(Unit – I)

FINANCIAL MANAGEMENT
Meaning:- Financial Management means planning, organizing, directing and
controlling the financial activities such as procurement and utilization of funds of
the enterprise.

According to Dr. S. N. Maheshwari, "Financial management is concerned with

raising financial resources and their effective utilization towards achieving the
organizational goals."

Thus, financial management means:

• To collect finance for the company at a low cost and

• To use this collected finance for earning maximum profits.

It is clear that financial management is that specialized activity which is

responsible for obtaining and affectively utilizing the funds for the efficient
functioning of the business and, therefore, it includes financial planning, financial
administration and financial control.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and

control of financial resources of a concern. The objectives can be

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.
 Nature of financial management

1. Planning and Decision-Making:

 Financial Planning:
This involves forecasting future financial needs, determining the optimal capital
structure, and developing strategies to acquire and manage funds.
 Investment Decisions:
Financial managers assess and select profitable investment opportunities, such as
purchasing new equipment, expanding into new markets, or investing in research
and development.
 Financing Decisions:
This involves choosing the best sources of funding for the business, whether it's
through debt (loans, bonds) or equity (issuing stock).
 Dividend Decisions:
These decisions relate to how much of the company's profits should be distributed
to shareholders as dividends and how much should be retained for future growth.
2. Resource Allocation and Control:
 Efficient Resource Allocation:
Financial management ensures that resources (capital, human resources, and
operational resources) are used effectively to achieve financial goals.
 Financial Control:
This involves monitoring financial performance, comparing it against plans, and
taking corrective actions to stay on track.
 Budgetary Control:
Creating and managing budgets to control spending and ensure resources are used
efficiently.
 Performance Management:
Tracking key financial metrics and using them to assess the company's overall
performance.
 3. Risk Management:
 Risk and Return Trade-off:
Financial management recognizes that every financial decision involves a trade-
off between potential risk and potential return.
 Managing Financial Risk:
This includes identifying, assessing, and mitigating various financial risks, such
as interest rate risk, exchange rate risk, and credit risk.
4. Interdependence with Other Functions:
 Integration with Other Business Functions:
Financial management is closely linked to other business functions, such as
marketing, operations, and human resources, as financial decisions impact all
areas of the business.
 Utilizing Accounting Information:
Financial management relies heavily on accounting information to analyze
financial data and make informed decisions.
5. Maximizing Value:
 Shareholder Wealth Maximization:
The primary goal of financial management is to maximize the value of the
company for its owners (shareholders).
 Stakeholder Value:
While shareholder wealth is a key focus, financial management also considers the
interests of other stakeholders, such as employees, customers, and the
community.
In essence, financial management is a dynamic and strategic process that guides a
company's financial decisions to achieve its objectives, maximize value, and
ensure its long-term sustainability

Scope of Financial Management

1. Investment Decisions:
 Determining how to allocate funds to acquire long-term assets (like property, plant,
and equipment) and short-term assets (like inventory and accounts receivable).
 Evaluating the profitability and risk associated with different investment
opportunities.
 Choosing the most profitable and efficient projects for the business.
2. Financing Decisions:
 Determining the optimal mix of debt and equity financing to minimize the cost of
capital.
 Raising funds from various sources like loans, bonds, and equity offerings.
 Managing relationships with lenders and investors.
3. Dividend Decisions:
 Deciding how much of the company's profits to distribute to shareholders as
dividends and how much to retain for reinvestment in the business.
 Balancing the needs of shareholders for current income with the company's need
for future growth.
4. Working Capital Management:
 Managing the company's short-term assets (like cash, inventory, and accounts
receivable) and short-term liabilities (like accounts payable).
 Ensuring the company has sufficient liquidity to meet its short-term obligations.
 Optimizing the use of current assets to maximize profitability and minimize the
risk of insolvency.
5. Financial Analysis and Planning:
 Analyzing financial statements to assess the company's financial performance and
identify areas for improvement.
 Developing financial plans and forecasts to guide the company's future direction.
 Monitoring financial performance against established goals and making necessary
adjustments.
6. Risk Management:
 Identifying, assessing, and mitigating financial risks.
 Developing strategies to protect the company's assets from potential losses.
 Ensuring the company's financial stability in the face of economic uncertainty.
7. Profitability and Wealth Maximization:
 Ensuring that the company is generating sufficient profits to meet its obligations
and provide a return to its shareholders.
 Ultimately, maximizing the long-term value of the company for its owners.

PROFIT V/S WEALTH MAXIMISATION

Finance Functions

Finance functions can be divided into three major decisions, which the firm must
make, namely investment decision, finance decision, and dividend decision. Each
of these decisions must be considered in relation to the objective of the firm: an
optimal combination of the three decisions will maximize the value of the share to
its shareholders –

Investment Decision -One of the most important finance functions is to

intelligently allocate capital to long term assets. This activity is also known as
capital budgeting. It is important to allocate capital in those long term assets so as
to get maximum yield in future. Following are the two aspects of investment
decision –

a. Evaluation of new investment in terms of profitability.

b. Comparison of cut off rate against new investment and prevailing investment.

