Prof.P.S.

Ravindra

UNIT-I
INTRODUCTION OF FINANCIAL MANAGEMENT
Nature and Scope and Objectives of Financial Management-Functions of FM- Firms Missions
and Objectives- Major decisions of financial Management-Profit Maximization Vs Wealth
Maximization Vs EPS Maximization– Role of Financial Manager in modern organizations.
INTRODUCTION TO FINANCIAL MANAGEMENT:
After getting a fairly good idea about Finance, lets, now move on to what Financial
Management is?
Financial management is a managerial activity concerned with planning and controlling
of the firm's financial resources to generate returns on its invested funds. The raising and using of
capital for generating funds and paying returns to the suppliers of capital is the finance function
of a firm. Thus the funds raised by the company will be invested in the best investment
opportunities, with an expectation of future benefits. As every business activity either directly or
indirectly involves the acquisition and use of funds, there is an inseparable relationship between
the finance and other functions like production, marketing etc. However, the raising of funds and
using of money may not necessarily limit the general running of the business. A firm in a tight
financial position will give more priority to financial considerations to devise its marketing and
production strategies in tune with its financial constraints. On the contrary, management of a
business firm, with plentiful supply of funds, will be more flexible in formulating its production
and marketing policies. In fact, the financial policies will be devised to fit the production and
marketing decisions under such a situation.
DEFINITION OF FINANCIAL MANAGEMENT:
As already discussed, the general meaning of finance refers to providing funds, as and
when needed. However, as management function, the term ‘Financial Management’ has a
distinct meaning.
Financial management deals with the study of procuring funds and its effective and
judicious utilization, in terms of the overall objectives of the firm, and expectations of the
providers of funds. The basic objective is to maximize the value of the firm. The purpose is to
achieve maximization of share value to the owners i.e. equity shareholders.
The term Financial Management has been defined, differently, by various authors. Some
of the authoritative definitions are given below:
1. “Financial Management is concerned with the efficient use of an important economic
resource, namely, Capital Funds” —Solomon
2. “Financial Management is concerned with the managerial decisions that result in the
acquisition and financing of short-term and long-term credits for the firm”
—Phillioppatus
3. “Business Finance is that business activity which is concerned with the conservation and
acquisition of capital funds in meeting financial needs and overall objectives of a business
enterprise” —Wheeler
 Prof.P.S.Ravindra

4. “Financial Management deals with procurement of funds and their effective utilization in the
business” —S.C. Kuchhal
The definition provided by Kuchhal is most acceptable as it focuses, clearly, the basic
requirements of financial management. From his definition, two basic aspects emerge:
(A) Procurement of funds.
(B) Effective and judicious utilization of funds.
Financial management has become so important that it has given birth to Financial
Management as a separate subject.
NATURE OF FINANCIAL MANAGEMENT
Financial management refers to that part of management activity, which is concerned
with the planning and controlling of firm’s financial resources. Financial management is a part of
overall management. All business decisions involve finance. Where finance is needed, role of
finance manager is inevitable. Financial management deals with raising of funds from various
sources, dependant on availability and existing capital structure of the organisation. The sources
must be suitable and economical to the organisation. Emphasis of financial management is more
on its efficient utilisation, rather than raising of funds, alone. The scope and complexity of
financial management has been widening, with the growth of business in different diverse
directions. As business competition has been increasing, with a greater pace, support of financial
management is more needed, in a more innovative way, to make the business grow, ahead of
others.
SCOPE OF FINANCIAL MANAGEMENT
Financial management is concerned with optimum utilisation of resources. Resources are
limited, particularly in developing countries like India. So, the focus, everywhere, is to take
maximum benefit, in the form of output, from the limited inputs.
Financial management is needed in every type of organisation, be it public or private
sector. Equally, its importance exists in both profit oriented and non-profit organisations. In fact,
need of financial management is more in loss-making organisations to turn them to profitable
enterprises. Study reveals many organisations have sustained losses, due to absence of
professional financial management. Financial management has undergone significant changes,
over the years in its scope and coverage.

