BBA III. - Module-1 FM

BBA III- SEM.
FINANCIAL MANAGEMENT
MR. RASHMIRANJAN PANIGRAHI
(LECTURE IN FINANCE, ASMIT)
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BBA - III- (206) - FINANCIAL MANAGEMENT
1.1 Meaning of Financial Management
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
The most popular and acceptable definition of financial management as given by-:
S. C. Kuchal is that Financial Management deals with procurement of funds and their
effective Utilization in the business.

According to Dr. S. N. Maheshwari,-:"Financial management is concerned with raising
financial resources and their effective utilization towards achieving the organizational goals.
1.2 Types Of Finance
Finance is one of the important and integral part of business concerns, hence, it plays a major
role in every part of the business activities. It is used in all the area of the activities under the
different names.
Finance can be classified into two major parts
Finance

Private Finance Public Finance

Individual Partnership Business Central State Semi
Finance Finance Finance Government Government Government

Private Finance, which includes the Individual, Firms, Business or Corporate Financial
activities to meet the requirements.
Public Finance which concerns with revenue and disbursement of Government such as
Central Government, State Government and Semi-Government Financial matters.

1.2.1 BUSINESS FINANCE
According to the Wheeler, Business finance is that business activity which is concerned with
the acquisition and conservation of capital funds in meeting financial needs and overall
objectives of business enterprises.
There are three As in Financial Management.
- Anticipating Financial needs
- Acquiring Financial Resources

BBA III- SEM. FINANCIAL MANAGEMENT
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- Allocating funds in business
Finance can be classified into two major parts:
Private Finance, which includes the Individual, Firms, Business or Corporate Financial
activities to meet the requirements.
Public Finance which concerns with revenue and disbursement of Government such as
Central Government, State Government and Semi-Government Financial matters.

Approaches To Finance Function
Traditional Approach
Modern Approach
Traditional Approach
The traditional approach, which was popular in the early stage, limited the role of
financial management to raising and administering of funds needed by the corporate
enterprises to meet their financial needs. It deals with the following aspects.
Arrangement of funds from financial institutions
Arrangement of funds through financial instruments like share, bonds etc.
Looking after the legal and accounting relationship between a corporation and its
sources of funds.
Main limitations of Traditional Approach
Outsider-looking-in-approach
Ignored routine problems
Ignored non-corporate enterprise.
Ignored working capital financing
No Emphasis on allocation of funds
Time value of money is not considered.

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Modern Approach
According to the modern approach the term financial management provides a conceptual and
analytical framework for financial decision making. That means, the finance function covers
both acquisition of funds as well as their allocation. This new approach views the term
financial management in a broader sense. It is viewed as an integral part of overall
management.

The modern approach of financial Management can be divided into four major decisions as
function of finance:
- The investment decision
- The financial decision
- The dividend policy decision
- The funds requirement decision

Investment Decisions
This is concerned with the allocation of capital. It has to show the funds can be invested in
assets which would yield benefit in future. This is a decision based on risk and uncertainty.
Finance Manager has to evaluate the investment in relation to their expected results and risk to
determine.whether.the.investment.is.feasible.o.rnot.

Financial Decisions
This decision is concerned with the mobilization of finance for investment. The Finance
Manager has to take the decisions regarding the acquisition of finance. Whether entire capital
required should be raised in the form of equity capital or the amount should be borrowed
totally or a balance should be struck between equity and borrowed capital has to be decided.
Even the timing of acquisition of capital should also be perfectly made.

Dividend Decision
The dividend decision involves the determination of the percentage of profit earned by the
enterprise which is paid to the shareholders. The dividend payout ratio must be evaluated in
the light of the objective of maximizing shareholders wealth. Thus, the dividend decision has
become a vital aspect of financial decision.

Current Assets Management/ Funds Requirement Decision
The Finance Manager should also manage the current assets to have liquidity in the business.
Investment of funds in current assets reduces the profitability of the firm. However the finance
manager should also equally look after the current financial needs of the firm to maintain
optimum production. While investing in current assets, he should see that proper trade off is
maintained between the profitability and liquidity.

