03/29/17
Profit maximization
1. Profit
features
maximization is also called as cashing per
share maximization. It leads to maximize the
business operation for profit maximization
2. Ultimate aim of the business concern is earning
profit, hence, it considers all the possible ways to
increase the profitability of the concern
3. Profit is the parameter of measuring the efficiency
of the business concern. So it shows the entire
position of the business concern
4. Profit maximization objectives help to reduce the
risk of the business

03/29/17 10
Favourable Arguments for Profit
Maximization
Main aim is earning profit
Profit is the parameter of the business operation
Profit reduces risk of the business concern
Profit is the main source of finance
Profitability meets the social needs also

Unfavourable Arguments for Profit


Maximization
Profit maximization leads to exploiting workers and consumers
Profit maximization creates immoral practices such as corrupt
practice, unfair trade practice, etc
Profit maximization objectives leads to inequalities among the
sake holders such as customers, suppliers, public shareholders,
03/29/17 11
etc
Drawbacks of Profit
Maximization

(i) It is vague: In this objective, profit is not


defined precisely or correctly. It creates some
unnecessary opinion regarding earning habits of the
business concern

(ii) It ignores the time value of money: Profit


maximization does not consider the time value of money
or the net present value of the cash inflow. It leads to
certain differences between the actual cash inflow and
net present cash flow during a particular period

(iii) It ignores risk: Profit maximization does not


consider risk of the business concern. Risks may be
internal or external which will affect the overall operation
03/29/17 12
Favourable Arguments for Wealth
Maximization
1.Wealth maximization is superior to the profit
maximization because the main aim of the business
concern under this concept is to improve the value or
wealth of the shareholders
2.Wealth maximization considers both time and risk of the
business concern
3.Wealth maximization provides efficient allocation of
resources
4.It ensures the economic interest of the society as total
cost of project undertaken is compared to its value for the
organization and the society as whole

03/29/17 13
Unfavourable Arguments for Wealth
Maximization

Wealth maximization is nothing, it is also profit


maximization, it is the indirect name of the profit
maximization
Wealth maximization creates ownership-management
controversy
The ultimate aim of the wealth maximization objectives
is to maximize the profit
Wealth maximization can be activated only with the
help of the profitable position of the business concern

03/29/17 14
AGENCY PROBLEM---Management versus
Management serves as an agent to Stockholders
the stockholders
(owner)
Stockholders delegate authority to management to
act on their behalf and are expected to act in their best
interest
Managements objectives may differ from those of
stockholders
In many large corporations, where ownership is largely
diversified, the situation arises where management may
act in their own best interests rather than in the best
interests of the stockholders
Management may attempt to amass income, power
and prestige
Appropriate incentives such as stock options, bonuses
03/29/17 15
ROLE/FUNCTIONS OF FINANCE
MANAGER
Finance manager is one of the important role players in the
field of finance function. He must have entire knowledge in
the area of accounting, finance, economics and
management. His position is highly critical and analytical to
solve various problems related to finance.
1.Forecasting Financial Requirements He should
estimate, how much finances required to acquire fixed assets
and forecast the amount needed to meet the working capital
requirements in future
2. Acquiring Necessary Capital After deciding the financial
requirement, the finance manager should concentrate how
the finance is mobilized and where it will be available
3.Investment Decision The finance manager must carefully
select best investment alternatives and consider the
reasonable and stable return from the investment. He must
be well versed in the field of capital budgeting techniques to
determine the effective utilization of investment
03/29/17 16
ROLE/FUNCTIONS OF FINANCE
MANAGER Contd.

4. Cash Management Proper cash management is not


only essential for effective utilization of cash but it also
helps to meet the short-term liquidity position of the
concern
5. Interrelation with Other Departments Finance
manager deals with various functional departments such as
marketing, production, personnel, research & development,
etc. Finance manager should have sound knowledge not
only in finance related area but has to be well versed in
other areas too. He must maintain a good relationship with
all the functional departments of the business organization

03/29/17 17
IMPORTANCE OF FINANCIAL
MANAGEMENT
Financial Planning Long-term profit planning aimed at
generating greater return on assets, growth in market share,
and at solving foreseeable problems
Acquisition of Funds Financial management involves the
acquisition of required finance to the business concern.
Acquiring needed funds play a major part of the financial
management, which involve possible source of finance at
minimum cost
Proper Use of Funds Proper use and allocation of funds
leads to improve the operational efficiency of the business
concern. When the finance manager uses the funds
properly, they can reduce the cost of capital and increase
the value of the firm.
Financial Decision Financial decision will affect the entire
business operations of the concern because there is a direct
relationship with various department functions such as
marketing, production personnel, etc
03/29/17 18
IMPORTANCE OF FINANCIAL
MGMT. Contd.
Improve Profitability Financial management helps to
improve the profitability position of the concern through
effectiveness utilization of funds with the help of strong
financial control devices such as budgetary control, ratio
analysis and cost volume profit analysis
Increase the Value of the Firm Ultimate aim of any
business concern is to achieve maximum profit. Higher
profitability leads to the maximization of the wealth of
investors as well as the nation
Promoting Savings Savings are possible only when the
business concern earns higher profitability and maximizing
wealth. Effective financial management helps to promoting
and mobilizing individual and corporate savings. Nowadays

financial management is also popularly known as business


finance or corporate finances. The business concern or
corporate sectors cannot function without the importance
03/29/17 19
of the financial management.
Areas of financial Mgmt.
1. Financial Management and Economics Economic
concepts like micro and macroeconomics are directly
applied with the financial management approaches.
Financial management also uses the economic equations
like money value discount factor, economic order quantity
etc.

2. Financial Management and Accounting Accounting


records include the financial information of the business
concern. Hence, we can easily understand the relationship
between the financial management and accounting. In the
old periods, both financial management and accounting are
treated as a same discipline and then it has been merged
as Management Accounting because this part is very much
helpful to finance manager to take decisions. But
nowadays financial management and accounting discipline20
03/29/17
are separate and interrelated.
Areas of financial Mgmt.
Contd.
3. Financial Management and Mathematics Economic
order quantity, discount factor, time value of money, present
value of money, cost of capital, capital structure theories,
dividend theories, ratio analysis and working capital analysis
are used as mathematical and statistical tools and techniques
in the field of financial management
4. Financial Management and Production Management
Profit of the concern depends upon the production
performance. Production performance needs finance, because
production department requires raw material, machinery,
wages, operating expenses etc. These expenditures are
decided and estimated by the financial department and the
finance manager allocates the appropriate finance to
production department.

03/29/17 21
Areas of financial Mgmt.
Contd.
5 Financial Management and Marketing Produced
.
goods are sold in the market with innovative and
modern approaches. For this, the marketing department
needs finance to meet their requirements. The financial
manager or finance department is responsible to
allocate the adequate finance to the marketing
department
6.Financial Management and Human Resource
Financial management is also related with human
resource department, which provides manpower to all
the functional areas of the management. Financial
manager should carefully evaluate the requirement of
manpower to each department and allocate the finance
to the human resource department as wages, salary,
remuneration, commission, bonus, pension and other
monetary benefits
03/29/17 22