Traditional Approach Procurement o f Funds

Scope
Modern Approach Effective Utilization o f Funds

Figure 2.1: Scope of Financial Management

 Prof.P.S.Ravindra

Traditional Approach:
The scope of finance function was treated, in the narrow sense of procurement or
arrangement of funds. The finance manager was treated as just provider of funds, when
organisation was in need of them. The utilisation or administering resources was considered
outside the purview of the finance function. It was felt that the finance manager had no role to
play in decision making for its utilisation. Others used to take decisions regarding its application
in the organisation, without the involvement of finance personnel. Finance manager had been
treated, in fact, as an outsider with a very specific and limited function, supplier of funds, to
perform when the need of funds was felt by the organisation.
As per this approach, the following aspects only were included in the scope of financial
management:
(i) Estimation of requirements of finance,
(ii) Arrangement of funds from financial institutions,
(iii) Arrangement of funds through financial instruments such as shares, debentures, bonds and
loans, and
(iv) Looking after the accounting and legal work connected with the raising of funds.
Limitations
The traditional approach was evolved during the 1920s and 1930s period and continued
till 1950. The approach had been discarded due to the following limitations:

(i) No Involvement in Application of Funds: The finance manager had not been involved in
decision-making in allocation of funds. He had been treated as an outsider. He had been ignored
in internal decision making process and considered as an outsider.
(ii) No Involvement in day to day Management: The focus was on providing long-term funds
from a combination of sources. This process was more of one time happening. The finance
manager was not involved in day to day administration of working capital management. Smooth
functioning depends on working capital management, where the finance manager was not
involved and allowed to play any role.
(iii) Not Associated in Decision-Making Allocation of Funds: The issue of allocation of funds
was kept outside his functioning. He had not been involved in decision- making for its judicious
utilisation.
Modern Approach:
Since 1950s, the approach and utility of financial management has started changing in a
revolutionary manner. Financial management is considered as vital and an integral part of overall
management.
The emphasis of Financial Management has been shifted from raising of funds to the
effective and judicious utilisation of funds. The modern approach is analytical way of looking
into the financial problems of the firm. Advice of finance manager is required at every moment,
whenever any decision with involvement of funds is taken. Hardly, there is an activity that does
not involve funds.
 Prof.P.S.Ravindra

In the words of Solomon “The central issue of financial policy is the use of funds. It is
helpful in achieving the broad financial goals which an enterprise sets for itself”. Nowadays, the
finance manger is required to look into the financial implications of every decision to be taken by
the firm. His Involvement of finance manager has been before taking the decision, during its
review and, finally, when the final outcome is judged. In other words, his association has been
continuous in every decision-making process from the inception till its end.
ROLE OF FINANCIAL MANAGEMENT
The financial management is generally concerned with procurement, allocation and
control of financial resources of a concern. Financial Management is need:
1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of capital
so that a balance is maintained between debt and equity capital.
FUNCTIONS OF FINANCIAL MANAGEMENT
The modern approach to the financial management is concerned with the solution of
major problems like investment financing and dividend decisions of the financial operations of a
business enterprise. Thus, the functions of financial management can be broadly classified into
three major decisions, namely:
(a) Investment decisions,
(b) Financing decisions,
(c) Dividend decisions.
The functions of financial management are briefly discussed as under:
A. Investment Decision
The investment decision is the most important one among the three decisions. It relates to the
selection of assets in which funds are invested by the firm. The assets, which can be acquired,
fall into two broad groups:
1. Long-term assets which will yield a return over a period of time in future,
2. Short-term/current assets which are convertible into cash in the normal course of business
usually within a year.
Accordingly, the asset selection decision of a firm is of two types. The first of these
involving the first category of assets is popularly known as capital budgeting. The other one,
which refers to short-term assets, is designated as liquidity decision/Working Capital
Management.
 Prof.P.S.Ravindra