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Q.NO. 1 - What do you mean by business finance? Discuss the various approaches to
finance function? (2011)
1.3 SCOPE OF FINANCIAL MANAGEMENT
Financial management is one of the important parts of overall management, which is directly
related with various functional departments like personnel, marketing and production.
Financial management covers wide area with multidimensional approaches. The following are
the important scope of financial management.
1. Financial Management and Economics
Economic concepts like micro and macroeconomics are directly applied with the financial
management approaches. Investment decisions, micro and macro environmental factors are
closely associated with the functions of financial manager. Financial management also uses the
economic equations like money value discount factor, economic order quantity etc. Financial
economics is one of the emerging area, which provides immense opportunities to finance, and
economical areas.
2. Financial Management and Accounting
Accounting records includes the financial information of the business concern. Hence, we can
easily understand the relationship between the financial management and accounting. In the
olden 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 now a days financial management and accounting
discipline are separate and interrelated.
3. Financial Management or Mathematics
Modern approaches of the financial management applied large number of mathematical and
statistical tools and techniques. They are also called as econometrics. 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
Production management is the operational part of the business concern, which helps to
multiple the money into profit. 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. The financial manager must be aware of the operational
process and finance required for each process of production activities.

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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.
Hence, marketing and financial management are interrelated and depends on each other.

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 to the human resource department. Hence, financial management is
directly related with human resource management.

Financial management has a wide scope. According to Dr. S. C. Saxena, the scope of
financial management includes the following five 'A's.
Anticipation: Financial management estimates the financial needs of the company. That is, it
finds out how much finance is required by the company.
Acquisition: It collects finance for the company from different sources.
Allocation: It uses this collected finance to purchase fixed and current assets for the company.
Appropriation: It divides the company's profits among the shareholders, debenture holders,
etc. It keeps a part of the profits as reserves.
Assessment: It also controls all the financial activities of the company. Financial management
is the most important functional area of management. All other functional areas such
as production management, marketing management, personnel management, etc. depend on
Financial management. Efficient financial management is required for survival, growth and
success of the company or firm.
1.4. OBJECTIVES OF FINANCIAL MANAGEMENT
The main objectives of financial management are:-
1. PROFIT MAXIMIZATION: The main objective of financial management is profit
maximization. Main aim of any kind of economic activity is earning profit. A business concern
is also functioning mainly for the purpose of earning profit. Profit is the measuring techniques
to understand the business efficiency of the concern. Profit maximization is also the traditional
and narrow approach, which aims at, maximizes the profit of the concern. Profit maximization
consists of the following important features.
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A) Profit maximization is also called as cashing per share maximization. It leads to maximize
the business operation for profit maximization.
B) Ultimate aim of the business concern is earning profit; hence, it considers all the possible
ways to increase the profitability of the concern.
C) Profit is the parameter of measuring the efficiency of the business concern.
2. WEALTH MAXIMIZATION: Wealth maximization (shareholders' value maximization) is also
a main objective of financial management. The term wealth means shareholder wealth or the wealth
of the persons those who are involved in the business concern. Wealth maximization is also known as
value maximization or net present worth maximization. This objective is an universally accepted
concept in the field of business. Wealth maximization means to earn maximum wealth for the
shareholders. So, the finance manager tries to give a maximum dividend to the shareholders.
He also tries to increase the market value of the shares. The market value of the shares is
directly related to the performance of the company. Better the performance, higher is the
market value of shares and vice-versa. So, the finance manager must try to maximize
shareholder's value.
3. PROPER ESTIMATION OF TOTAL FINANCIAL REQUIREMENTS: Proper estimation of total
financial requirements is a very important objective of financial management. The finance
manager must estimate the total financial requirements of the company. He must find out how
much finance is required to start and run the company. He must find out the fixed capital and
working capital requirements of the company. His estimation must be correct. If not, there will
be shortage or surplus of finance. Estimating the financial requirements is a very difficult job.
The finance manager must consider many factors, such as the type of technology used by
company, number of employees employed, scale of operations, legal requirements, etc.
4. PROPER MOBILIZATION: Mobilization (collection) of finance is an important objective of
financial management. After estimating the financial requirements, the finance manager must
decide about the sources of finance. He can collect finance from many sources such as shares,
debentures, bank loans, etc. There must be a proper balance between owned finance and
borrowed finance. The company must borrow money at a low rate of interest.
5. PROPER UTILISATION OF FINANCE: Proper utilization of finance is an important objective
of financial management. The finance manager must make optimum utilization of finance. He
must use the finance profitable. He must not waste the finance of the company. He must not
invest the company's finance in unprofitable projects. He must not block the company's
finance in inventories. He must have a short credit period.

