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FINANCIAL

MANAGEMENT
(Meaning ,Nature and Objectives)
Business Finance:
i) Business: ‘state of being busy’. It is
production and distribution of goods and
services for satisfying human wants.

ii) Finance: The provision of money when it is


required. It refers to the management of flows
of money through an organisation.
Forms of Business Finance:
I. Sole-proprietary Finance
II. Partnership Firms Finance
III. Corporation Finance

Business Activities:
I. Production
II. Marketing
III. Finance
Financial Management
The process of raising, providing & administering
of all funds to be used in a corporate enterprise.

Definition:
It refers to that part of the management activity
which is concerned with the planning and
controlling of firm’s financial resources.
IMPORTANCE:
 Financial Planning & successful promotion
 Acquisition of funds at minimum cost
 Proper use and allocation of funds
 Sound financial decision
 Improving profitability
 Maximization of wealth
 Promoting and mobilizing savings
Approaches:
The Traditional Approach :

 Outsider-looking, completely ignores internal


decision making.
 Focus on procurement of long term funds
 Ignores issue of working capital
 Issue of allocation of funds ignored
 Does not lay focus on day to day financial
problems
The Modern Approach:

 Financial Planning
 Raising of Funds
 Allocation of Funds
 Financial Control
Aims of Finance Function

Acquiring Sufficient Funds


Proper Utilization of Funds
Increasing Profitability
Maximizing Firm’s Value
SCOPE :
1. Estimating Financial Requirements
2. Deciding Capital Structure
3. Selecting a Source of Finance
4. Selecting a Pattern of Investment
5. Proper Cash Management
6. Implementing Financial Controls
7. Proper Use of Surpluses
Objectives and Goals:

I. Profit Maximization

II. Wealth Maximization


Profit Maximization:
Arguments in Favour:

 Obvious objective
 Barometer of measuring efficiency
 Dynamic business and economic conditions
 Growth of Business
 Maximizes socio-economic objectives
Arguments Against:
 Vague term
 Ignores time value of money
 Ignores risk
 Ignores effect of dividend policy
 In new business environment profit maximization
is regarded as:
Unrealistic
Difficult
Inappropriate
Immoral.
Wealth Maximization:
Stockholder’s current wealth in a firm = (Number of
shares owned) x (Current stock price per share)

Arguments in Favour:
 Serves the interest of suppliers of loaned capital
 Serves the interest of employees, Mgt & Society.
 Serves shareholder’s interest
 Serves short term lenders interest
 Serves Long term lenders interest
Arguments Against:
 Prescriptive idea
 Not socially desirable
 Controversy to maximize stockholder wealth or
firm’s wealth
 Face difficulties when ownership & Mgt. are
separated

In spite of all, wealth maximization is the most


appropriate objective of a firm.
Financial Decisions
Investment Decision
Financing Decision
Dividend Decision
Factors Influencing financial
decision
External Factors:
i. State of Economy
ii. Structure of capital and money markets
iii. Requirements of investors
iv. Government policy
v. Taxation policy
vi. Lending policy of financial institutions
Internal Factors:
i. Nature and size of business
ii. Expected return, cost and risk
iii. Composition of assets
iv. Structure of ownership
v. Trend of earnings
vi. Age of the Firm
vii. Liquidity position
viii. Working Capital Requirements
ix. Conditions of debt agreements
Functions of a Finance Manager
 Financial Forecasting and Planning
 Acquisition of Funds
 Investment of Funds
 Helping in Valuation Decisions
 Maintain Proper Liquidity
Organisation of Finance Function
Reason for placing the finance functions in the
hands of top management :
 Financial decisions are crucial for the survival of the
firm.
 The financial actions determine solvency of the firm
 Centralisation of the finance functions can result in a
number of economies to the firm.
Status and Duties of Finance
Executives
 The exact organisation structure for financial
management will differ across firms.

 The financial officer may be known as the


financial manager in some organisations, while
in others as the vice-president of finance or the
director of finance or the financial controller.
Role of Treasurer and Controller
 Two more officers—the treasurer and the
controller—may be appointed under the direct
supervision of CFO to assist him or her.

 The treasurer’s function is to raise and manage


company funds while the controller oversees
whether funds are correctly applied.
Functions of Treasurer:
a. Provision of capital
b. Relations with banks and F.I’s
c. Cash management
d. Receivables management
e. Protect funds and securities (insurance)
f. Investor relations
g. Audit
Functions of Controller:
a. Accounting
b. Preparation of financial reports
c. Reporting and interpreting
d. Planning and control
e. Internal audit
f. Tax administration
g. Economic appraisal & reporting to Government