i. Capital budgeting decision

It is the most crucial financial decision of a firm which relates to the selection of an
investment proposal whose benefits are likely to arise in future over the life-time of the project.
The first aspect of the capital budgeting decision is the choice of the investment out of the
available alternatives. The selection will be always based on the relative benefits and returns
associated with it. Therefore, the measurement of the worth of the investment proposal is a major
element in the capital budgeting decision. Another aspect of the capital budgeting decision is the
analysis of risk and uncertainty. As, the benefits from the proposed investment relate to the
future period, their accrual is uncertain. Thus, an element of risk in the sense of uncertainty of
future benefits is involved in this exercise. Therefore, the return from the proposed investment
should be evaluated in relation to the risk associated with it. Finally, this return should be judged
with a certain norm, which is referred by several names such as cut-off rate, required rate, hurdle
rate, minimum rate of return, etc. The correct standard to use for this purpose is the company's
cost of capital, which is another important aspect of the capital budgeting decision.
ii. Liquidity decision (Working Capital Management)
The liquidity decision is concerned with the management of the current assets, which is a
pre-requisite to long-term success of any business firm. The main objective of the current assets:
management is the trade - off between profitability and liquidity. There is a conflict between
these two concepts. If a firm does not have adequate working capital, it may become illiquid and
consequently fail to meet its current obligations thus inviting the risk of bankruptcy. On the
contrary, if the current assets are too large, the profitability is adversely affected. Hence, the key
strategy and the main consideration in ensuring a trade-off between profitability and liquidity is
the major objective of the liquidity decision. Besides, the funds should be invested optimally in
the individual current assets to avoid inadequacy or excessive locking up of funds in these assets.
Thus, the liquidity decision should obtain the basic two ingredients, i.e. overview of working
capital management and the efficient allocation of funds on the individual current assets.
B. Financing Decision
The second major decision of the firm is the financing decision for determining the best
financing mix of the firm.
After determining the asset-mix, the financial manager must decide the mode of raising
the funds to meet the firm's investment requirements. The major issue in this decision is to
determine the proportion of equity and debt capital. Since the involvement of debt capital affects
the return and risk of shareholders, the financial manager should get the optimal capital structure
to maximise the shareholders' return with minimum risk, in other words the cost of capital is the
lowest and the market value of the share is the highest at that combination of debt and equity.
Thus, the financing decision covers three inter-related aspects: (i) Cost of Capital (ii) Capital
Structure Decisions and (iii) Leverages.
 Prof.P.S.Ravindra

Capital Budgeting

INVESTMENT
DECISIONS
Working Capital
Management

Cost of Capital

FINANCIAL FINANCE Capital Structure

MANAGEMENT DECISIONS
FUNCTIONS

Leverages

Dividend Policy
DIVIDEND
DECISIONS

Retained Earnings

Figure 2.2: Functions of Financial Management

C. Dividend Decision
The third important decision of a firm is its dividend policy. The financial manager must
decide whether the firm should distribute all profits or retain it in the firm or distribute part and
retain the balance. The dividend decision should be taken in terms of its impact on the
shareholders' wealth. The optimum dividend policy is one, which maximizes the market value of
share. Thus, if the shareholders are not indifferent to the firm's dividend policy, the financial
manager must determine the optimum dividend-payout ratio. Another important aspect of the
dividend decision is the factors determining dividend policy of the firm in practice. The dividend
decisions must be analysed in relation to the financing decisions of the firm to determine the
portion of retained earnings as a means of direct financing for the future expansions of the firm.
To summarise, the financial management involves the solution of the three decisions of
the firm according to the modern approach. The traditional approach with a very narrow
perception was devoid of an integrated conceptual and analytical framework. In contrast the
modern approach has broadened the scope of financial management to ensure the optimum
decisions by fulfilling the objectives of the business firm.
 Prof.P.S.Ravindra