6. MAINTAINING PROPER CASH FLOW: Maintaining proper cash flow is a short-term objective
of financial management. The company must have a proper cash flow to pay the day-to-day
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expenses such as purchase of raw materials, payment of wages and salaries, rent, electricity
bills, etc. If the company has a good cash flow, it can take advantage of many opportunities
such as getting cash discounts on purchases, large-scale purchasing, and giving credit to
customers, etc. A healthy cash flow improves the chances of survival and success of the
company.
7. SURVIVAL OF COMPANY: Survival is the most important objective of financial
management. The company must survive in this competitive business world. The finance
manager must be very careful while making financial decisions. One wrong decision can make
the company sick, and it will close down.

8. CREATING RESERVES: One of the objectives of financial management is to create reserves.
The company must not distribute the full profit as a dividend to the shareholders. It must keep
a part of it profit as reserves. Reserves can be used for future growth and expansion. It can also
be used to face contingencies in the future.

9. PROPER COORDINATION: Financial management must try to have proper coordination between the
finance department and other departments of the company.

10. CREATE GOODWILL: Financial management must try to create goodwill for the company.
It must improve the image and reputation of the company. Goodwill helps the company to
survive in the short-term and succeed in the long-term. It also helps the company during bad
times.
11. INCREASE EFFICIENCY: Financial management also tries to increase the efficiency of all
the departments of the company. Proper distribution of finance to all the departments will
increase the efficiency of the entire company.

12. FINANCIAL DISCIPLINE: Financial management also tries to create a financial discipline.
Financial discipline means: - To invest finance only in productive areas. This will bring high
returns (profits) to the company. To avoid wastage and misuse of finance.

13. REDUCE COST OF CAPITAL: Financial management tries to reduce the cost of capital. That is, it
tries to borrow money at a low rate of interest. The finance manager must plan the capital structure in
such a way that the cost of capital it minimized.

14. REDUCE OPERATING RISKS: Financial management also tries to reduce the operating risks.
There are many risks and uncertainties in a business. The finance manager must take steps to
reduce these risks. He must avoid high-risk projects. He must also take proper insurance.
15. PREPARE CAPITAL STRUCTURE: Financial management also prepares the capital structure.
It decides the ratio between owned finance and borrowed finance. It brings a proper balance
between the different sources of Capital. This balance is necessary for liquidity, economy,
flexibility and stability.
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1.5. Functions of Financial Management
Functions of financial management can be broadly divided into two groups.
1. Executive functions of financial management, and
2. Routine functions of financial management,

