Financial Management The business that earns profit can manage itself

Financial management in business refers to without developing dependency promoters or the

an application of management principles to government.
financial activities in the business. Only profit-making entities can think of
Financial management is the art and science tomorrow and beyond and those business entities
of managing money to meet predefined objectives. struck in losses would become a burden to the
It is the process of planning, organizing, society at large.
controlling, and monitoring financial resources to Another important aspect to understand is that
achieve organizational goals and objectives. the term profit is accepted in many societies as long
In business, financial management is the process of as it is earned in legitimate ways.
handling a company’s finances in a way that The profit is critical for a business to pay off
generates value for the overall business. their employees’ salaries, pay suppliers, pay all
Financial management is an organic function outstanding financial obligations. A loss-making
in business undertaken by some dedicated company would have to depend on external sources
departments and designated managers. of funds to take care of financial responsibilities,
In a nutshell, financial management is about the while a profit-making business generates funds
following: within the business.
1. Actions to reduce the cost of finance There are many ways in which a business can
2. Confirms sufficient availability of funds improve its profit. For example, increasing units
3. Deals with the planning, organizing, and sold, increasing the price and cost minimization.
controlling of financial activities like the obtaining Business entities choose to look out for new
and utilization of funds for various financial needs business opportunities, acquire businesses, and
within the business. expand into different industries to capitalize on the
Goals of Financial Management potential and promising business opportunities.
The goals of financial management can be
grouped in many ways. However, most of those 2. Wealth Maximization
goals are overlapping and ultimately boils down to The second most popular goal of financial
the following three goals: management is to increase the wealth of business.
1. Profit maximization This is the most modern approach towards
Profit is one of the most traditional yet popular the goals of financial management.
goals of financial management. In economic terms, This is also called value maximization since this
profit refers to an excess of revenues over the cost. theory focuses on increasing the value of the
Profit is considered as the fuel for a business which business to increase the value of shares by creating
keeps the engine of a business active all the time. wealth for the stakeholders.
The term profit is subject to interpretation.
There are different classes of profits we can observe
in a business. For example,
Profit before Tax (PBT)
Profit after Tax (PAT)
Earnings before Interest and Taxes (EBIT) Creditors
Earnings before Tax Depreciation and Governments
Amortization (EBITDA) Suppliers
The basic purpose of business is to earn profit. EXTERNAL Tax Authorities
No business begins and runs for charity. Customers
Of course, if there is a charitable intention then Media
the business ceases to exist and becomes a Society
charitable institution.
A business begins and runs for profit. Shareholders
Profit is the motive behind every business. Managers
Often profit is considered as the meter for INTERNAL BOD’s
success. Employees
 Wealth maximization in business mostly A business should pick where to invest in order
refers to improving the market price of the share to gain the uppermost imaginable returns.
and enabling the business to pay frequent dividends
so that the investors are motivated enough to The firm puts its funds in obtaining fixed assets
continue in the business. and current assets. When choice with respect to a
fixed asset is taken it is known as a capital
The wealth in this context is based on cash flows budgeting decision.
and not on profits.
3. Dividend Decisions
This theory emphasizes long term perspectives
rather unlike profit maximization goal focusing on The financial decision narrates the payout of
the short term. profits back to investors who provided capital to the
firm.
3. Improving market share
The word dividend refers to that part of the
The business entities may start with a humble profits of a company that is circulated by it among
beginning but they dream to acquire market share. its shareholders.
Market share gives a general idea of the size It is an incentive of shareholders for investments
of a company about its market and its competitors. made by them in the share capital of the company.
The market leader in an industry is the The dividend decision is related to the quantum
company with the largest market share. of profits to be dispersed among shareholders.
It is important to note that when the business
improves the market share, it can start enjoying
economies of scale, reducing the competition
resulting in the growth of revenues. A few important
means to improve market share are listed below:
•Reducing cost Increase volume of sales •Promotion
• Improving efficiency • Introducing new products
•Customization and standardization •Customer The financial policy should align with the
loyalty •New technologies •Talent retention company's strategic planning.
•Acquisitions
It allows the firm in overcoming its weaknesses,
enables the firm to maximize the utilization of its
Scope of Financial Management competencies and to direct the prospective business
opportunities and threats to its advantage.
1. Financing Decisions
What is the relationship between strategy and
A financial manager is required to take decisions finance?
on the sources of finance available to be chosen for
obtaining funds. There is a give and take relationship
between your strategic and financial plans. You
2. Investing Decisions need financial planning to achieve your strategic
Investing decisions are equally critical in a objectives, but your strategic objectives also
business. When the finance manager brings funds to influence your financial strategies.
the business, it is important to make use of those
resources in such a way that creates value for the Why does an organization need both financial
business in the long run. and strategic objectives?