IMPORTANCE OF FINANCIAL MANAGEMENT

Finance is the lifeblood of business organization. It needs to meet the requirement of the
business concern. Each and every business concern must maintain adequate amount of finance
for their smooth running of the business concern and also maintain the business carefully to
achieve the goal of the business concern. The business goal can be achieved only with the help of
effective management of finance. We can’t neglect the importance of finance at any time at and
at any situation. Some of the importance of the financial management is as follows:
Financial Planning
Financial management helps to determine the financial requirement of the business concern and
leads to take financial planning of the concern. Financial planning is an important part of the
business concern, which helps to promotion of an enterprise.
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 management helps to take sound financial decision in the business concern. Financial
decision will affect the entire business operation of the concern. Because there is a direct
relationship with various department functions such as marketing, production personnel, etc.
Improve Profitability
Profitability of the concern purely depends on the effectiveness and proper utilization of funds by
the business concern. Financial management helps to improve the profitability position of the
concern 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
Financial management is very important in the field of increasing the wealth of the investors and
the business concern. Ultimate aim of any business concern will achieve the maximum profit and
higher profitability leads to maximize the wealth of the 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 of
the financial management.
 Prof.P.S.Ravindra

GOALS OF FINANCIAL MANAGEMENT:

Profit Maximization:
The financial management has come a long way by shifting its focus from traditional approach to
modern approach. The modern approach focuses on wealth maximization rather than profit
maximization. This gives a longer term horizon for assessment, making way for sustainable
performance by businesses.
Profit Maximization is the firm’s ability to produce the maximum return with limited input or
use the minimum input to produce the claimed result. It is termed the main objective of the
company.
Profit maximization is a company’s economic objective to increase the company’s value. This
increase in the company’s value is what shareholders and investors seek, who expect their
investment to be profitable.
In the business world, profit maximization involves considering the level of production of goods
or services faced by a particular firm and its costs. This production should be directly related to
the sales price and the company’s profits from selling these goods or services to the public.
The profit is calculated by deducting the total cost from the total revenue. Through profit
maximization, a company may be able to determine the input-output levels, which give a
tremendous amount of profit.
Profit = Revenue − Costs
Pros and Cons of Profit Maximisation
The pros of profit maximisation:
• Helps develop a business’s financial sustainability.
• Facilitates earnings growth, which can increase shareholder value.
• Promotes effective resource allocation, which improves operational efficiency.
• Enables companies to develop a strong financial foundation, which is key to surviving in
a competitive market.
The cons of profit maximisation are as follows:
• Profit maximisation strategies can often violate social responsibility and ethical
standards. Such activities can severely damage an organisation’s reputation and lead to
social or legal consequences.
• Such tactics only focus on the short term. They do not include aspects like customer
satisfaction, R&D, staff training, etc., which are essential for long-term success.
• Businesses may be tempted to go for high-risk projects in order to maximise profits,
which can result in heavy losses.
Wealth Maximization:
Wealth maximization is a company’s ability to increase the market value of its common stock
over time. The company’s market value is based on many factors, such as goodwill, sales,
services, product quality, etc.
The primary objective of the company and the highly recommended criteria is to evaluate the
organization’s performance. This will help the company increase its market share, achieve
leadership, and maintain consumer satisfaction, among other benefits.
 Prof.P.S.Ravindra

The company is also expected to increase the wealth of its shareholders, who invest in its shares
with the expectation that it will give some return after one year. This states that the company’s
financial decisions should be made in such a way as to increase the Present Net Value of the
company’s earnings.
Pros and Cons of Wealth Maximisation
The pros of wealth maximisation:
• Helps businesses focus on long-term sustainability.
• Focuses more on cash flow rather than profits. Now, cash flows are more definite,
enabling companies to avoid the ambiguity that usually comes with accounting profits.
• Takes into account the time value of money. Thus, future cash flows are discounted at an
appropriate rate in order to appropriately represent their current value.
• Considers risk and uncertainty factors while computing the discount rate, leading to more
accurate results.
The cons of following wealth maximisation strategies are as follows:
• Largely depends on a business’s profits.
• Wealth-maximising tactics are mostly prospective; they lack proper description and
clarity.
• It can make other business goals suffer.

