Introduction to Financial

Management
Definition
 It is the process of planning, organizing, controlling
and monitoring financial resources with a view to
achieve organizational goals and objectives.

 It is an ideal practice for controlling the financial

activities of an organization such as procurement of
funds, utilization of funds, accounting, payments, risk
assessment and every other thing related to money.
Nature
1. Primary nature of financial management focus towards
valuation of company. That is the reason where all the
financial decisions is directly linked with optimizing /
maximization the value of a company.

2. Nature of financial management basically involves decision

where risk and return are linked with investment. Generally
high risk investment yield high returns on investments.

So, role of financial manager is to effectively calculate the

level of risk company is involve and take the appropriate
decision which can satisfy shareholders, investors or founder
of the company.
Nature
3. Finance is a foundation of economic activities. The person
who manages finance is called as financial manager.

Important role of financial manager is to control finance and

implement the plans. For any company financial manager
plays a crucial role in it.

4. Financial Management is an important function in

company’s management. Financial factors are considered in
all the company’s decisions and all the departments of an
organization. It affects success, growth and volatility of a
company. Finance is said to end up being the lifeline of a
business.
Nature
5. Finance management is one of the important education
which has been realized word wide. Now a day’s people are
undergoing through various specialization courses of financial
management. Many people have chosen financial
management as their profession.

6. The nature of financial management is never a separate

entity. Even as an operational manager or functional manager
one has to take responsibility of financial management.
Nature
7. Nature of financial management is multi-disciplinary.
Financial management depends upon various other factors
like: accounting, banking, inflation, economy, etc. for the
better utilization of finances.

8. Approach of financial management is not limited to

business functions but it is a backbone of commerce,
economic and industry.
Scope
1. Investment Decision
The investment decision involves the evaluation of risk,
measurement of cost of capital and estimation of
expected benefits from a project. 

The two major components of investment decision are –

Capital budgeting and liquidity. Capital budgeting
determines the long term investment of capital and
funds in such a manner that they will yield earnings in
future.
Scope
2. Working Capital Decision
Working capital decision is related to the investment in
current assets and current liabilities.
Current assets include cash, receivables, inventory,
short-term securities, etc. Current liabilities consist of
creditors, bills payable, outstanding expenses, bank
overdraft, etc.
Current assets are those assets which are convertible
into a cash within a year. Similarly, current liabilities are
those liabilities, which are likely to mature for payment
within an accounting year.
Scope
3. Dividend Decision
In order to achieve the wealth maximisation objective,
an appropriate dividend policy must be developed. One
aspect of dividend policy is to decide whether to
distribute all the profits in the form of dividends or to
distribute a part of the profits and retain the balance. 

A good dividend policy helps to achieve the objective of

wealth maximization. Distributing the entire profit in the
form of dividends or distributing only a certain
percentage of it is decided by dividend policy.
Scope
4. Financing Decision
While the investment decision involves decision with
respect to composition or mix of assets, financing
decision is concerned with the financing mix or financial
structure of the firm.

The raising of funds requires decisions regarding the

methods and sources of finance, relative proportion and
choice between alternative sources, time of floatation of
securities, etc.
Purpose
The purpose of financial management is to:
 Create wealth for the business;
 Generate income; and
 Provide an adequate return on investment, while
taking the risk on account
Functions
1. Estimates the capital requirements of business:
A financial manager firstly has to make the estimation
with regards to overall capital requirements of the
business.

Predictions have to be made in an adequate and

concern manner which increases the earning capacity of
business and which ensures proper use of financial
resources.

Thus financial management functions guide a financial

manager to estimate organizational capital
Functions
2. Ascertains capital composition:
Once the estimation of capital requirement has been
made with the best effort, the capital structure of the
enterprise has to be decided.

This involves the analysis of short- term and long- term

debt equity. This will depend on the proportion of
possessed equity capital a company and other
additional funds which have to be raised from outside
parties through borrowing.
Functions
3. Makes the Choice of sources of funds:
A financial manager needs to evaluate different sources
of funds. Choice of a factor depends on the relative
advantages and disadvantages of each source and
financing period.
Functions
4. Investment of total funds:
The finance manager has to decide how to allocate the
total amount of funds into profitable ventures. He has to
make sure that there is safety on investment and
positive regular returns are possible.

The capital should be invested in a wisely manner so

that there is less possibility of losing funds or experience
loses. For that, the manager can use different
investment tools like portfolio analysis, net present
value, internal rate of return, an average rate of return
and so on.
Functions
5. Disposal of surplus:
Financial manager calculates profits of business at the end
of an accounting period. Then the net profits decision has
to be taken by the finance manager of the company.

This decision can be made in two ways. He can declare a

dividend to the shareholders of a company where the
ordinary shareholders will get the profits in the form of
money or share or retain profits for some purposes like
expansion, diversification or innovation of the business.
Functions
6. Manages of cash flow:
Finance manager of a company has to make decisions
regarding cash management.

Cash is required for several purposes like payment of

wages and salaries to the workers, payment to the
creditors, payment of electricity and water bills, meeting
current liabilities of the business, cost of maintenance of
having enough stock, purchase of raw materials for daily
production etc.
Functions
7. Controls Finances:
The functions of a finance manager are not only to do a
financial plan, procure fund and utilize the funds but he
also has to control the finances involving in the
business.
This function can be done by many techniques like ratio
analysis, forecasting of financials, cost analysis and
control and profit distribution techniques etc.
Functions
8. Decisions regarding acquisitions and mergers:
A business organization can either be expanded through
acquiring other business or by entering into the business
by mergers with other firms. During such decision, a
financial manager has to deal with many complex
valuations of securities of each company.
Functions
9. Tax Planning and protection of Assets:
It is the duty of a financial manager to lessen the tax
liability of the business. This task should be performed
wisely.

It is very important that a finance executive properly

examines various schemes and invest accordingly. He
should also protect the assets engaged in the business
to ensure the best use of the resources.
Functions
10. Decision on Capital Budgeting:
Long-term decisions involve investing in share or bond,
purchasing new equipment, building new plant etc. These
decisions are called capital budgeting. In this decision making
of the company financial managers faces many complicated
situations. As the process requires a huge amount of capital,
it is necessary that a financial manager identifies the
investment opportunities and involved challenges.
 The efficient use of financial management functions
helps a company to maximize wealth. Financial
management is a continuous and interrelated process
which involves identifying the required amount of
capital that is needed for running the business
promptly, evaluating and selecting best alternative
sources of funds, allocating the funds according to the
need of business area and distributing earned profits.