Unit 9: Financial Management MEANING OF FINANCE Finance is referred as the provision of money at the time when it is needed.

Finance function is the procurement of funds and their effective utilization in business concerns. The concept of finance includes capital, funds, money, and amount. But each word is having unique meaning. 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, i) Private Finance: Private finance includes the Individual, Firms, Business or Corporate Financial activities to meet the requirements and ii) Public Finance: It concerns with revenue and disbursement of Government such as Central Government, State Government and Semi-Government Financial matters. MEANING AND DEFINITION OF FINANCIAL MANAGEMENT Financial management is that managerial activity which is concerned with planning and controlling of the firms financial resources. In other words it is concerned with acquiring, financing and managing assets to accomplish the overall goal of a business enterprise (mainly to maximise the shareholders wealth). According to Raymond Chambers Financial management comprises the forecasting, planning, organizing, directing, coordinating and controlling of all activities relating to acquisition and application of the financial resources of an undertaking in keeping with its financial objective. According to Solomon, It is concerned with the efficient use of an important economic resource namely, capital funds. 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 achieving the goal of the business concern. The business goal can be achieved only with the help of effective management of finance. The importance of financial management is discussed below: a) 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. b) 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. c) 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. d) 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. e) 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. f) 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. FINANCIAL PLANNING AND OBJECTIVES OF FINANCIAL PLANNING Financial planning is essentially preparation of a financial blueprint of an organisations future operations. In other words, it is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise. It involves estimation of funds required, deciding the sources of funds and determination of suitable policies for optimum utilisation of funds. Financial planning strives to achieve the following objectives: a) To ensure availability of funds whenever these are required: The main objective of financial planning is to ensure availability sufficient funds for different purposes such as, for the purchase of long-term assets or to meet day to day expenses of business etc. Apart from this, financial planning ensures timely availability of funds and also tries to specify possible sources of these funds.

b) To see that the firm does not raise resources unnecessarily: Excess funding is almost as bad as inadequate funding. Even if there is some surplus money, good financial planning would put it to the best possible use so that the financial resources are not left idle and dont unnecessarily add to the cost. c) To ensure Flexibility: One of the main objectives of financial management is to ensure flexibility so as to adjust as per changing conditions. d) To ensure optimum use of funds: Financial plan ensures optimum use of funds. Meaning there by, neither the plans should suffer from shortage of funds nor there wasteful use of them. e) Economy: A financial plan aims at raising funds with minimum costs. It tries to lessen the disproportionate burden on the business enterprise by determining a proper debt-equity mix. IMPORTANCE OF FINANCIAL PLANNING Financial planning is an important part of overall planning of any business enterprise. Sound financial planning is essential for success of any business. The importance of financial planning can be explained as follows: a) Facilitates collection of optimum funds: Financial planning estimates the precise requirements of funds which helps in avoiding the risk of undercapitalisation and overcapitalisation. b) Helps in avoiding business shocks and surprises: By anticipating the financial requirements, financial planning helps to avoid business shocks and surprises and also helps the business enterprise in preparing for the future. c) Helps in Co-Ordination: Financial planning helps in co-ordinating various business functions e.g., sales and production functions, by providing clear policies and procedures. d) Base for financial control: Financial planning acts as a basis for checking the financial activities by comparing the actual revenue with estimated revenue and actual cost with estimated cost. By spelling out detailed objectives for various business segments, it makes the evaluation of actual performance easier. e) Solvency and liquidity: It means availability of sufficient funds to meet liability. A good financial plan ensures the availability of funds for both short term and long term needs of the business. COMPARISN BETWEEN FINANCIAL MANAGEMENT AND FINANCIAL PLANNING BASIS 1. Meaning FINANCIAL MANAGEMENT It refers to efficient acquisition, utilisation and disposal of surplus for the smooth flow of an organisation. It is wider in scope, it includes financial planning. Its objective is to manage all activities related to finance. FINANCIAL PLANNING It refers to estimation of funds required, deciding the sources of funds and determination of suitable policies for optimum utilisation of funds. It is narrow in scope as it is one segment of financial management. Its objective is to ensure availability of funds and to see that the firm does not raise the funds unnecessarily.

