Q.1Define financial management and also explain its various decisions.

Ans.

Introduction To Financial Management

Financial management is a process that involves making decisions about how to allocate
financial resources in order to achieve organizational objectives. The financial manager must
decide on the organization's financing mix in the financing decision, which is a crucial decision.
A financing Decision is concerned with the borrowing and allocating of funds required for the
firm's investment decisions.

Financial management has an impact on all aspects of organizational activity, including both
profit and non-profit organizations. Several different activities, including

 Fund acquisition,
 Resource allocation
 Financial performance tracking.

As a result, it has come to play an essential role in all types of organizations. The financing
decision is based on two sources of funds:

The first is capital owned by the business, including shareholding and retained earnings.

The second source of funds is borrowed from outside the corporate entity in the form of
debenture, loan, bond, and so on. The goal of the financial decision is to achieve an optimal
capital structure.

Financial Management Concept

Financial management entails making plans for a person's or a business's future in order to
maintain positive cash flow. It involves the administration and upkeep of financial assets.
Financial management also includes the process of determining and controlling risks.

Financial management is more concerned with evaluation than with financial

quantification techniques. A financial manager examines available data to assess the
performance of businesses. Managerial finance is a diverse discipline that draws on managerial
accounting and financial analysis.

Financial management is sometimes referred to as the "science of money management" by some

experts. This term is most commonly used in the community of financing financial transactions.
On the other hand, financial management is crucial at all stages of human creation because every
entity must manage its finances.
Evolution and Emergence of Financial Management

The scope and nature of financial management have evolved and broadened over time. Its
evolution can be broadly classified into three stages:

1. Traditional phase

2. Transitional phase

3. Modern phase.

1. Traditional phase

The Traditional period lasted roughly four decades until the early 1940s. During this period, the
emphasis of financial management was primarily on episodic events such as capital procurement,
engagement with major lenders such as banks, debt servicing, issuance of securities, expansion,
merger, and compliance with legal aspects. The approach was primarily descriptive.

2. Transitional phase

The Transitional phase started in the 1940s and lasted until the early 1950s. During this phase,
financial management was almost identical in nature and scope to that of the traditional stage.

However, there was a growing emphasis on organizing, procuring, managing and controlling
funds to fulfill the business's day-to-day financial needs. Financial issues have begun to be
examined within an analytical framework.

3. Modern phase

Due to increased competition, growth opportunities, globalization, breakthroughs in economic

theories, and the development of quantitative methods of analysis, the mid-1950s labeled the
start of the modern phase in financial management.

This resulted in the development of an increasingly analytical and empirical approach to

financial decision-making. The management or insider's point of view has become core to
financial management.

Key Objectives of Financial Management

Financial management is concerned with acquiring, allocating, and controlling a business's

financial resource management.

Financial management may have a variety of key objectives, including.

 To ensure a steady and adequate supply of funds.

  To guarantee adequate returns.
 To ensure efficient utilization of funds.
 To ensure investment security.
 To establish solid financial leverage, and so on.

Scope and Extent of Financial Management

Financing a business necessitates numerous short- and long-term decisions, expanding financial
management's scope.

 Short-term Financial Decisions

Short-term financial decisions are primarily concerned with the business firm's day-to-day
capital requirements or working capital management. These decisions have an impact on the
firm's liquidity and profitability.

 Long-term Financial Decisions

Long-term financial decisions, on the other hand, are concerned with financing the enterprise,
investing funds, and managing earnings.

Types of Financial Decisions

Financial decisions are divided into three types. These types are referred to as the basics of
financial decisions that the financial manager must make:

 Investment Decisions
 Financing Decisions
 Dividend Decisions
 Working Capital Decisions
 Investment Decisions

Any prospective investment made by a business unit must be assessed regarding the risk, the cost
of capital, and the expected benefits. As a result, the two key elements of investment decisions
are

Capital budgeting

Liquidity.

Simply put, capital budgeting is the dedication and allocation of funds to long-term investments
that will generate earnings in the future.
It also considers decisions regarding the replacement and renovation of old assets. A finance
manager's primary responsibility is to balance current and fixed assets to maximize profitability
while maintaining the desired level of liquidity for the component.

Making these decisions is not for the faint of heart; it entails extensive estimation of expenses
and benefits that cannot be determined with surety and are unknown.

Factors Influencing Investment Decisions

Venture cash flow

When a company launches a new venture, it begins by investing a large sum of money.
However, the organization anticipates at least one source of revenue to cover daily expenses. As
a result, there needs to be some consistent cash flow within the venture to sustain it.

Investment Criteria

A business utilizes multiple Capital Budgeting procedures to evaluate various investment

propositions. Most notably, they are based on calculations involving investment, cash flows,
interest rates, and the rate of return on propositions. These are applied to investment proposals in
order to select the best one.

Profits:

The primary reason for starting a business is to earn revenue but also profits. The essential
criteria in selecting the venture are the organization's rate of return in relation to its profit
essence. For example, project B should be preferred if venture A earns 10% and venture B earns
15%.

Financing Decisions

Firm financing decisions are concerned with an organization's financing mix or financial
structure. Financing a company necessitates significant decisions regarding methodologies and
finance sources relative to the proportion and selection of sustainable resources, period of
floatation of equities, and so on

Numerous funds can be used to meet an organization's investment needs. The finance manager is
responsible for designing the optimal combination of finance structures for an organization that
involves the least amount of money to raise and maximizes the long-term market prices of the
company's shares.

Furthermore, while financing, a balance of debt and equity must be maintained in order to
generate a sufficient return on equity with the least amount of risk. The utilization of debt or
leverage ratio affects both the rates of return and risk of capital investment.
To maximize the per-share value of equity stock, the financial manager is tasked with making the
best decisions possible regarding the means of issuing debt securities and the timing of raising
funds for the company.

Factors Influencing Financial Decisions

 Cash flow position.

The cash flow position is the company's daily earnings. A strong cash flow position encourages
investors to put money into the company.

 Control

In this case, where existing investors have control of the company or organization and raise
funds by borrowing money, equity can be used to raise funds if they are willing to give up
control of the business.

 Cost

Financing decisions are made based on fund allocation and cost-cutting. The cost of raising
funds from various sources varies greatly, so the most affordable source should be used.

 Risk

The risks of starting a business with funds vary depending on the source. Borrowed funds are
riskier than equity funds.

 Market condition

The market condition has a significant impact on financing decisions. During a boom period, the
majority of equity is issued, but during a depression, a firm's debt is used .