Difference Between Profit Maximisation And Wealth Maximisation

Factors Profit Maximisation Wealth Maximisation
Motive Maximising a company’s Maximising the wealth of
profits. shareholders.
Strategy Time Period Short term Long term
Maximisation Procedure Increasing the business’s Enhancing stock value for
earning capacity. stakeholders and shareholders.
Main Focus Increasing a company’s Improving the business’s share
capacity to generate maximum price.
returns with the minimum
input.
Time Value of Money Does not acknowledge the Considers the time value of
time value of money. money.
SHAREHOLDER’S WEALTH MAXIMIZATION Vs STAKEHOLDER WELFARE:
Stakeholder’s welfare is a superior corporate goal over shareholder’s wealth
maximization. Stakeholder’s welfare looks after all the factors responsible for its success
whereas the wealth maximization as an objective overemphasizes the importance of money
provider i.e. shareholders.
Shareholder’s wealth maximization is a well accepted corporate objective in almost
whole the world barring a few exceptions. Indisputably, it is a superior and healthier goal
compared to profit maximization which was lacking a long term perspective. Apart from
shareholders, there are various parties which are affected by a business conducted by an
organization viz. employees, customers, suppliers, communities etc. Wealth maximization as a
corporate goal does not mention concerns of any of these parties except shareholders. Hence,
stakeholder’s welfare is evolving as a further improved and wider corporate objective.
 Prof.P.S.Ravindra

Should a manager take decision only for shareholders and neglect the interest of all the
other stakeholders? Let us think the other way round. How a manager is able to maximize wealth
and welfare of shareholders? It is only with the support of all the other stakeholders. If the
supplier does not supply good raw material, can managers produce good quality products? If the
employee does not work efficiently, can the managers alone do everything? If the customers are
provided low quality goods, will they continue buying them? Answer to all these questions is a
clear “No”.
If we see, there is a simple math. The management is able to serve the shareholder’s
objective with the help of other stakeholders of the business and stakeholders are also not doing
it for charity. Naturally they would also look for their wellbeing. If their objective is not fulfilled,
sooner or later their interest in working with the organization will be lost and they may mend
their way. Without welfare of the stakeholders, shareholder’s wealth creation is not possible.
In different countries, different culture is adopted. In US, UK etc, wealth maximization of
shareholders is the main corporate objective whereas in countries like Germany, interest of the
workers is given first priority. In Japanese companies, employees and customers are kept at par
with shareholders.
Have we seen a tree where only one branch is grown and rest remain as it is? When a tree
grows, all its branches grow. Wealth maximization as a sole objective resembles the first
situation which is not practical and possible whereas the stakeholder’s including shareholders
welfare resembles the second situation which is natural and healthier.
Growth and development of a business has a number of requirements and not only the
money. Shareholders only provide money and rest is provided by the other stakeholders of the
business. When the input required for growth is shared by all the stakeholders, the outcome in
the form of wealth and welfare should also be shared among all the stakeholders.
MAXIMIZING Vs SATISFYING
Maximizing seeking the maximum level of returns, even though this might involve
exposure to risk and much higher management workloads.
Satisfying finding a merely adequate outcome, holding returns at a satisfactory level,
avoiding risky ventures and reducing workloads.
Within a company, management might seek to maximise the return to some groups (e.g.
shareholders) and satisfy the requirements of other groups (e.g. employees).
The distinction between satisfying and maximizing not only differs in the decision-
making process, but also in the post-decision evaluation. Maximizers tend to use a more
exhaustive approach to their decision-making process: they seek and evaluate more options than
satisfiers do to achieve greater satisfaction. However, whereas satisfiers tend to be relatively
pleased with their decisions, maximizers tend to be less happy with their decision outcomes. This
is thought to be due to limited cognitive resources people have when their options are vast,
forcing maximizers to not make an optimal choice. Because maximization is unrealistic and
usually impossible in everyday life, maximizers often feel regretful in their post-choice
evaluation.
 Prof.P.S.Ravindra