2. scope 3. objective

MEANING OF CAPITAL STRUCTURE Capital Structure of a company refers to the composition or make up of its capitalization and it includes all long-term capital resources. It is the proportion of debt and equity used for financing the operation of the business. In other words, the term capital structure refers to the relationship between the various long-term sources of financing such as equity capital, preference share capital and debt capital. According to James C Van Horne, the mix of a firms permanent long-term financing represented by debt, preferred stock and common stock equity.

OBJECTIVES OF MANAGEMENT (unit 1) Ans: Management seeks to achieve certain objectives which are the desired result of any activity. Objectives can be classified into organisational objectives, social objectives and personal or individual objectives. These are discussed below: (i) Organisational Objectives: Management is responsible for setting and achieving objectives for the organisation. It has to achieve a variety of objectives in all areas considering the interest of all stakeholders including, shareholders, employees, customers and the government. The main objective of any organisation should be to utilise human and material resources to the maximum possible advantage, i.e., to fulfil the economic objectives such as survival, profit and growth of a business. Survival: The basic objective of any business is survival. Management must strive to ensure the survival of the organisation. In order to survive, an organisation must earn enough revenues to cover costs. Profit: Mere survival is not enough for business. Management has to ensure that the organisation makes a profit. Profit provides a vital incentive for the continued successful operation of the enterprise. Profit is essential for covering costs and risks of the business. Growth: A business needs to add to its prospects in the long run, for this it is important for the business to grow. To remain in the industry, management must exploit fully the growth potential of the organisation. Growth of a business can be measured in terms of sales volume increase in the number of employees, the number of products or the increase in capital investment, etc. (ii) Social objectives: It involves the creation of benefit for society. As a part of society, every organisation whether it is business or non-business, has a social obligation to fulfil. This refers to consistently creating economic value for various constituents of society. This includes using environmental friendly methods of production, giving employment opportunities to the disadvantaged sections of society and providing basic amenities like schools and crches to employees. (iii) Personal objectives: Organisations are made up of people who have different personalities, backgrounds, experiences and objectives. They all become part of the organisation to satisfy their diverse needs. These vary from financial needs such as competitive salaries and perks, social needs such as peer recognition and higher level needs such as personal growth and development. Management has to reconcile personal goals with organisational objectives for harmony in the organisation. FINANCE FUNCTION The finance function is most important for all business enterprises. It remains a focus of all activities. It starts with the setting up of an enterprise. It is concerned with rising of funds, deciding the cheapest source of finance, utilization of funds raised, making provision for refund when money is not required in the business, deciding the most profitable investment, managing the funds raised and paying returns to the providers of funds in proportion to the risks undertaken by them. Therefore, it aims at acquiring sufficient funds, utilizing them properly, increasing the profitability of the organization and maximizing the value of the organization and ultimately the shareholders wealth. Scope or contents of finance function: (Same as the functions of finance manager) FUNCTIONS/JOB OF FINNCIAL MANAGER The main function of finance manager (scope of finance function) revolves around procurement of funds and its effective utilisation. Thus all the decisions concerning management of funds are subject matter of finance function. This function involves a number of important decisions; some of these have been listed below The following explanation will help in understanding each finance function in detail a) Investment Decision: One of the most important finance functions is to intelligently allocate capital to long term assets. This activity is also known as capital budgeting. It is important to allocate capital in those long term assets so as to get maximum yield in future. Following are the two aspects of investment decision i. Evaluation of new investment in terms of profitability ii. Comparison of cut off rate against new investment and prevailing investment

