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FINANCIAL MANAGEMENT

Meaning
Finance Function
Aims of Finance Function
Financial Management
Goals of Financial Management
Financial Decisions
 Introduction
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 Every Business needs capital.

 Capital is required at the time of beginning of the business, is
in operation and also it’s grows in size and expands.
 Establishment of any business is not possible without finance.
Business finance means the management of assets and money.
 Today, finance is crucial for any company.
 Its primary focus is to increase profit and minimize financial
risks.
 Business finance refers to money and credit employed in
business.
  It involves procurement and utilization of funds so that business
may be able to carry out their operations effectively and
efficiently.
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 Finance decision regarding source of funds are very crucial for
any business.
 The problems of determining the amount of capitalization is
necessary both for a newly started company as well as for an
established concern.
 Concept of Business Finance

 Business finance is encompasses a wide range of activities and

disciplines regarding the management of money and other
valuable assets.
 Small business owners must have a solid understanding of the
principles of finance to keep their companies profitable.
 Business finance refers to money and credit employed in business.
 Finance is the basic of business. It is required to purchase assets,
goods, raw materials and for the other flow of economic
activities.
 Business finance programs in universities familiarize students with
accounting methodologies, investing strategies and effective debt
management.
 Definitions:

 Scott and Brigham

“Finance is concerned with decision about money or more
appropriately cash flows.”
 Professor Gloss and Baker

Business finance is concerned with the sources of funds available

to enterprises of all sizes and the proper use of money or
credit obtained from such sources.”
 E.W Walker

“Business finance is to planning, coordinating, controlling an

implementing of financial activities of business institution.”
 Scope of Business Finance

 The scope of business finance is very wide.

 While accounting is concerned with the routine type of work,
business finance is concerned with financial planning, policy
formulation and control.
 Earnest W. Walker and William are of the opinion that the
financial function has always been important in business
management.
 The financial organization depends upon the nature of the
organization whether, it is a proprietary organization, a
partnership firm or corporate body.
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 The significance of the finance function depends on the nature

and size of a business firm.
 The role of business finance officers must be clearly defined to
avoid conflicts and the overlapping of responsibilities.
 There are various fields covered by business finance and some
of them are:
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1. Financial Planning and Control

2. Deciding Capital Structure
3. Selection of Source of Finance
4. Financial Statement Analysis
5. Working Capital Management
6. Capital Building
7. Management of Financing
8. Dividend Management
 Significance of Business Finance

 Businesses have to consider their finances for so many

purposes, ranging from survival in bad times to improving the
next success in good ones.
 How you finance your business can affect your ability to
employ staff, purchase goods, acquire licenses, expand and
develop.
 While finances are not necessarily as important as vision and a
great product, they are crucial to making the good issue
happen.
 Significance of Business Finance
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1. Starting Capital
2. Debt Ratios
3. Business Cycles
4. Growth
5. Payroll
 DEFINITION OF FINANCIAL MANAGEMENT
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 Financial management is an integral part of overall management. It is

concerned with the duties of the financial managers in the business firm.
 Howard and Upton :
Financial management “as an application of general managerial
principles to the area of financial decision-making.
 Weston and Brigham :
 Financial management “is an area of financial decision-making,
harmonizing individual motives and enterprise goals”.
 Joshep 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.
 SCOPE OF FINANCIAL MANAGEMENT
 Financial management is one of the important parts of overall
12 management, which is directly related with various functional
departments like personnel, marketing and production.
 Financial management covers wide area with multidimensional
approaches.
 The following are the important scope of financial
management.
1. Financial Management and Economics
2. Financial Management and Accounting
3. Financial Management or Mathematics
4. Financial Management and Production Management
5. Financial Management and Marketing
6. Financial Management and Human Resource
 OBJECTIVES OF FINANCIAL MANAGEMENT

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 Effective procurement and efficient use of finance lead to

proper utilization of the finance by the business concern. It is
the essential part of the financial manager.
 Hence, the financial manager must determine the basic

objectives of the financial management.

 Objectives of Financial Management may be broadly divided

into two parts such as:

1. Profit maximization
2. Wealth maximization.
 Objectives of Financial Management
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Wealth
maximization

Profit
maximization

Objective
 Profit Maximization

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 Main aim of any kind of economic activity is earning profit.