FIRM’S MISSION AND OBJECTIVES

“Essential purpose of the organisation, concerning particularly why it is in existence, the
nature of the business it is in, and the customers it seeks to serve and satisfy”
“Purpose of reason for the organization’s existence” is called Mission
In short the Mission describes the product, market and technological areas of emphasis
for the business.
Need for an explicit Mission:
• To ensure unanimity of purpose within the organisatin
• To provide a basis for motivating the use of the organizations resources
• To develop a basic, or standard, for allocating organizational resources.
• To establish a general tone or organization climate.
• To serve as a focal point for those who can identify with the organization’s purpose and
direction.
Mission Statement:
“A Mission statement is an enduring statement of purpose that distinguishes one firm
from other similar firm”
Every business comes into existence to serve a purpose. Some businesses seek to fill an
essential gap in local services while others aim to replace or cut into the market share of existing
businesses. In every case, an overriding mission drives the business. The purpose of a mission
statement is to give a concise explanation of the business's reason for existing and its long-term
goals. The exact form of a mission statement can vary, but effective mission statements typically
include nine elements.
1. Function: The mission statement needs to include some description of the function of the
business. For example, "to promote industrial excellence," tells customers and employees
nothing. A more effective description would be "To provide management consulting services."
2. Target Consumers: An effective mission statement sets out, in broad terms, the target market.
A manufacturer that makes nuts and bolts might set its target market as retail hardware stores,
machine manufacturers, or both.
3. Target Region: The business must determine what region it serves best and relay that
information by way of the mission statement. A garage, for example, might limit its target region
to the community while a magazine company might target an entire country.
4. Values: Mission statements typically include a statement of company values. Values such as
customer service, efficiency and eco-consciousness often appear on lists of company values. At
their best, company values should express principles the company explicitly tries to affirm in
day-to-day operations.
5. Technology: For businesses that rely heavily on technology, the mission statement should
include a description of the essential technology the company does or plans to employ. If nothing
else, this directs purchasing agents toward the appropriate vendors for goods and services.
6. Employees: Every company has a policy regarding its relationship with employees. A mission
statement provides an opportunity to describe that policy in brief so employees know the
essentials of where they stand.
 Prof.P.S.Ravindra

7. Strategic Positioning: Effective mission statements also include a brief description of the
business's strategic position within the market. For example, the company might excel at serving
residential clients and seek to maximize that strategic advantage.
8. Financial Objectives: For for-profit ventures, businesses require clear financial objectives. A
start-up company might set one of its financial objectives as making an initial public offering of
common stock within two years. This lets the employees and potential investors know the
company intends to go public, with all of the legal and record keeping ramifications that entails.
9. Image: Like people, companies develop public images. Careful companies craft the public
image they want to establish and lay out the major features of it in the mission statement. This
helps manager’s direct employees that stray from the sanctioned public image.
Objectives of a Firm
Firm’s objectives are the goals, aims or purpose of the business. The business tries to
achieve these goals. Profit is the main objective of business. However, the business cannot have
only one objective. This is because it has to satisfy different groups such as shareholders,
employees, customers, creditors, etc. So, it has to fix objectives for each group
According to Louis Allen, "Objectives are goals established to guide the efforts of the company
and each of its components.
According to Dalton E. McFarland, "Objectives are the goals, aims or purposes that organisation
wish to achieve over varying period of time."
Characteristics of Firm’s/Business Objectives:
1. Multiplicity of Objectives: Business objectives are multiple in character. That is, a business
does not have only one objective. It has many or multiple objectives. This is because a business
has to satisfy different groups, i.e. shareholders, employees, customers, creditors, vendors,
society, etc. The business has to fix different objectives for each group.
2. Hierarchy of Objectives: Hierarchy means to write down the objectives according to their
importance. The most important objective is written first, and the least important objective is
written last. All objectives are important. However, some objectives are more important than
others. Some objectives need immediate action while others can be kept aside for some time.
3. Periodicity of Objectives: Based on period, business objectives can be classified into two
types, viz.,
• Short-term objectives, and
• Long-term objectives.
The short-term objectives are made for a short-period, i.e. maximum one year. Short-term
objectives are more specific.
The long-term objectives are made for a long-period, i.e. for five years or more. Long-
term objectives are more general. They are like a Master Plan.
4. Flexibility of Objectives: The business is flexible. Therefore, the business objectives must
also be flexible. If the objectives are rigid, the business will not survive. This is because the
business environment keeps on changing. There are continuous changes in the technical, social,
economic and political environment. The business has to change its objectives according to the
 Prof.P.S.Ravindra