Also, the choice of investments in various The financial goals help in the attainment of
projects needs to be carefully decided. That is the strategic goals.
reason the role of the finance manager is critical in Strategic goals set what the company
capital budgeting decisions. ultimately wants to achieve and financial goals set
the short and long-term financial targets the and earnings per share. It suggests the regular and
company needs to meet in order to attain the consistent dividend payments to the shareholders.
strategic goals.
Investing
Financial objectives are the goals or targets The finance manager is responsible for
related to the financial performance of a business. determining how scarce resources or funds are
There are six types of financial objectives: committed to projects. The investing function deals
1. revenue objectives with managing the firm’s assets. This task requires
2. cost objectives both the mix and type of assets to hold. Investment
3. profit objectives decision should aim at investments in assets only
4. cash flow objectives when they are expected to earn greater than a
5. investment objectives minimum acceptable return, also called handle rate.
6. capital structure objectives
The financial decisions are taken with a
Finance permeates the entire business view to improve the capital appreciation of the
organizations by providing guidance for the firm’s share price. Maximization of firm’s value is
strategic and day to day decisions. reflected in the market price of share since it
Objective Setting is an important phase in depends on shareholder’s expectations regarding
the business enterprise since upon correct objectives profitability long run prospects, timing difference of
setting will the entire structure of strategies, returns, risk distribution of returns of the firm.
policies, and plans of a company rest. Example of Investing Decisions of Financial
managers

Strategic planning is long range in scope and Evaluation and selection of capital
has its focus on the organization as whole. A investment proposal • Determination of the total
company strategic or business plan reflects how it amount of fund that a firm can commit for
plans to achieve its goals and objectives. investment • Prioritization of investment
alternatives Funds allocation and rationing •
Historical financial statements provide Determination of the levels of investments in
insight into the success of a company’s strategic working capital • Determination of fixed assets to
plan and are an important input of the planning be acquired • Asset replacement decision • Purchase
process. or lease decisions • Restructuring reorganization
mergers and acquisition Securities analysis and
Short and Medium Term Maximization of portfolio management
return on capital employed or return on investment.
What are the functions of financial management?
Growth in earnings per share and
price/earnings ratio through maximization of net The functions of financial management
income or profit and adoption of optimum level of involve organizing, planning, controlling and
leverage. directing an organization's financial activities. It
includes applying different management principles
Financial Objectives of the Business Viewpoints to financial assets.
The owner’s perspective which hold that the These efforts focus on allocating capital,
only appropriate goal is to maximize shareholder or monitoring foreign currency, raising capital,
owner’s wealth. budgeting and following product lifecycles.
The stakeholder’s perspective which 1. Estimation of the capital required
emphasizes social responsibility over profitability.
The primary function of managing business
Wealth Maximization Goal finances is estimating the amount of capital
It considers the risk and time value of required.
money. It considers all future cash flow, dividends
 Estimating the capital is essential to determine When taking such allocation and investment
how much capital a firm requires to purchase fixed decisions, the manager focuses on three principles,
assets, modernize and expand the business and meet including liquidity, safety and profitability.
the working capital requirement.
6. Disposal of surplus funds or profits
A financial manager estimates funds required
for long term and short-term purposes during this The next step of financial management is
process. Accurately estimating the capital required deciding how much funds a company retains and
can help in increasing the company's revenue how much they distribute as dividends to
capacity. shareholders from its overall profit.

2. Determination of the capital structure Often, companies distribute surplus funds as

a bonus to employees for performing well.
After estimating the capital required, financial
managers decide on the capital composition and 7. Management of cash
structure. A company requires cash to maintain enough
This might involve short-term and long-term stock, purchase raw materials and pay current
debt equity analysis. Through this analysis, they liabilities.
determine the accurate proportion of debt and After distributing the surplus funds, a finance
equity. manager decides on management.
Determination of capital structure helps It involves forecasting cash inflows or outflows
maximize shareholders' wealth and minimize capital to ensure the company never faces a shortage or
costs. surplus of funds. They also ensure that the company
3. Choice of the source of funds has adequate cash for different purposes like paying
salaries, utility bills and creditors.
The next step is to choose the source of funds.
8. Financial control
Apart from using equity capital, a financial
manager can choose other funding options like The last function of financial management is
preferred shareholders, banks and financial ensuring financial control of the company's
institutions, debentures, public deposits and other finances.
third-party sources. Usually, the return on investment (ROI)
Usually, financial managers consider the provides a holistic overview of a company's
advantages and disadvantages of each source and financial performance.
period of financing. Using techniques like financial forecasting,
4. Procurement of financial resources budgetary control, ratio analysis, cost and profit
control and internal audits, managers determine the
The acquisition of funds by financial managers financial performance.
is not solely dependent on the cost of raising funds
but also on other factors, such as the choice of Also, the financial control tells how much
investors, market conditions and government policy. money a company has, what is the source of that
money and what expenses the company incurred
5. Utilization of funds during a financial year or specific accounting
period.
Upon procuring the funds, financial managers
invest in various tangible and intangible assets to What is the role of a financial manager?
maximize return on investment.
The role of a financial manager is to oversee
These managers can allocate funds into various the financial health of an organization.
ventures to ensure safety on investment.
They generate financial reports, direct
investment activities and create an organization's
long-term financial goals.
 They are often responsible for analyzing
fiscal data and advising senior managers on any
opportunities to maximize profits.