Financial Management

Finance:
Finance is a field that deals with the study of investments. It includes the dynamics
of assets and liabilities over time under conditions of different degrees of uncertainty and risk.
Definition of Financial Management
It is the management of firm’s financial resources, in relation to its acquisition and application. It is that branch of
management, which deals with the procuring, financing and managing business assets, to achieve the objectives of
the concern.
“The science of money management”
Or
“Finance is an art of managing various available resources like money, assets, investments, securities,
etc.”
Aspects of Financial Management
The two aspects that form the basis of financial management:

Procurement of Funds: The firm acquires funds from an array of sources, such as Debentures and Bonds,
Owner’s funds, i.e. equity shares and preference shares, commercial banks, venture capital, angel financing, hire
purchases and leasing.

Utilization of Funds: Another important aspect of the financial management is the deployment of funds in an
effective manner, i.e. the funds are to be invested in such a way that it yields good returns for the business without
posing a threat to its overall solvency.
Simply, financial management deals with raising finance for the business to meet short term and long term
requirement, mobilization of funds, control over its use and creating a balance.

Objectives of Financial Management or Goal of the firm

Profit Maximization: Conventionally, profit maximization is believed as the ultimate objective of the
business entity. This implies that the company’s decisions are taken while keeping in mind the profits of the
business. Nevertheless, profit maximization is just one of the objectives of the business, but not the only objective.
Wealth Maximization: The wealth of the shareholders can be ascertained through cost-benefit analysis,
adjusted according to the time for which money is invested and the risk involved. In this way, it can be expressed as:
 Wealth = Present Value of benefits – Present value of cost
The firm’s value is reflected by the market value of the company’s shares and the Earnings per Share, which acts as
a performance index of the firm’s progress.
The firm’s business objective sets criteria for the decision making in Financial Management. Profit Maximization is
the basic objective of the firm, but wealth maximization is the overall objective.
Other objectives can be
 To ensure regular and adequate supply of funds.
 To ensure adequate returns to the shareholders.
 To ensure optimum funds utilization.
 To ensure safety on investment’
 To plan a sound capital structure

Key Decisions of Financial Management/ Functions of FM

1. Investment Decision:
The finance manager has to take a decision regarding the selection of the assets, i.e. long-term assets and short-term
assets, in which the firm’s money is to be invested. While long-term investment decision is known as capital
budgeting, the short-term investment decision is called as working capital management.
2. Financing Decision:
The firm’s financing decision is related to the capital structure of the business, i.e. the proportion of the debt and
equity capital in the business. The decisions are made in the light of the cost of capital, risk factor involved and
returns to the shareholders.
3. Dividend Decision:
As the name suggest, dividend decisions of the firm reflects the distribution of firm’s profits among the owners, i.e.
shareholders. The decision will be based on certain factors such as shareholder’s preferences, future expansion
opportunities and investment opportunities for the firm.
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 their smooth
running of the business concern and also maintain the business carefully to achieve the goal of the
business concern. Some of the importance of the financial management is as follows:
 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.
 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.
 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.
 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.
 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.
 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.
 Promoting Savings
It is possible only when the business concern earns higher profitability and maximizing wealth. Effective
financial management helps to promoting and mobilizing individual and corporate savings. Nowadays financial
management is also popularly known as business finance or corporate finances. The business concern or
corporate sectors cannot function without the importance of the financial management.
Role of Financial Managers
The financial manager plays a dynamic role in a modern company’s development. This has not always been the
case. Until around the first half of the 1900s financial managers primarily raised funds and managed their firms’
cash positions – and that was pretty much it. In the 1950s, the increasing acceptance of present value concepts
encouraged financial managers to expand their responsibilities and to become concerned with the selection of
capital investment projects.
Financial managers perform data analysis and advise senior managers on profit-maximizing ideas. Financial
managers are responsible for the financial health of an organization. Financial managers typically:
 Prepare financial statements and business activity reports
 Monitor financial details to ensure that legal requirements are met,
 Supervise employees who do financial reporting and budgeting,
 seek ways to reduce costs,
 Analyze market trends to find opportunities for growth
 Help management make financial decisions.
Business Legal Entities
• Sole Proprietorship:
It is an unincorporated business owned by one individual. Going into a business as a sole proprietor is
simple – one merely has to begin business operations. Proprietorship consists of 80% of the total number
of businesses worldwide.
Advantages:
i. It is easily & inexpensively formed.
ii. It is subject to few government regulations.
iii. The business pays no corporate income tax; only personal income tax is paid by the proprietor.
Limitations:
i. It is difficult for a proprietorship to obtain large sums of capital.
ii. The proprietor has unlimited personal liability for the business debts, which can result in losses that
exceed the money invested by him in the business.
iii. The life of the business organized as proprietorship is limited to the life of the individual who created
it.
Partnership:
A partnership exists whenever two or more persons associate to conduct a non-corporate business. It
could be registered or unregistered.
Advantages:
i. Low cost involved
ii. Ease of formation.
Limitations:
i. Unlimited Liability.
ii. Limited life of the organization.
iii. Difficulty of transferring ownership.
iv. Difficulty of raising large amounts of capital.
Corporation:
A corporation is a limited company and a separate legal entity registered by the government. It is separate
& distinct from its owners & managers. It Can be Private Limited (Pvt. Ltd.) or Public Limited (which
may be listed on Stock Exchange). The businesses in the form of corporations control 80% of global sales
of products and services.
Advantages:
i- Unlimited life:
A corporation can continue even after the death of its original owners.
ii- Easy transferability of ownership interest:
Ownership interests can be divided into shares of stock, which in turn can be transferred far more easily
than can proprietorship & partnership interests.
iii- Limited Liability:
The liability of the shareholders is limited up to the extent of nominal value of shares held by them.
Creditors and banks cannot confiscate personal properties of director & shareholders in case of its
bankruptcy.
Limitations:
i. Double Taxation:
Corporate earnings may be subject to double taxation – the earnings of the corporation are taxed at
corporate level, and then any earnings paid out as dividends are taxed again as income to the
stockholders.
ii. Legal Formalities:
Setting up a corporation, and filing many official documents, is more complex and time consuming than
for a proprietor ship or a partnership