Eight Executive / Managerial Functions Of Financial Management (FM) Are:-
1. ESTIMATING CAPITAL REQUIREMENTS: The Company must estimate
its capital requirements (needs) very carefully. This must be done at the promotion stage. The
company must estimate its fixed capital needs and working capital need. If not, the company
will become over-capitalized or under-capitalized.
2. DETERMINING CAPITAL STRUCTURE: Capital structure is the ratio between owned capital
and borrowed capital. There must be a balance between owned capital and borrowed capital. If
the company has too much owned capital, then the shareholders will get fewer dividends.
Whereas, if the company has too much of borrowed capital, it has to pay a lot of interest. It
also has to repay the borrowed capital after some time. So the finance managers must prepare a
balanced capital structure.
3. ESTIMATING CASH FLOW: Cash flow refers to the cash which comes in and the cash which
goes out of the business. The cash comes in mostly from sales. The cash goes out for business
expenses. So, the finance manager must estimate the future sales of the business. This is called
Sales forecasting. He also has to estimate the future business expenses.
4. INVESTMENT DECISIONS: The business gets cash, mainly from sales. It also gets cash from
other sources. It gets long-term cash from equity shares, debentures, term loans from financial
institutions, etc. It gets short-term loans from banks, fixed deposits, dealer deposits, etc. The
finance manager must invest the cash properly. Long-term cash must be used for purchasing
fixed assets. Short-term cash must be used as a working capital.
5. ALLOCATION OF SURPLUS: Surplus means profits earned by the company. When the
company has a surplus, it has three options, viz., it can pay dividend to shareholders, it can save
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the surplus. That is, it can have retained earnings. It can give bonus to the employees.
6. DECIDING ADDITIONAL FINANCE: Sometimes, a company needs additional finance for
modernization, expansion, diversification, etc. The finance manager has to decide on following
questions. When the additional finance will be needed? For how long will this finance be
needed? From which sources to collect this finance? How to repay this finance? Additional
finance can be collected from shares, debentures, loans from financial institutions, fixed
deposits from public, etc.
7. NEGOTIATING FOR ADDITIONAL FINANCE: The finance manager has to negotiate for
additional finance. That is, he has to speak to many bank managers. He has to persuade and
convince them to give loans to his company. There are two types of loans, viz., short-term
loans and long-term loans. It is easy to get short-term loans from banks. However, it is very
difficult to get long-term loans.
8. CHECKING THE FINANCIAL PERFORMANCE: The finance manager has to check the
financial performance of the company. This is a very important finance function. It must be
done regularly. This will improve the financial performance of the company. Investors will
invest their money in the company only if the financial performance is good. The finance
manager must compare the financial performance of the company with the established
standards. He must find ways for improving the financial performance of the company.
SIX ROUTINE / INCIDENTAL FUNCTIONS OF FINANCIAL MANAGEMENT (FM) ARE:-
1. Supervision of cash receipts and payments.
2. Safeguarding of cash balances.
3. Safeguarding of securities, insurance policies and other valuable papers.
4. Taking proper care of mechanical details of financing.
5. Record keeping and reporting.
6. Credit Management.
Q.NO. 2- Proper management of finance is essential for success of any business.
Critically analysis the statement and discuss the nature, scope and function of financial
management?(2010)
Q. NO. 3 - Critically analyses the functions of financial manager in a public limited
company?(2012)

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1.6. 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 cant neglect the importance of finance at any time at
and at any situation. Some of the importance of the financial management is as follows:
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.

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1.7. ROLE OF FINANCE MANAGER
The financial manager plays an important role in the functional areas of finance. The
assignments of finance functions to the financial manager depend upon size of the business
enterprise. The larger the business enterprise- the greater degree of specialization of tasks is
needed. The financial manager is the key persons in any business enterprise. The function of
finance manager includes budgeting and investing funds, accounting, products pricing and
forecasting. The financial manager is engaged in the analysis, planning and control of the
financial activities of the enterprise.
The function of financial manager may be stated as under-
FINANCING AND INVESTING: The financial manager performs the financing and
investing function of an enterprise. He supervises the cash and other holding of the firm. He
arranges for raising additional funds as per the requirement of the enterprise.
FINANCIAL ANALYSIS: Financial manager makes analysis of financial condition of the
firm. Financial analysis ensures the effective and smooth functioning of any enterprise.
Financial analysis is made to judge the propriety of the trend of share market prices, etc.
DIVIDEND DECISIONS: The financial manager takes dividend decision. For taking
decisions in respect of dividend, the following factors are considered-availability of cash, tax
position of the share-holders, trend of earnings, etc.
ACCOUNTING AND CONTROL: The financial manager arranges for the maintenance of
financial records. He controls the financial activities of the enterprise. He identifies deviations
from planned and efficient financial activities.
FORECASTING AND LONG-RUN PLANNING: The finance manager forecasts costs and
technological changes. He studies the market conditions and forecasts the funds needed for
investment. He calculated the estimated returns on proposed investment project and forecasts
about the demand for the products of the enterprise.
CASH MANAGEMENT: The financial manager arranges for cash management of the
enterprise. Through cash management, he ensures the supply of funds to the different dept. of
the enterprise. The financial manager arranges for the adequate supply of cash to all sections
of the enterprise for its smooth flow of operations.
DECISION REGARDING CAPITAL STRUCTURE: The financial manager takes decision
regarding capital structure of the firm. Capital structure indicates the proper mix of different
sources of capital. He tries to maintain proper balances between the long-run funds and shorts-
run funds.
EVALUATION OF FINANCIAL PERFORMANCE: The financial manager evaluates the
financial performance for the analysis of financial performance of the enterprise. The financial
manager constantly reviews the financial performance to assess the financial health of the
business enterprise. The financial manager helps the management to take different decision on
the result of the evaluation of the financial performances.

