FINANCIAL MANAGEMENT

WHAT IS FINANCE?
Finance is the science of money. It is the life
blood of any commercial undertaking and is
essential element of every king of business
activity. In a modern economy, Finance may
be defined as the provision of money at the
time it is wanted. Henry Ford once remarked
`Money is like an arm or leg. You either use it
or lose it. To Byron, the great poet a ready
money is Aladin`s lamp.

A business requires finance for various

purposes.
From
the
moment
of
an
organization is born till the death finance is
required
for
various
purposes.
It
is
circulatory system of economic body and
helps
in
co-ordination
and
controlling
activities of several bodies. It converts
accumulate funds to productive use. Thus

finance helps in planning and controlling

business activities.

What is financial management?

A mother is trying to decide whether to buy
her daughter a new dress now, or wait until
next summer so that she does not grow out
of the dress too soon.
A school governing body is working out
how much money they have, they want to
buy new desks for the Grade 1 classroom.
The treasurer of the soccer club is
working out how much it will cost to take
the club to a regional tournament

FINANCIAL MANAGEMENT:
Financial management means the entire
activities of managerial efforts devoted to

the management of finance both its sources

and uses of the enterprise; it is mainly
concerns with the proper management of
funds. The finance manager must see that
funds ware procured in a manner that the
risk, cost and control considerations are
properly balanced in a given situation and
there is optimum utilization of funds.
According
to
philipatus,
Financial
management is concerns with managerial
decisions that result in the acquisition and
financing of long term and short term credit
for the firm. As such it deals with the
situations that require selection of specific
assets and liabilities as well as the problem
of size and growth of an enterprise .The
analyze of these decisions is based on the
expected inflows and outflows of funds and
their effects upon managerial objectives.

1. Financial management is and integral part

of
overall
management.
Acquisition,
maintenance, replacement of assets, sources
and costs of different capital, production,
marketing, finance and personal decisions

etc. have financial implications.so financial

management is pervasive throughout the
organization.
2. The central focus of financial management
is valuation of firm. That is financial
decisions are directed at optimizing the
value of the firm.
3. It involves risk return trade off. Decisions
on investment involve choosing the type of
assets which generate returns accompanied
by risks. Generally higher the risk , returns
must be greater.
4. It is the concern of every concern small or
big individual or corporate undertakings.

5. The investor preferences stock market

conditions etc. affect financial decision of the
business.
6.
Finance
functions
are
generally
centralized, i.e more decisions are taken at
the top level and ensure unified directions to
investment and financing functions.
SCOPE OF FINANCIAL MANAGEMENT:

 Functions performed
Relationships with other activities
Approaches to business finance

1. Functions performed: For a long time

the finance function was viewed simply
as the task of providing funds needed
by the business on favourable terms.
but later on , it was realized that
finance should cover more activities
than only the supply of funds.
The function of procurement of funds.
Allocation of funds to specific assets
Establishing of best possible mix of
financing in relation to the overall
valuation of the firm.
2. Relationship with other activities:
Every business transaction involves
funds.hence finance is concerned with
all business operations. Guthmann and
Dougall
rightly
pointed
out
that
problems of finance are intimately
connected with problems of purchasing
production, marketing etc. It also
related with the fields of law and

accounting.Any financial decision must

consider its legality.For presenting the
financial
position
the
accountant
prepares
financial
statements.Thus
activities of all the departments involve
financial problems directly or indirectly.
3. Approaches to business finance:
In early day , the scope of business
finance was limited to keeping accurate
financial
records,
reports,managing
cash position and providing means for
payment.In recent years , it has
included
the
responsibilities
of
allocating funds to specific assets and
securing the best possible finance mix.
*Traditionally
it
emphasized
on
management
of
working
capital.In
modern days , it has increased as
financial planning and control.

Earlier, its scope was limited to

financial
operations
and
their
mechanics, now it emphasis on
formulation of financial policies.

 In modern times it is concerned with

the valuation of the firm in the overall
market.
Earlier, it was concerned with external
analysis of the firm, now, it also
emphasis on decision making within
the firm.

FUNCTIONS OF FINANCIAL MANAGEMENT:

Finance functions have been differently
defined According to one definition, finance
function means merely providing funds on
most favouable terms.Another definition
suggests that it deals with procurement of
funds and their effective utilization in the
business.some functions relate to implement
decision business and some relate to the
business activities of non recurring nature.

