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Financial Management

Financial Management



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Published by Anurag Sharma

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Published by: Anurag Sharma on Apr 15, 2008
Copyright:Attribution Non-commercial


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The basic message behind the statement " Financial Management is concernedwith the solutions of the three major decisions a firm must make theinvestment decision, the financing decision and the dividend decision " is self evident.A firm wants to earn the profit because the founders of the firm believe thatthere is an opportunity to make profitable investment. This profitableinvestment need to be financed and profit distributed amongst those who havecontributed the capital. Hence, there is need for decisions such as how tofinance investment ? How to distribute profit among shareholders ?Modern approach of financial management basically provides a conceptual andanalytical framework for financial decision making. It emphasises on aneffective use of fund. According to this approach the financial management canbe broken down into three different decisions:1) Investment Decisions;2) Financing Decisions; and3) Dividend Decisions1) Investment Decisions : These involve the allocation of resources amongvarious type of assets. what portion of the firm's fund should be invested invarious current assets such as cash. marketable securities and receivable andwhat portion in fixed assets, such as inventories and plant and equipment. Theassets mix affects the amount of income the firm can earn. For example, amanufacturer is in business to earn income with fixed assets such as machineryand not with current assets. However, placing too high a percentage of itsassets in new building or new machinery may leave the firm short of cash tomeet an unexpected need or exploit sudden opportunity. The firm’s financialmanager must invest in fixed assets. but not too much. Besides determining theassets mix financial manager must also decide what type of fixed and currentassets to acquire. All this covers area pertaining to capital budgeting andworking capital management.2) Financing Decision : It is the next step in financial management forexecuting the investment decisions once taken a look at the balance - sheetof a company indicates that it obtains finance from shareholders ordinary,preference, debenture holders, or long - term loans from the institutions, bankand other sources. There are variations in the provisions contained inpreference shares, debentures, loans papers etc. Thus financing decisions i.e.The financing mix of capital structure. Efforts are made to obtain an optimalfinancing mix for a particular company. This necessitates study of capitalstructure as also the short and intermediate term financing plans of thecompany.In more advanced companies financing decision today , has become fully -integrated with top - management policy formulation via capital budgeting,
long - range planning , evalution of alternate uses of funds and establishmentof measurable standards of performance in financial terms.3) Dividend Decisions : The third major decision of financial management is thedecision relating to the dividend policy. The dividend decision should beanalysed in relation to the financing decision of a firm . Two alternatives areavailable in dealing with the profits of a firm; they can be retained in thebusiness. Which courses should be followed - dividend or retention ? Onesignificant factor is that the dividend pay out ratio i.e. what proportion of netprofits should be paid out to the shareholders. The decision will depend uponthe preference of the shareholders and investment opportunitiesavailable within the firm. The second major aspect of the dividend decision isthe factors determining dividend policy of a firm in practiceAll the above decision of finance are inter - related with one another. Anydecision undertaken by the firm in one area has its impact on other areas aswell. For example acceptance of an investment proposal by a firm affects itscapital structure and dividend decision as well. So these decision are inter -related and should be taken jointly so that financial decision is optimal. All thefinancial decision have ultimately to achieve the firm's goal of maximisation of shareholders wealth.3.Modern Approach to corporate finance in an improvement on the TraditionalApproach :company finance is identified with raising of funds in meeting financial needsand fulfilling the set objectives of a company. At the outset in the earlyyears corporate finance was confined to :1) arrangement of funds from financial institutions.2) mobilising funds through financial institutions.3) looking after the legal and accounting relationship betweena corporate unitand its sources of funds.The traditional approach to corporate finance laid emphasis on the externalfund. But the subject or corporate finance spreads itself wider and wider.In the changed scenario the scope and importance of corporate finance hasbeen greatly widened. onalNow it not only includes the traditional andconventional role of taking decision viz, investment, financing and dividend butalso covers the area of reviewing and controlling decision to commit fundsto new and on going uses.The field underwent a number of significant changes - new financial instrumentand transactions like options on future contracts, foreign currency swaps,and interest rate swaps, GDR ( Global Depository Receipts ), globalisation of capital market, liberalisation measures taken by various government - all thesehave emphasised the need for effective and efficient modern approach tocorporate finance.
The modern approach to corporate finance lay emphasis that the corporateunit must make the best and most efficient use of finances available to it.Accordingly the central theme of financial policy is the wise use of funds and arational matching of advantage of potential uses against the cost of alternative potential useu with a desire to reach the set financial goals. Itfacilitates the key - how large should an undertaking be, in what form assetsshould beheld with capital market.Given the existing legal, poltical and economic environment the modernapproach entails a conceptual framework and is concerned with issues like -(a) - financial goals or corporate unit;(b) - adequacy of capita - maintaining minimum levels of capital to support theperceived risks ;(c) - controls of client's money.(d) - measuring the performance of the company.(e) - position of the firm within the group.Thus it is quit obvious that the modern approach to corporate finance is anextension as well as an improvement on the traditional approach.
Posted by
anurag agnihotri
Financial management
: it is a specialized functional field, dealing with themanagement of finance right from estimation and procurement till its effectiveutilization in the business. It is an area looked after by the finance managerwho deals with the following issues:i). Which new proposals for employing capital should be accepted by the firm ?ii). How much working capital will be needed to support the firm's operations ?iii). Where should the firm go to raise long term capital and how much will itcost ?iv). Should the firm declare dividend on its equity capital and if so, how large adividend should be declared ?v). What steps can be taken to increase the value of firm's equity capital?The above issues are solved by taking three major decisions (1) Investmentdecision (2) Financing decision (3) Dividend decision. As objective of theFinancial Management is to maximize the value (i.e. wealth of shareholders).the firm should strive for an optimal combination of the there interrelateddecisions solved jointly .The decisions to invest in a new capital project, forexample, necessities financing the investment. The financing decisions in turn,influences and is influenced by the dividend decision. The retained earningsused in internal financing represents dividends foregone by the shareholders.With a proper conceptual frame work, joint decisions that tend to be optimalcan be reached .

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