Financial Management

Introduction
Finance is the life blood of any organisation. If it is not properly managed it leads to chaos & confusion. It even affects the mere existence of the organisation. Managing the finance is an art by itself Application of the principles of management to finance function is called as financial management.

Application of the principles

Planning- forecasting the required finance to the enterprise Organising arranging the required finance from various sources with least cost. Directing apportioning the available funds to the required Staffing Recruiting the necessary staff for the finance department Controlling find out the whether funds are used for the purpose for which they are apportioned or whether they are effectively used for the benefits of the unit

As of Financial Management
Anticipating financial needs Acquiring financial resources Allocating of funds in business Administering the allocation of funds Analysing the performance of finance Accounting and reporting to management

Definitions
FM is the operational activity of a business that is responsible for obtaining & effectively utilising the funds necessary for efficient operations Joseph & Massie FM is an area of financial decision making, harmonising individual motives and enterprise goals FM is the application of the planning & Control functions to the finance function Archer & Ambrosio

 Finance function covers financial planning, forecasting of cash receipts and disbursements, the realising of funds, use & allocation of funds and financial control. Kutchal FM is broadly concerned with the acquisition and use of funds by a business firm. Its scope may be defined in terms of the following questions.

 How large the firm be and how fast should it grow? How should be the composition of the firms assets? What specific asset should a company to acquire? How the fund raised? How should be the mix of firms financing? How should the firm analyse plan and control its financial affairs?

Objectives of FM

The major objectives are Profit Maximisation Wealth Maximisation

Profit Maximisation

Profit is the main objective of any business activity Business must earn profit to cover its cost and provide funds for growth It is a measure of an efficiency of any business unit It serves as a protection against future risks, future competition from other units, adverse govt. policies etc Hence profit maximisation is considered as the main objective

Points in favour of profit maximisation

It is a barometer by which the performance of any business unit can be measured It ensures maximum to the share holders, employees & prompt payment to creditors It increases the confidence of management in expansion and diversification programmes of a co., It attracts the investors to invest their savings It indicates the efficient use of funds for different requirements & and efficient allocation of resources

Criticism leveled against profit maximisation

The term profit is vague & it cannot be clearly defined it means different things to different people is it a short term profit or long term profit does it mean total profit or gross profit is it before tax or after tax does it mean operationg profit or net profit or profit available to equity holders & hence which is maximised

 It ignores risk It ignores the financing aspect of the decision It encourages corrupt practices to increase the profit It attracts the cut throat competition It ignores the timing of costs and returns & thereby ignores time value of money it may widen the gap between the perception of management and that of the share holders It borrows the concept of profit from the accounting field & thus tends to concentrate on the immediate effect without thinking of the effect in future

 Huge amount of profit attracts government intervention. Huge profit leads to problems from workers demanding high wages/ bonus & other fringe benefits. It is a narrow concept, later it may affect the long term liquidity of the firm. It may affect the morale of the customers as he feels that he is exploited

Wealth maximisation
Wealth maximisation means maximising the present value of a course of action. The maximisation of wealth by making the decisions of the firm to get benefits that exceeds cost As the profit is the difference between revenue & costs and profit maximisation leads to wealth maximisation of the firm

 As wealth maximisation leads to maximising the value of dividends & capital gains. The wealth maximisation objectives takes into consideration the time value of money and risk of expected benefits. Wealth maximisation is not for the share holders alone but for all the stack holders of the firm.

 Maximisation of firms value is reflected in the market price of the share It is consistent with the object of owners economic wealth The share holders always prefer wealth maximisation than maximisation of inflow of profit It suggests the regular and consistent dividend payments to the share holders It considers all future cash flows, dividends and earnings/share

Criticism of wealth maximisation The objective of wealth maximisation is not necessarily socially desirable The objective of wealth maximisation is not descriptive it differs from entity to another It leads to confusion and misinterpretation of financial policy as different yardsticks are used by different interest in a company

Other objectives
Balanced asset structure Liquidity Judicious planning of funds Efficiency Financial discipline

Decisions of financial management

Investment decision Financing decision Dividend decision

Organisation of finance function Share holders

Board of directors Managing Directors Finance Manager Treasurer controller Cash management Accounting Investments Budgeting Tax & Insurance profit analysis Drs management pay roll Audit planning & Control protect funds & securities Annual reports
Relations with bankers & financial institutions

FM & other areas of management

In management of business there are many functional area Production management, Materials Management, Human Resource Management Marketing Management & Financial management

 All these areas are interrelated & practically equally important The FM provides oxygen to the life of a firm by providing uninterrupted flow of funds throughout Finance function is related to all other functions wherever & whatever and whenever a policy decision is to be taken as every policy finally involves finance

FM & other areas of management

FM with Production Department FM with Materials Department FM with Personnel Department FM with Marketing Department

Functions of finance manager

Estimation of the financial requirements Selection of the right source of funds Allocation of funds Analysing the financial performance Analysing the cost volume profit Capital budgeting Working capital management Profit planning & control Fair returns to the investors Maintaining liquidity & wealth maximisation

Non financial decisions

Decisions about labor participation in management Decisions about changes in employment practices Decision about administrative practices Decision about change in marketing technique advertisement, channels of distribution, non financial schemes to promote sales etc

Executive finance function

Establishing asset management Determining the allocation of profits Estimating & controlling cash flows Deciding upon needs and sources of new outside financing Carrying on negotiations for new source of finance Checking upon financial performance

Incidental finance function

Supervision of cash receipts & payments & safe guarding of cash balances Custody & safe guarding of securities, insurance policies and other valuables Taking care of mechanical details of financing Record keeping and reporting