Finance is the lifeline of any business.

However, finances, like most other resources,

are always limited. On the other hand, wants are always unlimited. Therefore, it is
important for a business to manage its finances efficiently. For any business, it is
important that the finance it procures is invested in a manner that the returns from
the investment are higher than the cost of finance. In a nutshell, financial
management –

 Endeavors to reduce the cost of finance

 Ensures sufficient availability of funds
 Deals with the planning, organizing, and controlling of financial activities like
the procurement and utilization of funds.

Financial management is the activity concerned with planning, raising, controlling and
administering of funds used in the business.” – Guthman and Dougal

“Financial management is that area of business management devoted to a judicious

use of capital and a careful selection of the source of capital in order to enable a
spending unit to move in the direction of reaching the goals.” – J.F. Brandley

“Financial management is the operational activity of a business that is responsible for

obtaining and effectively utilizing the funds necessary for efficient operations.”- Massie

 Scope of Financial Management

1. Capital Structure & Planning

In this scope of financial management, the professionals must create a plan for
structuring this capital after forecasting the financial budget. They must first keep
tabs on transactions and divide the available funds into various categories, such as
the owner's risk capital, borrowed capital, and the short- and long-term debt-equity
ratio.

2. Capital Budgeting

This scope of financial management involves predictions about all business

transactions and operating expenses are the responsibility of the company's financial
management executives. They produce a probable estimate of the fixed capital and
working capital the company will need within a specific time period based on this
estimate. The financial experts must also forecast any additional funds that the
business might receive from investors. They consequently develop a budget for the
distribution of those money. Learn how to become a financial analyst.

3. Financial Decision

Financial choices can be made with reference to a variety of funding sources,

investments and cash flow management. The company can obtain capital from a
variety of sources, including shareholders, banks, public deposits, and other lenders.
The financial management division examines each of these sources carefully and
selects the one with the highest profit and lowest liability.

4. Working Capital Management

Another prominent decision that comes under the scope of Financial Management is
working capital management. To determine the cash flow, financial executives first list
the company's assets and liabilities. Short-term operational expenses and short-term
liabilities are paid for with this cash flow. To manage working capital, the finance
department examines a variety of ratios. They comprise the inventory ratio, the
collection ratio, and the working capital ratio. The study's findings aid professionals in
conducting efficient commercial operations.

5. Dividend Decision

The dividend decision is the essential scope of financial management. A financial

manager's primary goal is to maximise shareholder value while contributing to the
reputation of the organisation. The choice to declare a dividend is fundamental to
financial management. Dividends are payments made to shareholders and are
determined using EPS.

6. Managing and Accessing risk

One of the essential processes that comes under the scope of Financial Management is
managing and accessing risks. Risks frequently manifest themselves in unanticipated
events or unanticipated market situations. Financial managers need to have a solid
strategy in place to deal with these circumstances. Also, with the assistance of
experts, they must anticipate potentially dangerous circumstances and make an effort
to avoid them. Explore advantage of financial risk management and how to measure
financial risk management.

7. Market risk

For public firms, market risk has an impact on the company's investments, reporting,
and stock performance. Indicators of industry-specific financial risk, such as a
pandemic that affects restaurants or the shift from a direct-to-consumer approach in
retail, may also exist.

8. Credit risk

The consequences of, for instance, late payments from customers and a company's
inability to pay obligations, which may negatively affect creditworthiness and
valuation, which influences a company's capacity to borrow money at favourable rates.

9. Liquidity risk

Teams in charge of accounting and finance must keep an eye on present cash flow,
forecast future cash needs, and be prepared to discharge working capital as required.

10.Operational risk

Many finance teams are not familiar with this large group. The likelihood of a
cyberattack, the need for cybersecurity insurance, the existence of disaster recovery
and business continuity plans, and the crisis management techniques to be applied in
the event that a senior executive is accused of fraud or misconduct are some examples
of the subjects it might cover.

11.Procedures

The procedure is the most essential scope of financial management. Financial data,
including invoices, payments, and reports, are processed, and communicated by the
finance department in accordance with policies established by the financial manager.
Also, these written regulations outline who in the organisation is in control of and
authorises financial decisions. For a variety of organisation types, there are policy and
procedure templates accessible, so businesses don't have to start from scratch.
An Example of Financial Management

The CEO of a soap manufacturer wants to launch shower gel as a new product. She
will ask her team to estimate the cost of making the gel and the financial manager to
decide how that money should be raised, such as through a bank loan, respectively.
The finance manager will secure that money and make sure they are used in the most
economically advantageous manner to create gels. In the event that the gels are a
success, the finance manager will compile information to aid the management team in
deciding whether to use the earnings to expand the gel production, launch a line of
shampoos, distribute a dividend to shareholders, or adopt some other course of action.
The financial manager will make sure the business always has sufficient money on
hand to pay the new employees. Also, they'll examine whether the business is making
and spending as much money as she anticipated when she created the project's
budget

Importance of Financial Management

1. Helps organizations in financial planning

To understand what financial management is and examples of financial management,

you must know that financial planning is a crucial part of an integrated and
sustainable organization because it assists in branding the company among
competitors. In addition, financial management helps the company to ascertain fund
requirements and decides the necessary steps to meet those requirements.

