FINANCIAL MANAGEMENT – DETAILED NOTES
1. Meaning & Definition
Financial management is the planning, organizing, directing, and controlling of financial activities
such as procurement and utilization of funds in an enterprise. It applies general management
principles to financial resources to achieve the organization’s objectives.
Definitions:
- Guthman & Dougal: “Financial management is the activity concerned with the planning, raising,
controlling, and administering of funds used in the business.”
- Howard & Upton: “Financial management is the application of planning and control functions to the
finance function.”
2. Objectives of Financial Management
Primary Objective – Wealth Maximization: Increase shareholders’ value by maximizing market price
of shares.
Secondary Objectives:
- Ensure profitability and growth.
- Maintain liquidity for smooth operations.
- Minimize cost of capital.
- Manage risks effectively.
- Ensure proper use of funds.
3. Functions of Financial Management
A. Executive Functions:
1. Investment Decision (Capital Budgeting)
2. Financing Decision
3. Dividend Decision
4. Liquidity Decision
B. Routine Functions:
- Maintaining cash flows
- Handling receipts and payments
- Record keeping and reporting
- Managing credit policies and collections
4. Scope of Financial Management
- Financial Planning
- Capital Structure Management
- Capital Budgeting
- Working Capital Management
- Financial Control
5. Importance of Financial Management
- Ensures adequate funds
- Maximizes wealth and profitability
- Aids investment decision-making
- Maintains financial discipline
- Supports long-term growth
6. Capital Structure
Meaning: Proportion of debt, preference capital, and equity in total capital.
Factors Affecting: Cost of capital, risk level, control considerations, cash flow position, flexibility &
stability.
Theories: Net Income Approach, Net Operating Income Approach, Modigliani-Miller Theory,
Traditional Approach
7. Capital Budgeting
Definition: Evaluating and selecting long-term investments consistent with the firm's goal of wealth
maximization.
Techniques: Payback Period, ARR, NPV, IRR, Profitability Index.
Importance: Reduces risk, ensures optimal use of resources, aligns investments with strategic
goals.
8. Working Capital Management
Working Capital = Current Assets – Current Liabilities.
Types: Permanent & Temporary.
Determinants: Nature of business, production cycle, seasonal variations, credit policy.
Techniques: Cash budgeting, inventory control, receivables management.
9. Cost of Capital
Meaning: Minimum rate of return to maintain market value.
Types: Explicit, Implicit, Specific, Weighted Average (WACC).
Importance: Used in investment appraisal, capital structure, performance evaluation.
10. Dividend Policy
Factors: Earnings stability, liquidity, growth opportunities, shareholder preferences, legal
constraints.
Theories: Walter’s Model, Gordon’s Model, Modigliani-Miller Hypothesis.
11. Financial Planning
Meaning: Estimation of capital requirements and deciding sources.
Features: Simple, flexible, based on forecasting.
Steps: Forecasting requirements, determining capital structure, framing policies, ensuring control.
12. Risk Management in Finance
Types: Market Risk, Credit Risk, Liquidity Risk, Operational Risk.
Tools: Hedging, diversification, insurance, derivatives.
13. Financial Control Tools
Budgetary Control, Ratio Analysis, Break-even Analysis, Cash Flow Statements.
14. Role of Financial Manager
Decision-making in investment, financing, and dividend.
Ensuring legal compliance.
Communication with stakeholders.
Strategic planning for growth.
15. Recent Trends in Financial Management
Fintech innovations, Green finance, Behavioral finance, AI-driven analytics, ESG investing.
