Financial management is an integrated

decisionmaking process, concerned with

acquiring,managing and financing assets to
accomplishoverall goals within a business entity.

Speaking differently, it is concerned with

makingdecisions relating to investments in long
termassets, working capital, financing of assets
and soon.
What is Financial Management?
Financial management capacity is a cornerstone of
organizational excellence.

Financial management pervades the whole organization

as management decisions almost always have financial
implications.
Meaning of Financial Management
Financial management entails planning for the future of
a person or a business enterprise to ensure a positive cash
flow, including the administration and maintenance of
financial assets.

The primary concern of financial management is the

assessment rather than the techniques of financial
quantification.

Some experts refer to financial management as the

science of money management.
Scope / Elements of Financial
Management :

1. Financial Decisions

2. Investment Decisions

3. Dividend Decisions
Investment Decisions:

This decision relates to the careful selection of assets in

which funds will be invested by the firm. It Involves buying,
holding, reducing, replacing, selling & managing assets.

Common questions involving Investments include:

In what lines of business should the firm engage?

Should the firm acquire other companies?
What sort of property, plant, equipment should the firm
hold?
Should the firm modernise or sell an old production
facility?
Since the future is uncertain therefore there are difficulties in
calculation of expected return. 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. It wise decisions to decompose depreciated
assets which are not adding value and utilize those funds in
securing other beneficial assets.
Financing Decisions:
Financing decisions involve the acquisition of funds needed to
support long-term investments.

While taking this decision, financial management weighs the

advantages and disadvantages of the different sources of finance.

The business can either finance from its shareholder funds which
can be subdivided into equity share capital, preference share
capital and the accumulated profits.

Borrowings from outsiders include borrowed funds like

debentures and loans from financial institutions.
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. Other than equity
and debt there are several other tools which are used in deciding a
firm capital structure.

Finance functions/Decisions are divided into

• Long term decisions

• Short term decisions

 Long-term finance functions or decisions have a longer time
horizon, greater than a year

 Affect the firm’s performance and value in the long run

 Relate to the firm’s strategy

 Involve senior management in taking the final decision

Investment Decisions:

This decision relates to the appropriation of profits earned. The

two major alternatives are to retain the profits earned or to
distribute these profits to shareholders.

While declaring dividend, a large number of considerations are

kept in mind such as:
Trend of earnings
Stability in dividends
The trend of share market prices
The requirement of funds for future growth
The cash flow situation
Restrictions under the Companies Act
The tax impact on shareholders etc.
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. Other than equity
and debt there are several other tools which are used in deciding a
firm capital structure. Important aspects of Investment decision :-
 Involve capital expenditures

 Referred as capital budgeting decisions

 Decision of allocation of capital to long term assets that would yield

benefits (cash flows) in the future

 Evaluation of the prospective profitability of new investments

 Measurement of a cut-off rate against which the prospective return

on new Investments could be compared
Functions of Financial Mangement / Manager:
1. Estimation of Capital Requirement: Estimation depends upon expected
costs, profits, future programs and policies of a firm. Estimation must be
adequate, as it can increase the earning capacity of the firm. 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: It is based on long term-short

term debt equity analysis. This will depend upon the proportion of equity
capital a company is processing and additional funds which have to be
raised from outside parties. 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.

3. Choice of sources of funds: Choice of funds depend upon the relative

merits and demerits of each resource. Various sources of funds are:

 Issue of shares and debentures

 Loans to be taken from banks and financial institutions
 Public deposits to be drawn, like in the form of bonds

Choice of factor will depend on relative merits and demerits of each

source and period of financing.
4. Investment of Funds: Financial Manager has to decide to allocate
funds into profitable ventures so that there is safety on investment
and regular returns are possible.

5. Disposal of surplus: It refers to the decisions on the net profits made

about the dividend declaration and retained earnings. The net
profits decision 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.
6. Management of cash: The Financial manager has to make
decisions with regards to cash management. It is required for many
purposes like payment of wages and salaries, bills, creditors,
maintenance of stock, raw materials, etc.

7. Financial Control: Financial Manager not only has to plan, procure

and utilize 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.
Objectives of financial management
The term ‘objective’ refers to a goal or decision for taking financial decisions.

Profit Maximisation

The term profit maximisation is deep rooted in the economic theory.

It is need that when firms pursue the policy of maximising.

Society’s resources are efficiently utilised.

It makes allocation of resources to profitable and desirable areas.

It also ensures maximum social welfare.

Alternative to profit maximization which solves all those problems

The objective is considered as consistent with the survival goal and with the
personal objectives of managers such as recognition, power, status and personal
wealth

SWM maximizing the net present value of a course of action to shareholders

Net Present Value (NPV) or wealth of a course of action is the difference

between the present value of its benefits and present value of its cost

A financial action that has a positive NPV creates wealth for shareholders and
therefore is desirable
A financial action resulting in negative NPV should be rejected since it
would destroy shareholders wealth

Between mutually exclusive projects, the one with the highest NPV
should be adopted.NPV’s of a firm projects are additive in nature. That is
NPV(A)+ NPV(B) = NPV(A+B).

This is refered to as the principle of value- additivity

Merits of Profit Maximization

 Best Criterion on decision making.

 Efficient allocation of resources.

 Optimum utilization.
Drawbacks of Profit Maximization

 It ignores time value of money.

 It is vague conceptually.

 It ignores the risk factor.

 It may tempt to make such decisions which may in the

long run prove disastrous. S Its emphasis is generally on
Short run projects.

 In the new business environment Profit maximization is

regarded as unrealistic, difficult, inappropriate and
immoral.
 Wealth Maximisation

Wealth maximization is also known as value or net present

worth maximization. It should satisfy all three requirement, i.e.
exactness, quality and money value of time.

The technical flaws of Wealth Maximization are:

1. Focus on Stakeholders : Stakeholders include groups of

employees, investors and stakeholders which are directly
related to the firm.

2. EVA (EconomicValueAdded) : EVA is equal to after tax

operating benefits of a firm less the cost of the firm
Merits of Wealth Maximization

 It focuses on the long term.

 It takes into account the time value of money.

 It considers risk.

 It maintains market price of the shares of the

organization.

 It recognizes the value of regular dividend payments.

 Conflict
Profit Maximization Wealth Maximization
o Its main objective is to earn large o Its main objective is to achieve
amount of profits. highest market value of common
stock.
o It emphasizes short term. o It emphasizes long term
o It ignores time value of money. o It considers time value of money.
o It ignores risk and uncertainty. o It recognizes risk and uncertainty.
o It ignores timing of return o It recognizes the timings of return.
Other Objectives:

To ensure regular and adequate supply of funds to the concern.

To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.

To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.

To ensure safety on investment, i.e, funds should be invested in safe ventures so that
adequate rate of return can be achieved.

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.
Conclusion
Financial Management is the mixture of
financial planning, administration and
control.

Financial corporation deals with how

corporation obtains the funds and how
corporation allocates that funds.