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Q. NO.4 - Define the scope of financial management. What role should the financial
manager play in modern enterprise? (2009)
1.8. TIME VALUE OF MONEY
Money has time value. A rupee today is more valuable than a year hence. It is on this concept
the time value of money is based. The recognition of the time value of money and risk is
extremely vital in financial decision making.
If the timing and risk of cash flows is not considered, the firm may make decisions which may
allow it to miss its objective of maximizing the owners welfare. The welfare of owners would
be maximized when Net Present Value is created from making a financial decision. It is thus,
time value concept which is important for financial decisions.
Since money can be put to productive use, its value is different depending upon when it is
received or paid. In simpler terms, the value of a certain amount of money today is more
valuable than its value tomorrow. It is not because of the uncertainty involved with time but
purely on account of timing. The difference in the value of money today and tomorrow is
referred as time value of money.
1.2 REASONS FOR TIME VALUE OF MONEY
Money has time value because of the following reasons:
1. Risk and Uncertainty: Future is always uncertain and risky. Outflow of cash is in our control as
payments to parties are made by us. There is no certainty for future cash inflows. A cash inflow is
dependent out on our Creditor, Bank etc. As an individual or firm is not certain about future cash
receipts, it prefers receiving cash now.
2. Inflation: In an inflationary economy, the money received today, has more purchasing power than
the money to be received in future. In other words, a rupee today represents a greater real purchasing
power than a rupee a year hence.
3. Consumption: Individuals generally prefer current consumption to future consumption.
4. Investment opportunities: An investor can profitably employ a rupee received today, to give him a
higher value to be received tomorrow or after a certain period of time.

Thus, the fundamental principle behind the concept of time value of money is that, a sum of money
received today, is worth more than if the same is received after a certain period of time. For example, if
an individual is given an alternative either to receive ` 10,000 now or after one year, he will prefer `
10,000 now. This is because, today, he may be in a position to purchase more goods with this money
than what he is going to get for the same amount after one year.
EXAMPLE 1: A project needs an initial investment of ` 1, 00,000. It is expected to give a return of `
20,000 per annum at the end of each year, for six years. The project thus involves a cash outflow of ` 1,
00,000 in the zero year and cash inflows of ` 20,000 per year, for six years. In order to decide,
whether to accept or reject the project, it is necessary that the Present Value of cash inflows received
annually for six years is ascertained and compared with the initial investment of ` 1, 00,000.

The firm will accept the project only when the Present Value of cash inflows at the desired rate of
interest exceeds the initial investment or at least equals the initial investment of ` 1, 00,000.
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Q. NO. 5- Why is the consideration of time important in financial decision- making? How
can time value be adjusted? Illustrate your answer?(2009)
Q.NO.6- Define time value of money and discuss its importance in financial management.
Taking a hypothetical example, suggest what method would you suggest to replace
machinery after 5 years? (2010)

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