 A business concern is also functioning mainly for the purpose
of earning profit.
 Profit is the measuring techniques to understand the business
efficiency of the concern.
 Profit maximization is also the traditional and narrow
approach, which aims at, maximizes the profit of the concern
 Profit maximization consists of the following important features.
 1. Profit maximization is also called as cashing per share
maximization. It leads to maximize the business operation for
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profit maximization.
2. Ultimate aim of the business concern is earning profit, hence,
it considers all the possible ways to increase the profitability
of the concern.
3. Profit is the parameter of measuring the efficiency of the
business concern. So it shows the entire position of the business
concern.
4. Profit maximization objectives help to reduce the risk of the
business.
 Favorable Arguments for Profit Maximization
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 The following important points are in support of the profit

maximization objectives of the business concern:
(i) Main aim is earning profit.
(ii) Profit is the parameter of the business operation.
(iii) Profit reduces risk of the business concern.
(iv) Profit is the main source of finance.
(v) Profitability meets the social needs also.
 Unfavorable Arguments for Profit
Maximization
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 The following important points are against the objectives of

profit maximization:
(i) Profit maximization leads to exploiting workers and consumers.
(ii) Profit maximization creates immoral practices such as corrupt
practice, unfair trade practice, etc.
(iii) Profit maximization objectives leads to inequalities among the
sake holders such as customers, suppliers, public shareholders,
etc.
 Wealth Maximization
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 Wealth maximization is one of the modern approaches, which

involves latest innovations and improvements in the field of the
business concern.
 The term wealth means shareholder wealth or the wealth of
the persons those who are involved in the business concern.
 Wealth maximization is also known as value maximization or
net present worth maximization.
 This objective is an universally accepted concept in the field of
business.
 Favorable Arguments for Wealth Maximization
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(i) Wealth maximization is superior to the profit maximization

because the main aim of the business concern under this
concept is to improve the value or wealth of the shareholders.
(ii) Wealth maximization considers the comparison of the value to
cost associated with the business concern. Total value detected
from the total cost incurred for the business operation. It
provides extract value of the business concern.
(iii) Wealth maximization considers both time and risk of the
business concern.
(iv) Wealth maximization provides efficient allocation of
resources.
(v) It ensures the economic interest of the society.
 Unfavorable Arguments for Wealth
Maximization
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(i) Wealth maximization leads to prescriptive idea of the business

concern but it may not be suitable to present day business
activities.
(ii) Wealth maximization is nothing, it is also profit maximization,
it is the indirect name of the profit maximization.
(iii) Wealth maximization creates ownership-management
controversy.
(iv) Management alone enjoy certain benefits.
(v) The ultimate aim of the wealth maximization objectives is to
maximize the profit.
(vi) Wealth maximization can be activated only with the help of
the profitable position of the business concern.
 Value maximisation
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 The primary objective of FM is to maximize the value of

the firm.
 It facilitates in maximizing the value of equity share
which serves as an index of the performance of the
company.
 It takes into consideration the present and the future
earnings, risk dividend, retention policies, level of
gearing.
 The Share holder wealth is maximized only if market
share increases, hence WM is redefined as value
maximization
 Other maximisation of objectives
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 Sales Maximizations
 Growth Maximizations
 Return on investment maximization
 Social objectives
 Group of objectives ( Production, inventory, sales,
market share, profit)
 Finance function
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Meaning
It is one of the main functions of a business
organization, which, aims at getting and carefully
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.
Approaches to Finance Function
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 Providing of funds needed by a business on most suitable terms

(This approach confines only to raising of funds)
 Second Approach relates finance function to cash. This approach

implies that finance function is related to every activity in the

business .
 Third approach to this function predicts the raising of funds and
their effective utilization .
To conclude, finance function covers financial planning, raising of
funds, allocation of funds, financial control.
 FUNCTIONS OF FINANCE MANAGER
 Finance function is one of the major parts of business
26 organization, which involves the permanent, and continuous
process of the business concern.
 Finance is one of the interrelated functions which deal with
personal function, marketing function, production function and
 research and development activities of the business concern.
 At present, every business concern concentrates more on the
field of finance because, it is a very emerging part which
reflects the entire operational and profit ability position of the
concern.
 Deciding the proper financial function is the essential and
ultimate goal of the business organization.
 Finance manager performs the following major
functions:
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1. Forecasting Financial Requirements

