Meaning of Financial

Management

• 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
the financial resources of the
enterprise.
Scope/Elements of Financial Management
1. Investment decisions -
Investment decisions include investment in fixed assets (called as capital budgeting). Investment in current
assets are also a part of investment decisions called working capital decisions.

2. Financial decisions -
They relate to the raising of finance from various resources which will depend upon the decision on type of
source, period of financing, cost of financing and the returns thereby.

3. Dividend decision -
The finance manager has to make a decision with regard to the net profit distribution. Net profits are
generally divided into two:

Dividend for shareholders- Dividend and the rate of it has to be decided.

Retained profits- Amount of retained profits has to be finalised which will depend upon expansion and
diversification plans of the enterprise.
•Objectives of Financial Management
•Financial management is generally concerned with procurement,
allocation and control of financial resources of a concern. The objectives
can be

•To ensure a 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, and expectations
of the shareholders.

•To ensure optimum funds utilization. Once the funds are procured,
they should be utilized in the maximum possible way at the least cost.

•To ensure safety on investment, i.e, funds should be invested in safe

ventures so that an adequate rate of return can be achieved.

•To plan a sound capital structure should be a sound and fair

composition of capital so that a balance is maintained between debt
and equity capital.
 Estimation of Determination
Functions of Fin capital of capital
ancial Managem requirements composition
ent

Choice of
Investment of Disposal of Management
sources of
funds surplus of cash
funds

Financial Raising of
Role of a Financial
controls Manager Funds

Understanding
Allocation of
Profit Planning Capital
Funds
Markets
 Wealth Maximization

Wealth Maximization is the ability of the company to

increase the value for the stakeholders of the company,
mainly through an increase in the market price of the
company’s share over some time. The value depends on
several tangible and intangible factors like sales, quality of
products or services, etc.

It is mainly achieved throughout the long term as it requires

the company to attain a leadership position, which in turn
translates to a larger market share and higher share price,
ultimately benefiting all the stakeholders of the company.

To be more specific, the universally accepted goal of a

business entity has been to increase the wealth for
the shareholders of the company as they are the
actual owners of the company who have invested
their capital, given the risk inherent in the business of
the company with expectations of high returns.
Profit Maximization
Profit Maximization is the ability of the company to operate efficiently to produce maximum output with
limited input or to produce the same output using much lesser input. So, it becomes the most crucial goal
of the company to survive and grow in the current cut-throat competitive landscape of the business
environment.

Given the nature of this form of financial management, companies mainly have a short-term
perspective when it comes to earning profits, and that is very much limited to the current
financial year.

If we get into the details, profit is actually what remains out of the total revenue after paying for all the
expenses and taxes for the financial year. Now to increase the profit, companies can either try to increase
their revenue or try to minimise their cost structure.

It may need some analysis of the input-output levels to diagnose the operating efficiency of the company
to identify the key improvement areas where processes could be tweaked or changed in their entirety to
earn larger profits.