2. Assists in acquiring funds from different sources

Another important role of financial management is to understand available sources

and acquire funds for the business. This acquisition must be made keeping in mind
the cost and liabilities.

3. Helps in investing an appropriate amount of fund

The very definition of financial management entails managing and allocating available
finances. The proper functioning of the finance department boosts the growth and
efficiency of the organization. When the funds are utilized in a precise manner, the
financial management can work toward holding the cost of capital and amplifying the
company's worth. This will ultimately solidify the financial standing of the
organization.

4. Increases organizational efficiency

Financial management focuses on establishing a firm position for the company in the
market. It achieves this through a framework for increasing the investors' and
shareholders' wealth. The main objective of an organization is to perform well and
optimize profits while stumping up the economy.

5. Reduces delayed production

Production delays are the root cause of poor financial management. It causes
inefficiency in every department. Secure financial planning monitors production
timelines and deadlines and tries to reduce production delays.

6. Financial costs planning

This involves projections regarding the company's financial requirements to meet its
short-term and long-term objectives. Financial management executives provide a
vision for daily operations and enable planning for cost reduction and profit
maximization.

7. Provides economic stability

Maintaining economic stability is a prerequisite for an organization to achieve constant

growth. Sound financial resources will help an organization expand its horizons and
thrive in the business. To achieve financial stability, it is important to have efficient
financial management in place.

8. Financial decisions making

Financial professionals assist the senior professionals in the company in forming rules
and creating policies by giving a precise report of the daily finances and data on
appropriate key performance indicators.
9. Guideline for earning maximum profits with minimum cost

Maximizing profits is the end goal for every organization. And the earrings and
revenues are solely based on the productive employment of financial resources. A solid
financial foundation comprises different attributes such as budget control, cost
control, ratio analysis, trend analysis, and cost-volume-profit numbers. Thus,
financial management is crucial to enhancing profits and minimizing operations
costs.

10. Increases shareholders' wealth

Shareholders act as assets for an organization. They are investors in the company.
This is why a company's main objective should be to maximize its shareholders'
wealth. It will retain the funds and benefit the economy.

11. Encourages employees to save money

A transparent and sustainable financial management system enables employees to

understand the available resources. In addition, it authorizes professionals in every
department to work toward the company's betterment by functioning under a budget.

Nature of Financial Management

Managing money involves careful planning, using resources wisely, following financial
rules, and more. To understand financial management in this field, let’s explore its
characteristics in more detail.

1. Risk and Returns Evaluation

Financial management is about making decisions, especially about risk and return on
investment. The relationship between risk and return is important in financial
management decisions. Generally, when an investment is riskier, it usually brings
higher returns. The job of a financial manager is to determine how much risk a
company faces. The assessment helps the financial manager make wise choices that
meet company goals. It also satisfies the interests of shareholders, investors, or
founders.
2. Capital Requirement Estimation

An organization can plan for its financial needs by implementing financial

management techniques. They can anticipate the funds required based on both day-
to-day operations and long-term plans. Maintaining the right balance between debt
and equity is crucial to minimizing the overall cost of capital. Financial management is
essential for determining how to allocate funds among various investments, such as
stocks, bonds, and loans. This allocation aids the organization in obtaining funds
while lowering capital structure costs.

3. Wealth Management

The finance manager watches how cash comes in and goes out to avoid cash
problems. The primary goal is to grow and protect wealth while achieving specific
financial objectives.

4. Valuation of Company

Financial management primarily concentrates on determining the worth of a company.

This means that every money-related choice is all about making the company as
valuable as possible. The main aim is to make the company more valuable, and this
guides all the financial decisions. These decisions include things like investing,
sharing profits, and raising money.

5. Improve Company’s Stock

The company’s strategy to cut costs and increase earnings enables it to reach its
objective of distributing higher returns to shareholders. The primary responsibility of
the finance manager is to identify methods for increasing profits. This is accomplished
by obtaining funds from various sources and making prudent investment choices.

6. Source of Funds:

In any business, the choice of funding sources is a challenging decision. Companies

have various options, whether for an extended, intermediate, or brief period. It’s
essential for every company to extensively explore and consider the various funding
avenues available, such as stocks, bonds, or debentures. This helps them select the
most suitable and least risky method of raising funds.

