FINANCIAL

MANAGEMENT

DEFINITION OF BUSINESS FINANCE

According to the Wheeler, Business
finance is that business activity which
concerns
with
the
Acquisition
and
conversation of capital funds in meeting
financial needs and overall objectives of a
business enterprise.
According to the Guthumann
and
Dougall, Business finance can broadly
be defined as the activity concerned with
planning, raising, controlling, administering
of the funds used in the business.

Introduction:
Business Finance refers to money or funds
available to a business enterprise .
It is th aggregate of funds needed to purchase
assets and to run day to day operations of
business like buying supplies, payng bills, salaries
etc.

Objectives of Financial Management

To ensure availability of sufficient funds at
reasonable cost.
To ensure that the available funds are
effectively and properly utilised.
To ensure safety of funds through creation of
reserves, reinvetmentof profits, etc.

Introduction to Financial
Management
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.

DEFINITION OF FINANCIAL MANAGEMENT

Financial management is an integral part of
overall management. It is concerned with the
duties of the financial managers in the business
firm.
The term financial management has been
defined by Solomon, It is concerned with
the efficient use of an important economic
resource namely, capital funds.
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
effectiveutilization in the business.

 Howard
and
Upton
:
Financial
management as an application of
general managerial principles to the area of
financial decision-making.
Weston
and
Brigham
:
Financial
management is an area of financial
decision-making, harmonizing individual
motives and enterprise goals.
Joshep
and
Massie
:
Financial
management is the operational activity
of a business that is responsible for
obtaining and effectively utilizing the funds
necessary for efficientoperations.

Functions of Financial Management

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.
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.

 Choice of sources of funds:For additional

funds to be procured, a company has many
choices like Issue of shares and debentures
Loans to be taken from banks and financial
institutions
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.

 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.
Disposal of surplus:The net profits decision
have to be made by the finance manager. This
can be done in two ways:
Dividend declaration - It includes identifying the rate
of dividends and other benefits like bonus.
Retained profits - The volume has to be decided which
will
depend
upon
expansional,
innovational,
diversification plans of the company.

 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.
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.

Role of Financial Manager

Financial activities of a firm is one of the most
important and complex activities of a firm.
Therefore in order to take care of these
activities a financial manager performs all the
requisite financial activities.
A financial manger is a person who takes care
of all the important financial functions of an
organization. The person in charge should
maintain a far sightedness in order to ensure that
the funds are utilized in the most efficient manner.
His actions directly affect the Profitability, growth
and goodwill of the firm.

Main Functions of a Financial Manager

Raising of Funds
In order to meet the obligation of the
business it is important to have enough
cash and liquidity. A firm can raise funds
by the way of equity and debt. It is the
responsibility of a financial manager to
decide the ratio between debt and
equity. It is important to maintain a good
balance between equity and debt.

 Allocation of Funds
Once the funds are raised through
different channels the next important
function is to allocate the funds. The
funds should be allocated in such a
manner that they are optimally used.
In order to allocate funds in the best
possible manner the following point
must be considered

 Profit Planning
Profit earning is one of the prime functions of any
business organization. Profit earning is important
for survival and sustenance of any organization.
Profit planning refers to proper usage of the profit
generated by the firm. Profit arises due to many
factors such as pricing, industry competition,
state of the economy, mechanism of demand and
supply, cost and output. A healthy mix of variable
and fixed factors of production can lead to an
increase in the profitability of the firm.

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 takedecisions. But nowadays
financial management and accounting discipline are
separate and interrelated.

 3. Financial Management & 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.

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.

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.

 OBJECTIVES OF FINANCIAL
MANAGEMENT
Effective procurement and efficient use
of finance lead to proper utilization of
the finance by the business concern. It
is the essential part of the financial
manager. Hence, the financial manager
must determine the basic objectives of
the financial management.

 Objectives of Financial Management

may be broadly divided into two
parts such as:
1. Profit maximization
2. Wealth maximization.

Profit Maximization Vs. Wealth

Maximization

The objective of Financial Management is

profit maximisation.
However, It cannot be the sole objective of a
company as there is a directs/relationship
between risk and profit.
If profit maximisation is the only goal, then
risk factor is ignored.

 Sometimes, higher the risk, higher is the

possibility of profits. Hence, risk has to be
balanced
with
the
objective
of
profit
maximisation.
In addition, a firm has to take into account the
social considerations, and normal obligations to
the interests of workers, consumers, society,
government, as well as ethical trade practices.
However, as profit maximisation ignores risk
and uncertainty and timing of returns, a firm
cant solely depend on the objective.

 Wealth Maximisation:
Hence, the objective of a firm is to
maximise its wealth and the value of
its shares.
Wealth maximisation is represented
by the market price of the companys
common stock.

 The market price of a firms

stock takes into account
Present and prospective future
earnings per share (EPS),
The timing and risk of these
earnings,
The dividend policy of the firm and
many other factors that bear upon
the market price of the stock.

 The concept of wealth in the context

of wealth maximisation objective
refers to the shareholders wealth as
reflected by the market price of their
shares in theshare market. Hence,
maximisation
of
wealth
means
maximisation of the market price of
the equity shares of the company.

 To conclude, total profits are not as

important as earnings per share. Even
maximisation of earnings per share is not
enough because it does not specify the
timing or duration of expected returns.
Further, it does not consider the risk of
uncertainty of the future earnings.
Hence,
wealth
maximisation
is
appropriate and it is possible by
maximising the market price per share.