FINANCIAL MANAGEMENT

Financial management refers to the efficient and effective management of money

(funds) in such a manner as to accomplish the objectives of the organization. It is the
specialized function directly associated with the top management. The significance of this
function is not only seen in the 'Line' but also in the capacity of 'Staff' in overall
administration of a company. It has been defined differently by different experts in the field.
It includes how to raise the capital, how to allocate it i.e. capital budgeting. Not only
about long term budgeting but also how to allocate the short term resources like current
assets. It also deals with the dividend policies of the share holders.

DEFINITION
Financial management is the area of business management devoted to a judicious use of
capital and a careful selection of sources of capital in order to enable a business firm to move
in the direction of reaching its goals. by J.F.Bradlery

OBJECTIVES
The main objectives of financial management are:-

Profit maximization: The main objective of financial management is profit

maximization. The finance manager tries to earn maximum profits for the company in the
short-term and the long-term. He cannot guarantee profits in the long term because of
business uncertainties. However, a company can earn maximum profits even in the long-term,
if:I)

The Finance manager takes proper financial decisions.

II) He uses the finance of the company properly.

Wealth maximization: Wealth maximization (shareholders' value maximization) is also a

main objective of financial management. 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 maximise
shareholder's value.

FUNCTIONS OF FINANCIAL MANAGEMENT

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.
3. Choice of sources of funds: For additional funds to be procured, a company has
many choices likea. 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. 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.
5. Disposal of surplus: 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: 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, maintainance of enough stock, purchase of raw materials, etc.
7. 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.

TOOLS OF FINANCIAL MANAGEMENT STATEMENTS

BALANCE SHEET
A financial statement that summarizes a company's assets, liabilities and shareholders'
equity at a specific point in time. These three balance sheet segments give investors an idea as
to what the company owns and owes, as well as the amount invested by the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity

COMPARATIVE ANALYSIS
The

item-by-item

comparison

of

two

or

more

comparable

alternatives, processes, products, qualifications, sets of data, systems, or the like.

In accounting,

for

example, changes in

a financial

statement's items over

several accounting periods may be presented together to detect the emerging trends in
the company's operations and results. See also comparability.

FUNDS FLOW STATEMENT

Fund flow statement is a statement which shows the inflow and out flow of funds
between two dates of balance sheet. So, it is known as the statement of changes in financial
position. We all know that balance sheet shows our financial position and inflow and outflow
of fund affects it. So, in company level business, it is very necessary to prepare fund flow
statement to know what the sources are and what are applications of fund between two dates
of balance sheet. Generally, it is prepare after getting two year balance sheet.

CASH FLOW STATEMENT

One of the quarterly financial reports any publicly traded company is required to
disclose to the SEC and the public. The document provides aggregate data regarding all cash
inflows a company receives from both its ongoing operations and external investment
sources, as well as all cash outflows that pay for business activities and investments during a
given quarter.

TREND ANALYSIS
Trend Analysis is the practice of collecting information and attempting to spot a
pattern, or trend, in the information. In some fields of study, the term "trend analysis" has
more formally defined meanings.
Although trend analysis is often used to predict future events, it could be used to
estimate uncertain events in the past, such as how many ancient kings probably ruled between
two dates, based on data such as the average years which other known kings reigned.

RATIO ANALYSIS
Quantitative analysis of information contained in a companys financial statements.
Ratio analysis is based on line items in financial statements like the balance sheet, income
statement and cash flow statement; the ratios of one item or a combination of items - to
another item or combination are then calculated. Ratio analysis is used to evaluate various
aspects of a companys operating and financial performance such as its efficiency, liquidity,
profitability and solvency. The trend of these ratios over time is studied to check whether they
are improving or deteriorating. Ratios are also compared across different companies in the
same sector to see how they stack up, and to get an idea of comparative valuations. Ratio
analysis is a cornerstone of fundamental analysis.