7. Selective Investment

Before investing your money, it’s crucial to thoroughly assess and understand the
level of risk involved and the potential returns. Making intelligent investment decisions
is essential.

8. Control Management

Implementing effective financial controls is important for a company as it enables

them to carefully monitor and manage their real operating expenses, ensuring that
they align with their profit expectations and objectives.

Objective of Financial Management

Financial Management is concerned with the proper utilization of funds in such a

manner that it will increase the value plus earnings of the firm. Wherever funds are
involved, financial management is there. There are two paramount objectives of the
Financial Management: Profit Maximization and Wealth Maximization. Profit
Maximization as its name signifies refers that the profit of the firm should be
increased while Wealth Maximization aims at accelerating the worth of the entity.

Profit maximization is the primary objective of the concern because of profit act as the
measure of efficiency. On the other hand, wealth maximization aim at increasing the
value of the stakeholders.

There is always a conflict regarding which one is more important between the two. So,
in this article, you will find the significant differences between Profit Maximization and
Wealth Maximization, in tabular form.
Comparison Chart

BASIS FOR PROFIT MAXIMIZATION WEALTH MAXIMIZATION

COMPARISON
Concept The main objective of a The ultimate goal of the
concern is to earn a larger concern is to improve the
amount of profit. market value of its shares.
Emphasizes on Achieving short term Achieving long term objectives.
objectives.
Consideration of No Yes
Risks and
Uncertainty
Advantage Acts as a yardstick for Gaining a large market share.
computing the operational
efficiency of the entity.
Recognition of Time No Yes
Pattern of Returns

Definition of Profit Maximization

Profit Maximization is the capability of the firm in producing maximum output with
the limited input, or it uses minimum input for producing stated output. It is termed
as the foremost objective of the company.

It has been traditionally recommended that the apparent motive of any business
organisation is to earn a profit, it is essential for the success, survival, and growth of
the company. Profit is a long term objective, but it has a short-term perspective i.e.
one financial year.

Profit can be calculated by deducting total cost from total revenue. Through profit
maximization, a firm can be able to ascertain the input-output levels, which gives the
highest amount of profit. Therefore, the finance officer of an organisation should take
his decision in the direction of maximizing profit although it is not the only objective of
the company.
Definition of Wealth Maximization

Wealth maximizsation is the ability of a company to increase the market value of its
common stock over time. The market value of the firm is based on many factors like
their goodwill, sales, services, quality of products, etc.

It is the versatile goal of the company and highly recommended criterion for evaluating
the performance of a business organization. This will help the firm to increase its
share in the market, attain leadership, and maintain consumer satisfaction and many
other benefits are also there.

It has been universally accepted that the fundamental goal of the business enterprise
is to increase the wealth of its shareholders, as they are the owners of the
undertaking, and they buy the shares of the company with the expectation that it will
give some return after a period. This states that the financial decisions of the firm
should be taken in such a manner that will increase the Net Present Worth of the
company’s profit. The value is based on two factors:

1. Rate of Earning per share

2. Capitalization Rate

Key Differences between Profit Maximization and Wealth Maximization

The fundamental differences between profit maximization and wealth maximization

are explained in points below:

1. The process through which the company is capable of increasing earning

capacity known as Profit Maximization. On the other hand, the ability of the
company in increasing the value of its stock in the market is known as wealth
maximization.
2. Profit maximization is a short term objective of the firm while the long-term
objective is Wealth Maximization.
3. Profit Maximization ignores risk and uncertainty. Unlike Wealth Maximization,
which considers both?
 4. Profit Maximization avoids time value of money, but Wealth Maximization
recognizes it.
5. Profit Maximization is necessary for the survival and growth of the enterprise.
Conversely, Wealth Maximization accelerates the growth rate of the enterprise
and aims at attaining the maximum market share of the economy.

Conclusion

There is always a contradiction between Profit Maximization and Wealth Maximization.

We cannot say that which one is better, but we can discuss which is more important
for a company. Profit is the basic requirement of any entity. Otherwise, it will lose its
capital and cannot be able to survive in the long run. But, as we all know, the risk is
always associated with profit or in the simple language profit is directly proportional to
risk and the higher the profit, the higher will be the risk involved with it. So, for
gaining the larger amount of profit a finance manager has to take such decision which
will give a boost to the profitability of the enterprise.

In the short run, the risk factor can be neglected, but in the long-term, the entity
cannot ignore the uncertainty. Shareholders are investing their money in the company
with the hope of getting good returns and if they see that nothing is done to increase
their wealth. They will invest somewhere else. If the finance manager takes reckless
decisions regarding risky investments, shareholders will lose their trust in that
company and sell out the shares which will adversely effect on the reputation of the
company and ultimately the market value of the shares will fall.