Since the future is uncertain therefore there are difficulties in calculation of

expected return. Along with uncertainty comes the risk factor which has to be
taken into consideration.

Therefore while considering investment proposal it is important to take into

consideration both expected return and the risk involved.

Investment decision not only involves allocating capital to long term assets but
also involves decisions of using funds which are obtained by selling those assets
which become less profitable and less productive.

Financial Decision

Financial decision is yet another important function which a financial manger must
perform. It is important to make wise decisions about when, where and how should
a business acquire funds. Funds can be acquired through many ways and channels.
Broadly speaking a correct ratio of an equity and debt has to be maintained. This
mix of equity capital and debt is known as a firm’s capital structure.

A firm tends to benefit most when the market value of a company’s share
maximizes this not only is a sign of growth for the firm but also maximizes
shareholders wealth. On the other hand the use of debt affects the risk and return of
a shareholder. It is more risky though it may increase the return on equity funds. A
sound financial structure is said to be one which aims at maximizing shareholders
return with minimum risk. In such a scenario the market value of the firm will
maximize and hence an optimum capital structure would be achieved.

Dividend Decision

Earning profit or a positive return is a common aim of all the businesses. But the
key function a financial manger performs in case of profitability is to decide
 whether to distribute all the profits to the shareholder or retain all the profits or
distribute part of the profits to the shareholder and retain the other half in the
business. It’s the financial manager’s responsibility to decide an optimum dividend
policy which maximizes the market value of the firm. Hence an optimum dividend
payout ratio is calculated.

ROLES AND RESPONSIBILITIES OF A FINANCIAL MANAGER

Financial Reporting & Analysis:

 Preparing financial statements:
This includes balance sheets, income statements, and cash flow statements to
provide a snapshot of the company's financial position.
 Analyzing financial data:
Evaluating financial reports to identify trends, variances, and areas for
improvement.
 Forecasting and budgeting:
Developing financial projections and budgets to plan for future financial
performance.
 Reporting to management and stakeholders:
Communicating financial performance and trends to relevant parties.
Investment Management:
 Evaluating investment opportunities: Analyzing potential investments to
maximize returns.
 Managing investments: Overseeing investments and making adjustments as
needed to achieve financial goals.
 Ensuring compliance: Adhering to all relevant regulations and standards
regarding investments.
Financial Planning & Risk Management:
 Developing strategic plans: Creating long-term financial plans to support
business goals.
  Managing financial risks: Identifying, assessing, and mitigating financial risks.
 Developing financial strategies: Implementing strategies to achieve financial
goals and optimize financial performance.
Compliance and Other Responsibilities:
 Ensuring regulatory compliance: Adhering to tax laws, accounting standards,
and other regulations.
 Working with external auditors: Collaborating with auditors to ensure
compliance and accuracy of financial reporting.
 Providing financial guidance: Offering financial advice to other departments
within the company.
 Managing cash flow: Monitoring and managing cash inflows and outflows to
ensure sufficient liquidity.

FUNCTIONS OF A FINANCIAL MANAGER

1. Financial Planning and Analysis:
 Developing financial strategies:
Creating plans to achieve the company's financial goals, including revenue
targets, expense management, and profitability.
 Budgeting and forecasting:
Preparing budgets, forecasting future revenues and expenses, and monitoring
performance against these plans.
 Analyzing financial data:
Examining financial statements, identifying trends, and assessing the financial
health of the organization.
2. Investment Management:
 Evaluating investment opportunities:
Assessing potential investment projects and making recommendations on whether
to proceed.
 Managing capital structure:
 Determining the optimal mix of debt and equity financing to minimize the cost of
capital and maximize shareholder value.

 Overseeing investments:
Managing the company's investment portfolio and ensuring it aligns with the
company's financial goals.
3. Risk Management:
 Identifying financial risks: Assessing potential threats to the company's financial
stability, such as market volatility, currency fluctuations, or credit risk.
 Developing risk mitigation strategies: Creating plans to minimize the impact of
these risks.
4. Funding and Financing:
 Securing funding:
Identifying and securing the necessary funding for operations and investments,
including loans, equity financing, and other sources.
 Managing relationships with lenders and investors:
Maintaining relationships with banks, investors, and other financial institutions.
5. Compliance and Reporting:
 Ensuring compliance with financial regulations:
Adhering to all applicable laws and regulations related to financial reporting and
other financial activities.
 Preparing financial reports:
Creating accurate and timely financial statements for internal and external
stakeholders.
6. Other Key Functions:
 Supervising finance staff:
Managing and mentoring the finance team, ensuring they have the necessary
skills and resources.
 Advising senior management:
 Providing financial insights and recommendations to senior executives on
strategic decisions.

 Optimizing financial performance:

Continuously seeking ways to improve the company's financial performance and
profitability.
In essence, financial managers are crucial for ensuring the financial health and
success of an organization by effectively managing its financial resources and
making sound financial decision