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FINANCIAL MANAGEMENT
It is one of the main functions of a business organisation, which, aims at procuring and
judiciously utilizing the financial resources with a view to maximizing the value of the firm
thereby the value of the owners i.e., equity shareholders in a company is maximized.
Financial management refers to that part of management activity which is concerned with the
planning and controlling of form’s financial resources. It deals with the finding out various
sources for raising funds for the firm.
“Financial management is the operational activity of a business that is responsible for obtaining
and effectively utilizing the funds necessary for efficient operations”-Joseph and Massie.
“Financial management is the operational activity of a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient operations”-Joseph and Massie.
“Financial management is the area of business management devoted to a judicious use of capital and a
careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its
goals” – J.F Bradlery.
“Financial management is an area of financial decision making, harmonizing individual motives and
enterprise goals” – Weston and Brigham.
The first and foremost decision of the finance manager in any organisation has to carefully estimate the
total funds required by the organisation. It includes both working capital and fixed capital.
Financing decision:-
This second important decision of the finance manager, after estimation of the total fund requirement
by the finance manager has to clearly identify the sources from which the funds can be raised. And also the
finance managers try to obtain best financing mix or optimum capital structure of the firm.
Investment Decision:-
Under this aspect the finance manager has to concentrate investment decision in both capital assets and
current assets. But any how the finance manager give the special attention to the capital budgeting decisions.
Capital budgeting is the long term planning for the proposed capital outlay. It involves huge amount of capital
and also it would give benefits in some definite future period. Simply investment decision otherwise known as
capital budgeting decisions.
Dividend Decision:-
The formulation of sound dividend policy is another important decision of the finance manager. He
must very clearly decide, whether the firm should distribute all the earned profits to its shareholders or retain
certain portion and distribute the balance amount. In this respect he assess the dividend payout ratio ie
proportion of profits distributed as dividend and retention percentage.
Liquidity Decision:
Huge funds invested in current assets affect the organisations profitability and liquidity. So the finance
manager can take appropriate decision for the investment in current assets. Investment in current assets should
be managed effectively because in order to protect the firm from the risk of liquidity. Suppose the firm should
invest insufficient fund in current assets, it may become illiquid and more risky and also lose profitability. And
at the same time excess fund invested in current assets create idle current assets and it would not earn
anything. To overcome this difficulties a proper trade-off must be achieved between profitability and liquidity.
Financial management of the organisation has to estimate financial needs with help of the cash flow
statements, cash budgets and other related tools. The financial needs can be assessed by forecasting expected
funds in business and analyzing its implications.
In any financial decision make an immediate and direct effect on the business. It is also like with the
profitability. Financial management contribute valuable guidance to concern with regard to virtuous and
important financial aspects.
It indicates allocation and deployment of funds to various assets enable to achieve the maximum
return. In all the times financial manager should properly allocate funds among various projects after examine
the profitability and leverage.
All Entrepreneur must expect a continuous and consistent return on investment. The cost of each
financial decision and return of each must be analyzed. Where any deviations are found, necessary guidance
should be given to overcome such difficulties.
Adequate finance is very much essential for the successful operation of the any business. In this
respect proper financial planning needs attention on degree of profitability and alternative plans.
It indicates financial management of the concern should advise and supply information about the
financial performance to the top management and is also taking necessary steps for maintaining up to date
records to the performance of financial decisions.
The general concept of time value of money is very simple. Under this concept the value of money
received today is more than the value of same amount of money received after a certain period. Actually the
value of money received today is more than the value of the same amount receivable after 7 or 12 years. In
reality sooner the money receives is better.
Anything may be happen in future. Either in the individual or an organization there may a chance for
not getting the cash inflow and hence they will like to receive money immediately. Because future is
always uncertain and involves heavy risk.
(2) To satisfy present needs:
In the economics point of view people in actual life prefer to use their money for satisfying present
needs than future needs. For the purpose of purchasing clothes, television, Car and luxurious articles for their
present sophisticated life. They feel present needs are considered more urgent as compared to future needs.
Money has time value. Because more investment opportunities are available to invest money received
immediately than the future. For example Mr. Lal receives Rs. 40,000 today. But immediately he can invest
either banks or shares. It can earn some interest or appreciation. In reality he gets an interest of 12%.
Actually at the end of the first year he will have the value of Rs. 44,800. Therefore it is the opportunities for
the investor to receive Rs. 40,000 at present as it will enhance into Rs.44,800 at end of the year. If he is invest
in shares some times it may be doubted for one year also. So without investment, any investor is difficult
enhance their earnings.
The cash flows received actually differ according to the time of occurrence. It is actually adjusted to
reflect the time value of money. The following techniques employed for the determining time value of money.
A. Compounding Technique
B. Discounting or Present value Technique.
Investment decisions
Ascertainment of the total volume of funds, a firm can commit
Appraisal and selection of capital investment proposals
Measurement of risk and uncertainty in the investment proposal
Prioritization of investment decisions
Fund allocation and its rationing
Determination of fixed assets to be acquired
Determination of the level of investments and its management
Buy or lease decisions
Asset replacement decisions
Restructuring, reorganization, mergers and acquisitions
Securities analysts and portfolio management
2. Financing decisions: These decisions relate to acquiring the optimum finance to meet financial
objectives and seeing that fixed and working capital are effectively managed. The financial manager
needs to possess a good knowledge of the sources of available funds and their respective costs, and needs
to ensure that the company has a sound capital structure, i.e. a proper balance between equity capital and
debt.
Finance Decisions
Determination of the degree or level of gearing
Determination of the pattern of LT, MT & ST funds
Raising of funds through various instruments
Arrangement of funds through various institutions
Consideration of interest burden
Consideration of debt level changes and firm’s bankruptcy
Taking advantage of interest and depreciation in reducing the tax liability of the firm
Considering the various modes on improving the EPS and market value of the share.
Consideration of cost of capital of individual component and weighted average cost of capital to the
firm
Optimization of finance mix to improve returns
Portfolio management
Consideration of the impact of under capitalization and over capitalization
Consideration for foreign exchange risk exposure
Balance between owner’s capital and outside capital
Evaluation of alternative use of funds
Review of performance by analysis.
3. Dividend decisions: These decisions relate to the determination as to how much and how frequently
cash can be paid out of the profits of an organization as income for its owners/shareholders. The owner
of any profit-making organization looks for reward for his investment in two ways, the growth of the
capital invested and the cash paid out as income; for a sole trader this income would be termed as
drawings and for a limited liability company the term is dividends.
Dividend decisions
Determination of dividend and retention policies of the firm
Consideration of the impact of the levels of dividend and retention of earnings on the market value of
the share and the future earnings of the company
Consideration of possible requirements of funds by the firm for expansion and diversification
proposals for financing existing business requirements
Reconsideration of distribution and retention policies in boom and recession period
Considering the impact of legal and cash flow constraints on dividend decision
9. a) Calculate the future value if Rs.5000 deposit today for 10 years from now at 8% of interest
Gn:
Principle- Rs.5000
Rate of Interest-8%
No.of Years -10
FV=P(1+r/100)^n
=5000(2.1589)
=10794
b) Calculate the future value for deposit Rs.500000 for 4 years at 8% value on quarterly basis
Gn:
Principle- Rs.5000000
Rate of Interest-8%= 2% (quarterly)
No.of Years -4*4=16
FV=P(1+r/100)^n*4
=5000000(1.02)^16
=6863928