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 requirements.
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.