MIMA INSTITUTE OF MANAGEMENT

Financial Management
Dr. Madhura Bhagwat
Introduction
• Meaning Money required for carrying out business activities is called business
Finance.
• Financial management - Financial management is concerned with optimal
procurement as well as usage of Finance.

• Financial Management means planning, organizing, directing and controlling

the financial activities such as procurement and utilization of funds of the
enterprise. It means applying general management principles to financial
resources of the enterprise.

Important web/video links (if any)

Definition
• “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

Important web/video links (if any)

Scope of Financial Management

 Financing Decision- Decision regarding amount of Capital to be raised. Also

decision regarding sources of Finance. Proportion of equity and debt in
the capital structure.
 Investing Decision- Decision regarding amount of investment in fixed
assets and current assets and their proportion.
 Dividend Decision- decision regarding how much amount to be distributed
as dividend and how much to maintain as retained earning.
Objectives of Financial Management
The financial management is generally concerned with procurement, allocation
and control of financial resources of a concern. The objectives can be-

• To ensure regular and adequate supply of funds to the concern.

• To ensure adequate returns to the shareholders which will depend upon the
earning capacity, market price of the share, expectations of the shareholders.
• To ensure optimum funds utilization. Once the funds are procured, they should
be utilized in maximum possible way at least cost.
• To ensure safety on investment, i.e, funds should be invested in safe ventures so
that adequate rate of return can be achieved.
• To plan a sound capital structure-There should be sound and fair composition of
capital so that a balance is maintained between debt and equity capital.

Dr. Prajakta
Objectives of Financial Management

 In the past, the objective of Financial Management was said to be profit

maximization. But there were certain limitations to this objective.
 In modern times, however, Shareholder Wealth Maximization(SWM) is
considered to be the main objective of Financial Management. SWM means
maximizing the net present value(NPV) of a course of action to shareholders.
NPV or wealth of a course of action is the difference between the present
value of its benefits and the present value of its cost.
 A financial action that has a positive NPV creates wealth for shareholders and
therefore is desirable.
 A financial action resulting in negative NPV should be rejected since it would
destroy shareholders’ wealth.
 Between mutually exclusive projects, the one with the highest NPV should be
adopted.
 NPVs of a firm’s projects are additive in nature. i.e.
NPV(A)+NPV(B)=NPV(A=B)
This is referred to as the principle of value additivity. Therefore wealth will be
maximized if NPV criterion is followed in making decisions.
Thus SWM objective takes care of the questions of timing and risk of the
expected benefits.
Objectives of Financial Management
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Financing Decisions
• Financing decisions refer to the decisions that companies need to take regarding
what proportion of equity and debt capital to have in their capital structure.

• An integral part of financial decisions is the consideration of the cost of capital,

which companies must take into account.

• This decision is concerned with choosing the source of finance. major issue
involved here is to determine the proportion of equity and debt in the capital
structure. Mix of equity and debt is known a capital structure.

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Investment Decisions
• This decision is also known as Capital Budgeting Decision. It is concerned with
evaluation and selection of proposals for long-term investments. The returns
from these proposals are expected in the future. A thorough evaluation of
project in terms of risk and return is made as it required huge amount of funds.

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Dividend Decisions
• It is related with the distribution of profit. The finance manager has to decide
what proportion of earning is to be retained and what proportion is to be
distributed, whether dividend should be paid in cash or any other form etc.

• The dividend policy of a firm is critical to its success as it affects the market
value of shares.