San Carlos College

Department: B.E.S.O.
Subject: Financial Management
Professor: Jeffrey M. Peralta, CPA

FINANCIAL MANAGEMENT: INTRODUCTION

Financial Management (or Business Finance) is a regular practice in a business environment. It involves managing a
company’s financial resources to ensure there is little or no wastage.

It controls every single thing regarding the company’s financial activities which includes the procurement of funds, use
of funds, payments, accounting, risk assessment, and other things that are related to finances.

The Objectives of Financial Management

1. Profit Maximization
One of the reasons a company employs a financial manager is to maximize profit while managing the finance of
the company.

The gain can be in the short or long-term. But the main focus is that the individual or department handling the
financial issues of the company must ensure that the company in question is making sufficient profit.

2. Proper Mobilization of Finance

The collection of funds to run the business is also an integral part of financial management that the manager needs
to handle appropriately.

Once the manager concludes the estimation of the amount needed for a business process, the required amount can
then be requested from any legal sources such as debenture, shares, or even request for a bank loan. But the point is that
there should be a proper balance between the money the firm has and the amount borrowed.

3. The Company’s Survival

The survival of the company is essential. That is one of the reasons the management considers hiring financial
managers in the first place. The manager has to make adequate financial decisions to ensure the company is successful.

4. Proper Coordination
There must be a proper understanding and corporation among the various departments. The finance department
must understand and agree with other departments within the company for the business to function smoothly.

5. Lowers Cost of Capital

Financial managers also try their very best to reduce the cost of capital, which is something that is vital to the
business. They ensure money borrowed attracts little interest rates so the company can maximize profit.

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San Carlos College
Department: B.E.S.O.
Subject: Financial Management
Professor: Jeffrey M. Peralta, CPA

Scope of Financial Management

1. Investment Decisions
Managers need to decide on the amount of investment available out of the existing finance, on a long-term and
short-term basis. They are of two types:

 Long-term investment decisions or Capital Budgeting means committing funds for a long period of time like
fixed assets. These decisions are irreversible and usually include the ones pertaining to investing in a building
and/or land, acquiring new plants/machinery or replacing the old ones, etc. These decisions determine the
financial pursuits and performance of a business.
 Short-term investment decisions or Working Capital Management means committing funds for a short period of
time like current assets. These involve decisions pertaining to the investment of funds in the inventory, cash, bank
deposits, and other short-term investments. They directly affect the liquidity and performance of the business.

2. Financing Decisions
Managers also make decisions pertaining to raising finance from long-term sources (called Capital Structure) and
short-term sources (called Working Capital). They are of two types:

 Financial Planning decisions which relate to estimating the sources and application of funds. It means pre-
estimating financial needs of an organization to ensure the availability of adequate finance. The primary objective
of financial planning is to plan and ensure that the funds are available as and when required.
 Capital Structure decisions which involve identifying sources of funds. They also involve decisions with respect
to choosing external sources like issuing shares, bonds, borrowing from banks or internal sources like retained
earnings for raising funds.

3. Dividend Decisions
These involve decisions related to the portion of profits that will be distributed as dividend. Shareholders always
demand a higher dividend, while the management would want to retain profits for business needs. Hence, this is a
complex managerial decision.
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