MB0045-Unit-01-Financial Management Unit-01-Financial Management Structure: 1.1 Introduction Learning objectives 1.2 Meanings and Definitions 1.

3 Goals of Financial Management Profit maximisation Wealth maximisation Wealth maximisation vs. Profit maximisation 1.4 Finance Functions Financing decisions Investment decisions Dividend decisions Liquidity decision Organisation of Finance Function 1.5 Interface between Finance and Other Business Functions Finance and accounting Finance and marketing Finance and production (operations) Finance and HR 1.6 Summary

1.7 Terminal Questions 1.8 Answers to SAQs and TQs 1.1 Introduction Financial Management of a firm is concerned with procurement and effective utilisation of funds for the benefit of its stakeholders. It embraces all those managerial activities that are required to procure funds at the least cost and their effective deployment. The most admired Indian companies are Reliance and Infosys. They have been rated well by the financial analysts on many crucial aspects that enabled them to create value for its share holders. They employ the best technology, produce good quality goods or render services at the least cost and continuously contribute to the shareholders wealth. The three core elements of financial management are: a. Financial Planning Financial Planning is to ensure the availability of capital investments to acquire the real assets. Real assets are land and buildings, plants and equipments. Capital investments are required for establishing and running the business smoothly. b. Financial Control Financial Control involves managing the costs and expenses of a business. For example, it includes taking decisions on the routine aspects of day to day management of collecting money due from the firms customers and making payments to the suppliers of various resources. c. Financial Decisions Decision needs to be taken on the sources from which the funds required for the capital investments could be obtained. There are two sources of funds debt and equity. In what proportion the funds are to be obtained from these sources is to be decided for formulating the financing plan. In this unit, you will learn about these core elements of financial management. 1.1.1 Learning objectives After studying this unit, you should be able to understand: The meaning of Business Finance The objectives of Financial Management

 The various interfaces between finance and other managerial functions of a firm 1.2 Meaning and Definitions Financial Management is the art and science of managing money. Regulatory and economic environments have undergone drastic changes due to liberalisation and globalisation of Indian economy. This has changed the profile of Indian finance managers. Indian financial managers have transformed themselves from licensed raj managers to wellinformed dynamic proactive managers capable of taking decisions of complex nature. Traditionally, financial management was considered a branch of knowledge with focus on the procurement of funds. Instruments of financing, formation, merger and restructuring of firms and legal and institutional frame work occupied the prime place in this traditional approach. The modern approach transformed the field of study from the traditional narrow approach to the most analytical nature. The core of modern approach evolved around the procurement of the least cost funds and its effective utilisation for maximisation of share holders wealth. Self Assessment Questions Fill in the blanks: 1. What has changed the profile of Indian finance managers? 2. Finance management is considered a branch of knowledge with focus on the __________. 1.3 Goals of Financial Management Financial Management means maximisation of economic welfare of its shareholders. Maximisation of economic welfare means maximisation of wealth of its shareholders. Shareholders wealth maximisation is reflected in the market value of the firms shares. Experts believe that, the goal of the financial management is attained when it maximises its value. There are two versions of the goals of financial management of the firm Profit Maximisation and Wealth Maximisation (see figure 1.1). Figure 1.1: Goals of financial management

1.3.1 Profit Maximisation Profit maximisation is based on the cardinal rule of efficiency. Its goal is to maximise the returns, with the best output and price levels. A firms performance is evaluated in terms of profitability. Allocation of resources and investors perception of the companys performance can be traced to the goal of profit maximisation. Profit maximisation has been criticised on many accounts: 1. The concept of profit lacks clarity. What does profit mean? Is it profit after tax or before tax? Is it operating profit or net profit available to share holders? Differences in interpretation on the concept of profit expose the weakness of profit maximisation. 2. Profit maximisation ignores ------NOTE: We index only part of the original contents of the files.

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