2. Acquiring Necessary Capital
3. Investment Decision
4. Cash Management
5. Interrelation with Other Departments
Organisation chart of finance function
Board of Directors
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Managing Director

Finance Director / CFO

Financial Internal Treasurer

Controller Auditor

Manager manageme Manager Manager Cash Corp Foreign

Accounts nt Credit Taxation manager Finance & exchange
Accountant Funding manager
Manager
 Financial objectives of a firm
29  Return on Capital employed or ROI
 Value addition and profitability
 Growth in EPS and PE ratio
 Growth in MV of Share
 Growth in Dividends
 Optimum level of leverage
 Survival and growth of the firm
 Minimisation of finance charges
 Effective utilisation of Short, medium and long term
objectives
 Types of decisions
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 Investment decisions
 Finance Decisions
 Dividend decisions
Investment decisions
 Ascertainment of the total volume of funds, a firm can commit
31 Appraisal and selection of capital investment proposals
 Measurement of risk and uncertainty in the investment proposal
 Prioritisation 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, reorganisation, mergers and acquisitions
 Securities analysis and portfolio management
 Finance Decisions
 Determination of the degree or level of gearing
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 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
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 Optimizations of finance mix to improve returns
 Portfolio management
 Consideration of the impact of under capitalisation and
over capitalisation
 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.
 Dividend Decisions
34 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 decisions
 Sources of Finance
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 Business Growth
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 Internal Sources of Finance and Growth
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 ‘Organic growth’ – growth generated through the

development and expansion of the business itself. Can be
achieved through:
 Generating increasing sales – increasing revenue to impact
on overall profit levels
 Use of retained profit – used to reinvest in the business
 Sale of assets – can be a double edged sword – reduces
capacity?
 External Sources of Finance
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 Long Term – may be paid back

after many years or not at all!
 Short Term – used to cover
fluctuations in cash flow
 ‘Inorganic Growth’ – growth
generated by acquisition

The existence of capital markets enable firms to raise

long term loans and share capital.
 Long Term
 Shares (Shareholders are part owners of a company)
39  Ordinary Shares (Equities):
◼ Ordinary shareholders have voting rights
◼ Dividend can vary
◼ Last to be paid back in event of collapse
◼ Share price varies with trade on stock exchange
 Preference Shares:
◼ Paid before ordinary shareholders
◼ Fixed rate of return
◼ Cumulative preference shareholders – have right to dividend carried over to
next year in event of non-payment
 New Share Issues – arranged by merchant or investment banks
 Rights Issue – existing shareholders given right to buy new shares at
discounted rate
 Bonus or Scrip Issue – change to the share structure – increases number
of shares and reduces value but market capitalisation stays the same
 Long term
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 Loans (Represent creditors to the company – not owners)

 Debentures – fixed rate of return, first to be paid
 Bank loans and mortgages – suitable for small to medium sized firms
where property or some other asset acts as security for the loan
 Merchant or Investment Banks – act on behalf of clients to organise
and underwrite raising finance
 Government/EU – may offer loans in certain circumstances
◼ Grants
 Short Term
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 Bank loans – necessity of paying interest on the payment, repayment periods from
1 year upwards but generally no longer than 5 or 10 years at most
 Overdraft facilities – the right to be able to withdraw funds you do not currently
have
 Provides flexibility for a firm
 Interest only paid on the amount overdrawn
 Overdraft limit – the maximum amount allowed to be drawn - the firm does not
have to use all of this limit
 Trade credit – Careful management of trade credit can help ease cash flow –
usually between 28 and 90 days to pay
 Factoring – the sale of debt to a specialist firm who secures payment and charges
a commission for the service.
 Leasing – provides the opportunity to secure the use of capital without ownership –
effectively a hire agreement
 'Inorganic Growth'
 Acquisitions
 The necessity of financing
external inorganic growth
 Merger:
◼ firms agree to join together –
both may retain some form of
identity
 Takeover:
◼ One firm secures control of the
other, the firm taken over may
lose its identity

Safeway – subject to a £3 billion takeover by

Morrisons. Securing the £3 billion necessary is a
specialist job.

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