Financing functions broadly divided into:

Executive functions
Incidental functions
Executive functions:

Financial planning
Financial control
Financing decisions
Investment decision
Management of income and dividend
decision
Liquidity decision
Financial planning:
Decision making function.It involves three
basic steps namely

Determining short term & long term

financial objectives
Formulating financial policies
Making
adjustments
and
readjustments.
In
setting
out the
objective
,
Profitability and financial risk should
be considered.
After setting the objective the following
policies are likely to be formulated.

Total amount of capital required

Selection of source of capital
Debt equity ratio
Guiding the dividend policy
Credit policy terms

 Investments of funds in fixed assets

and current assets.
FINANCIAL CONTROL:
Success of a financial plan depends upon
suitably designed control systems and
measures control is essential for chexking
atual performance with planned one.For
control the following steps are needed.

Developing standards of performance

Comparing actual performance
For proper control system of reports
must be established.The function of
financial
control
should
be
continuously performed because the
working of a firm is continuously
changing.
FINANCING DECISIONS:
Financing decisions relate to proportion of
debt capital and equity capital in total capital
employed.while making this decision the
financial manager aims at securing optimal
financing mix which secure maximum market
price per share in the long run.

Financing decisions are concerned with the

choice of the sources of funds and the
amounts
to
be
realized
from
the
sources.Selection of sources of particular
source of finance is governed by

The cost of financing

The nature of commitment
The period of raising funds
INVESTMENT DECISIONS:
Investment decision involves the decision of
allocating funds to long term assets and
current assets which determines the firms
risk.Costs of various methods of financing
are affected by this risk.The financial
manager is to see that funds on profitable
investments.Some
special
investment
decisions
such
as
mergers,acquisitions,
reorganization etc. are also be taken by
financial manager.

MANAGEMENT OF INCOME AND DIVIDEND

DECISIONS:
Net profit can be allocated

 Either in the form of dividend to

shareholders
To employees in profit sharing plans
Retaining them for further expansion
of the concern.
Decisions relating to dividend relates:

Dividend pay out ratio

Stability of dividends over a period of
time
Dividend in the form of shares.
The financial manager has to study the
following to determine the dividend pay out
ratio.

The preference of investors or current

dividends and for capital appreciation
The impact of retained earnings on
capital structure.
The impact of decisions relating to
retained
earnings
on
weighted
average cost of capital.

LIQUIDITY DECISIONS:

Liquidity decisions relates current assets

management
.It
should
be
managed
efficiently otherwise the firm may become
liquid and insolvency.Investment in current
assets affect assets,firms profitability and
liquidity.In order to ensure that insufficient
and unnecessary funds are invested in
current assets.
DECIDING UPON BORROWING POLICY:
Every organization plans for the expansions
of the business for which he requires
additional
resources.Personal resources
being limited borrowing from banks or by
issue of new shares and new debentures.The
financial manager at this juncture will take a
decision about the time when the funds
borrowed from outside sources , how long
they will be needed and from what source
they will be repaid.He must choose the
capital structure keeping various points such
as cost of capital, return expected and
financial risks involved etc into mind.
CHECKING UPON FINANCIAL PERFORMANCE:
The financial manager is under an obligation
to check the financial performance of the

funds invested in the business. It requires

retrospective analysis of operating period to
evaluate the efficiency of financial planning.
The executive finance functions discussed
above are interrelated.Therefore, a change in
decision with regard to one of the functions
is likely to affect change in decision
concerning some or all others.
INCIDENTAL FUNCTIONS:
Incidental functions are supplementary to
other decision making functions.Some of the
important incidental functions include
*supervisions of cash receipts
guarding of cash balances.

and

safe

*proper custody and safe guarding of the

important and valuable papers,securities and
insurance policies.
*Taking care of all mechanical details of
financing.
*Record keeping and reporting.
*Compliance with governmental regulations.
*Opening accounts and depositing funds in
bank etc.