Since the future is uncertain therefore there are difficulties in calculation of expected return. Along with uncertainty comes the risk factor which has to be taken into consideration. This risk factor plays a very significant role in calculating the expected return of the prospective investment. Therefore while considering investment proposal it is important to take into consideration both expected return and the risk involved. Investment decision not only involves allocating capital to long term assets but also involves decisions of using funds which are obtained by selling those assets which become less profitable and less productive. It wise decisions to decompose depreciated assets which are not adding value and utilize those funds in securing other beneficial assets. An opportunity cost of capital needs to be calculating while dissolving such assets. The correct cut off rate is calculated by using this opportunity cost of the required rate of return (RRR) b) Investment decision: Funds procured should be invested in various kinds of assets. The investment in any asset should be made after thorough examination of all the options, the technique for examining various capital projects is termed as capital budgeting. One thing a finance manager should always keep in mind is that money should never be kept idle as idle money always has a cost. c) Dividend decision: Earning profit or a positive return is a common aim of all the businesses. But the key function a financial manger performs in case of profitability is to decide whether to distribute all the profits to the shareholder or retain all the profits or distribute part of the profits to the shareholder and retain the other half in the business. Its the financial managers responsibility to decide a optimum dividend policy which maximizes the market value of the firm. The finance manager is concerned with the decision to declare and pay the dividends periodically, so that the equity investors get return on their investments. He has to help the top management in identifying how much amount can be distributed as dividends, keeping in mind organisations cash needs, expansion plans etc. d) Liquidity Decision: It is very important to maintain a liquidity position of a firm to avoid insolvency. Firms profitability, liquidity and risk all are associated with the investment in current assets. In order to maintain a trade-off between profitability and liquidity it is important to invest sufficient funds in current assets. But since current assets do not earn anything for business therefore a proper calculation must be done before investing in current assets. Current assets should properly be valued and disposed of from time to time once they become non profitable. Currents assets must be used in times of liquidity problems and times of insolvency. e) Financial Decision: Financial decision is yet another important function which a financial manger must perform. It is important to make wise decisions about when, where and how should a business acquire funds. Funds can be acquired through many ways and channels. Broadly speaking a correct ratio of an equity and debt has to be maintained. This mix of equity capital and debt is known as a firms capital structure. A firm tends to benefit most when the market value of a companys share maximizes this not only is a sign of growth for the firm but also maximizes shareholders wealth. On the other hand the use of debt affects the risk and return of a shareholder. It is more risky though it may increase the return on equity funds. A sound financial structure is said to be one which aims at maximizing shareholders return with minimum risk. In such a scenario the market value of the firm will maximize and hence an optimum capital structure would be achieved. Other than equity and debt there are several other tools which are used in deciding a firm capital structure. f) Forecasting Financial Requirements: It is the primary function of the Finance Manager. He is responsible to estimate the financial requirement of the business concern. He should estimate, how much finances required to acquire fixed assets and forecast the amount needed to meet the working capital requirements in future. g) Decision regarding the capital structure: After estimating the quantum of funds required the finance manager has to plan for the sources from where the funds should and can be raised. An optimum mix of the various sources has to be worked out for this purpose. Finance manager has to maintain a proper proportion of outside borrowings and own funds. This is a golden rule of capital structure theories that lesser the cost of capital higher will be the market value of the business.

h) Supply of funds to all departments and cash management: Though not a primary function, cash management and funds allocation is an important function of a finance manager. It is more than likely in any organisation that one branch or department is having excess cash and other may be having a shortage, this may hamper companys day to day functioning as adequate funds is a necessity for smooth running of any business. Finance manager should ensure that cash is not kept idle as it may cost the organisation heavily. i) Evaluating financial performances: Finance manager is always required to do the job of performance evaluator of the company. He has to supply top management information with financial analysis. Analysis of financial performance helps the management in seeing how the funds have been utilised in various divisions and what can be done to improve it. j) Financial negotiations: A major responsibility of finance manager is to negotiate with bankers, financial institutions providing loans, debenture investors etc. Negotiation for finance is considered as a specialised job and involves lots of expertise. k) Maintenance of the share price of the company: The stability in market price of the shares is extremely essential for every organisation as it maintain the companys goodwill amongst the investors. It is responsibility of Finance manager to see that the prices of shares do not fluctuate extremely.