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Fundamentals of Financial Management (Overview)

Fundamentals of Financial Management (Overview)

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Published by Ali Raza Sahni

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Published by: Ali Raza Sahni on Aug 27, 2012
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08/27/2012

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Financialmanagement 
 
 
FINANCIAL MANAGEMENT
Financial
 
management
is area of management which concerned withplanning, administration and control uses of resources in monetary terms. Thediscipline is to be divided in to long term and short term decisions and thetechniques. Financial system is consists of public as well as private interestsand also the markets that serve them.(a) Profit maximization and the(b) Wealth maximization.Actually the term '
objective'
is to be used in the sense of an object, a goal ordecision criteria. Three decisions - Investment decision, financial decision anddividend policy decision are guided by objective. It should be noted that theterm objective provides a normal framework. So, a firm is tried to achieve andpolicies which should be follow so that the certain goals are to be achieved. Itis also to be noted that the firms do not necessarily follow them all.
How to maximize the profit:
 Profit is to be maximized by considering the goal of financial management. Inthis approach, the actions that Increase profits should be undertake and theactions that decrease the profits are surely avoided. So it is obvious that thevalue created by the use of resources is much higher than the Inputresources. So in all the actions, one test is to be used I.e. select the assets,projects and the decisions that are profitable and reject those which are notprofitable.
Ambiguity:
Maximized profit is the term for financial decision is vague and ambiguousconcept. It lacks the precise connotation. The term 'profit' is amenable todifferent type of interpretations by the different peoples. Example is here,profit may be a long-term or a short-term. It may be total profit or rate of aprofit. It may be a net profit before the tax or net profit after the tax.
Benefits of time:
Another objection to the maximization of the profit criterion is, It Ignores thedifferences in the time pattern of the benefits received from the Investmentproposals or courses of the action. When the profitable work is out
the biggerthe better principle
is adopted as the decision is based upon the totalbenefits received over the working life of asset.
Benefits of quality:
The most important technical limitation of profit maximization criterion is, itignores the quality aspects of benefits which are associated with the financial
 
 
course of action. Actually the term 'quality' means the degree of certaintyassociate with the benefits can be expected.It is not suitable and inappropriate as an operational objective of Investmentfinancing and dividend decisions of a firm. It is vague and ambiguous.An appropriate operational decision criterion
for
financial managementshould possess the following quality.a) It should be the precise and exact.b) It should be based on the bigger and the better principle.c) It should be considered both quantity and quality dimensions of benefits.d) It should be recognized the time value of money.
Maximization of wealth:
Wealth maximization through decision criterion is also known as ValueMaximization. It usually removes the technical limitations of the profitmaximization criterion. It has the three requirements of a suitable operationalobjective of financial courses of action. These three features are exactness,quality of benefits and time value of the money.
Exactness
: The value of asset should be determined In terms of returns itcan be produce. Thus, the worth of a course of action should be valued Interms of the returns less than the cost of undertaking the particular course of action. Important element in the computing of value of a financial course of action is the exactness in computing the benefits associated with the course of action. As against this the computation of accounting is not even exact.
Quality and Quantity Benefit and Time Value of Money:The
second feature of wealth maximization criterion is that. It considers boththe quality and quantity dimensions of benefits. Moreover, it also incorporatesthe time value of money. As stated earlier the quality of benefits refers tocertainty with which benefits are received In future.The more certain the expected cash in flows the better the quality of benefitsand higher the value. On the contrary the less certain the flows the lower thequality and hence, value of benefits. It should also be noted that money hastime value. It should also be noted that benefits received in earlier yearsshould be valued highly than benefits received later.The operational implication of the uncertainty and timing dimensions of thebenefits associated with a financial decision is that adjustments need to bemade in the cash flow pattern. It should be made to incorporate risk and to

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