The incidental and routine functions are

performed by peoples at lower levels.The
involvement of chief executive of incidental
functions is limited only to setting up rules,
establishing standards for carrying out the
functions effectively, and revising the
performance whether the instructions are
being followed properly or not.
METHODS OF FINANCIAL MANAGEMENT:
Financial Management is concerned with
raising of financial resources and their
effective utilization towards achieving the
organization goals. This requires application
of appropriate financial methods or logical
method or technique to be employed for the
purpose of accomplishing the following two
goals.

Measuring
the
effectiveness
decisions and actions:

of

firms

For example a firm may have accepted an

approach which has resulted in an income
Rs.1 lakh to the firm. Appropriate methods

can help in finding whether the approach was

eventually succesfull or not.Incase the
approach should have earned only Rs.80,000
it was successful.However if it were to earn a
sum of Rs.2 lakhs, the approach has
failed.The application of relevant tools can
help in providing answer to this problem.
Measuring the validity of the decisions
regarding accepting or rejecting future
projects:
A firm is confronted with this problem
whether the proposed course is the right one
or whether any other course can help in
better achievement of the firms goals.
Financial
tools
greatly
reduce
this
uncertainly and make the decision making
much easier.
Following are the important financial tools or
methods used by financial manager in
performance of his job:
Cost of Capital
Financial leverage or Trading on
equity
Capital budgeting Appraisal methods

 ABC analysis,Cash management,Aging

schedule of inventories,Debtors turnover ratio, etc
Ratio analysis
Fund flow and cash flow analysis

Relationship between Financial management

and other areas of management:
Financial
management
and
Cost
Accounting
Financial management and Marketing
Financial management and Assets
management
Financial management and Personnel
management
Financial management and Financial
Accounting
Financial management and Strategic
management
OBJECTIVES AND GOALS:
Financial management is concerned with
decision making in regard to the size and
composition of asset and the level and
structure of financing.To make wise decisions

it
is
necessary
to
understand
its
objectives.Of the various financial objective
may be taught two of them are not able
because of wide support for them.
These are

Profit maximasation
Wealth maximasation
PROFIT MAXIMASATION:
The firm should always to be keen on the
decisions of financing, investment,
Dividend to maximization of profits.It implies
that a firm should select projects and
decisions which are profitable and reject
those which are not.
It acts as a guide to financial decision
making.It is a test of economic efficiency.It
provides the economic performance on based
of allocation of resources.
Finally, it ensures maximum social welfare
i.e, maximum dividend to share holders,
timely payments to creditors, more wages to
employees, better quality at cheaper rate to
consumer more employment to society and
maximization of capital to the owners.

Objection and Criticism:

It is Vague
It ignore risk
It ignores the timing of returns.
WEALTH MAXIMATION:
This is operationally and managerially better
objective.
Wealth
maximization
means
maximizing the net present value of the firm.
The net present value is the difference
between the gross present value of the
benefits and the amount of investment
required to achieve those benefits.The gross
present value is foundout by discounting its
benefits at a rate which reflects their timing
and uncertainity.A positive net present value
financial action creates wealth and should be
accepted.On the other hand, a negative net
present
value
decision
should
by
rejected.The
market
price
of
shares
(excluding the impact of speculation)serves
as the standard to judge whether financial
decisions have been taken and implemented
efficiently or not.

Maximisation of the firms market value is

considered to be the proper objective.It
considers

Time value of money

The risk or uncertainity of future
earnings
Effects of dividend policy on the
market price of shares.
Responsibilites of Financial Manager:

Financial planning
Raising of necessary funds
Financial control
Disposition of profits

Other responsibilities:

Responsibilities to owners
Legal obligations
Responsibilities to employees
Responsibilities to customers
Wealth maximisation

Financial Management : Science or Art

Financial Management is both a science and

an art.Of Course is neither a pure science like
physics nor an art like painting.It is a science
because basic principles and procedures on
various theories propounded by financial
experts,
Cost of capital,Capital structure,etc. It also
helps of various statistical techniques ,
econometric models,computer technology,
etc for taking financial structure decisions,
etc. As a result it will be appropriate to say
that
financial
management
is
applied
science.
Financial management is also an art since
the application of human judgement and
skills
is
also
necessary
for
effective
management
of
finances.
Financial
management cannot wholly be derived on
the basis of mathematical or computer based
packages .A lot of discretion and judgment
has to be used by the finance manager.
Experience and Training acquired by the
finance manager are thus equally important.
Thus , Financial management is both art as
well as science.

The End