changes in the business environment. The hierarchy of objectives must also be changed from
time to time.
5. Qualitative and Quantitative Objectives: There are two types of objectives, viz., Quantitative
and Qualitative objectives.
Quantitative objectives are easy to measure. It is expressed in numbers. For e.g. in
Dollars, Rupees, Percentage, etc. Quantitative objectives are visible, tangible and countable.
Qualitative objectives are not easy to measure. It is not expressed in numbers. For e.g.
Employee performance, employee satisfaction, etc. These objectives cannot be measured.
Qualitative objectives are invisible, intangible and uncountable.
Today modern methods are used to measure qualitative objectives. A business must have both
quantitative and qualitative objectives.
6. Measurability of Objectives: The objectives must be clear and specific. It must be easy to
measure. For e.g. Each salesman must sell 100 units of water purifier per month. This is a clear
and specific objective. It is easy to measure the performance of the salesman. If a salesman sells
200 units of water purifier in a month then his performance is good. He can be given bonus and
promotion. However, if a salesman sells only 10 units of water purifier in a month then his
performance is bad. He needs more training. Measurable objectives motivate the employees to
work hard. This is because they know their target clearly. Their performance can also be
measured easily.
7. Network of Objectives: Network means an interconnection between different objectives. A
business has many different objectives, viz., corporate objectives, departmental objectives,
sectional objectives and individual objectives. It also has objectives for shareholders, customers,
employees, etc. All these objectives must be interconnected. They must support each other. They
must not clash with each other. They must move in the same direction. If not, the business will
not survive. Similarly, the objectives of all the departments, must support each other. They must
not clash or conflicts will each other.
ROLE OF FINANCE MANAGER
Financial activities of a firm is one of the most important and complex activities of a
firm. Therefore in order to take care of these activities a financial manager performs all the
requisite financial activities.
A financial manger is a person who takes care of all the important financial functions of
an organization. The person in charge should maintain a far sightedness in order to ensure that
the funds are utilized in the most efficient manner. His actions directly affect the Profitability,
growth and goodwill of the firm. Following are the main functions of a Financial Manager:
1. Estimation of Capital requirements: A finance manager has to make estimation with regards
to capital requirements of the company. This will depend upon expected costs and profits and
future programmes and policies of a concern. Estimations have to be made in an adequate
manner which increases earning capacity of enterprise.
2. Determination of Capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity analysis. This
will depend upon the proportion of equity capital a company is possessing and additional funds
which have to be raised from outside parties.
 Prof.P.S.Ravindra

3. Choice of sources of funds: For additional funds to be procured, a company has many choices
like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and period of
financing.
4. Disposal of surplus: The net profits decisions have to be made by the finance manager. This
can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other benefits like
bonus.
b. Retained profits - The volume has to be decided which will depend upon expansional,
innovational, diversification plans of the company.
5. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries, payment
of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of
enough stock, purchase of raw materials, etc.
6. Financial controls: The finance manager has not only to plan, procure and utilize the funds
but he also has to exercise control over finances. This can be done through many techniques like
ratio analysis, financial forecasting, cost and profit control, etc.
7. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.