Financial Management

Module 1
Financial Management
 Meaning
 Finance
 Financial Services
 Financial Managers
 Scope of Financial Management
 Finance Functions :
❖ Investment Decisions
❖ Financing Decisions
❖ Dividend Decisions
 Key Activities of Financial Mangers
 Objectives of Financial Management
 Profit Maximization Vs Wealth maximization
Meaning
 Financial management, also called corporate finance, focuses
on decisions relating to how much and what types of assets to
acquire, how to raise the capital needed to buy assets, and
how to run the firm so as to maximize its value.
 The same principles apply to both for-profit and not-for-
profit organizations.
Finance
 MEANING OF FINANCE Finance may be defined as the art
and science of managing money. It includes financial service
and financial instruments.
 Finance also is referred as the provision of money at the time
when it is needed.
 Finance function is the procurement of funds and their
effective utilization in business concerns
 According to GUTHMANN and DOUGALL, business
finance may be broadly defined as “the activity concerned
with the planning, raising, controlling and administering the
funds used in the business.”
 Financial decisions refer to decisions concerning financial
matters of a business firm. There are many kinds of financial
management decisions that the firm makers in pursuit of
maximizing shareholder’s wealth, viz., kind of assets to be
acquired, pattern of capitalization, distribution of firm’s
income etc.
We can classify these decisions into three major groups:
 Investment decisions
 Financing decision.
 Dividend decisions..
Financial Services
 What is Financial Services?
Financial Services may simply be defined as services offered by
different financial intermediaries such as Banks, Financial
Institutions, Insurance Companies, Brokerage Firms, Consumer
Finance companies, etc.
 It is concerned with the design and delivery of services and
financial products to individuals and businesses within the areas of
banking and related financial institutions, financial planning
,investments , real assets, insurance, and so on.
 A well-developed financial services industry is absolutely
necessary to mobilize the savings and to allocate them to various
investable channels and thereby promoting industrial development
in a country.
Types of financial services
SCOPE OF FINANCIAL MANAGEMENT:
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
Finance Function
The finance function refers to practices and activities directed
to manage business finances.
 The functions are oriented toward acquiring and managing
financial resources to generate profit.
 The financial resources and information optimized by these
functions contribute to the productivity of other business
functions, planning, and decision-making activities.
NATURE OF FINANCE FUNCTION:
 In most of the organizations, financial operations are centralized. This results in
economies.
 Finance functions are performed in all business firms, irrespective of their sizes
/legal form of organization.
 They contribute to the survival and growth of the firm.
 Finance function is primarily involved with the data analysis for use in decision
making.
 Finance functions are concerned with the basic business activities of a firm, in
addition to external environmental factors which affect basic business activities,
namely, production and marketing.
 Finance functions comprise control functions also
 The central focus of finance function is valuation of the firm.
Finance makes use of economic tools. From Micro economics it uses theories and
assumptions. From Macro economics it uses forecasting models. Even though
finance is concerned with individual firm and economics is concerned with
forecasting of an industry
Financing decision
 Financing decision relates to the choice of the proportion of
debt and equity sources.
 Financial decision is the utmost important decision which is
to be made by business individuals.
 These are wise decisions indeed that are to be chalked out
with proper analysis. He decides when, where and how
should the business acquire the fund.
 An organization’s increase in share is not only a sign of
development for the firm but also to boost the investor’s
wealth.
Factors affecting financing decisions
 Cost
 Risk
 Cash flow position
 Control
 Condition of the market
Investment Decision
 This decision is also known as capital budgeting
 It is concerned with the selection of an investment
proposal/proposals and the investment of funds in the
selected proposal/proposals
 Investment decisions can be internal as well as external
 Internal decision –in which finance manager has to
determine which capital expenditure projects to be
undertaken, funds that need to be committed and allocated
to certain project.
 External decision – it is concerned with investment of funds
outside the business for M&A’s
Factors affecting investment decision
 Cash flow of venture
 Profit
 Investment criteria
Dividend decisions
 Dividend decisions relate to the distribution of profit that are
earned by the organization.
 The main criteria in this decision are whether to distribute
to the shareholders or to retain the earnings.
 Dividend decisions are affected by the earnings of the
business, dependency on earnings.
Factors affecting Dividend decisions
 Growth and Profitability of business
 Liquidity capability of business
 Cost and availability of other forms/sources of financing
 Management control
 Legal factors
 Reach to the capital Market
 Other external restrictions
Financial manager
 Financial managers are responsible for overseeing the
financial health of an organization.
 They are responsible for creating financial reports,
developing and implementing financial strategies, and
managing investments.
 Financial managers work in a variety of settings, including
corporations, non-profit organizations, and government
agencies.
 Financial Manager’s goal is to maximize the value of
organization.
Key activities of financial Manager
 Performing financial analysis and planning
 Making investment and financing decisions
 Maintaining cash flow by reviewing banking activity and
reconciling monthly reports
 Developing and interpreting databases and financial models
 Managing the company budget to maximize revenue and
identify potential areas for savings
 Promoting process improvements in specified budget areas
 Implementing report production, productivity and quality
standards
Objectives of financial management
 Profit maximization
Main aim of any kind of economic activity is earning profit. Profit is the
measuring techniques to understand the business efficiency of the concern.
Profit maximization is also the traditional and narrow approach, which
aims at, maximizing the profit of the concern.

 Wealth maximization
Wealth maximization is one of the modern approaches. The term wealth
means shareholder wealth or the wealth of the persons those who are
involved in the business concern. Wealth maximization is also known as
value maximization or net present worth maximization.
This objective is an universally accepted concept in the field of business.
Stockholder’s current wealth in a firm = (Number of shares owned) x
(Current Stock Price share)
Profit maximization consists of the
following important features.
 Profit maximization is also called as cashing per share
maximization. It leads to maximize the business operation for
profit maximization.
 Ultimate aim of the business concern is earning profit, hence,
it considers all the possible ways to increase the profitability
of the concern.
 Profit is the parameter of measuring the efficiency of the
business concern. So it shows the entire position of the
business concern.
 Profit maximization objectives help to reduce the risk of the
business.
Unfavourable Arguments and
Drawbacks for Profit Maximization
The following important points are against the objectives of profit
maximization:
 Profit maximization leads to exploiting workers and consumers.
 Profit maximization creates immoral practices such as corrupt
practice, unfair trade practice, etc.
 Profit maximization objectives leads to inequalities among the
stake holders such as customers, suppliers, public shareholders,
etc.
 It is vague
 Does not consider time value of money
 Does not consider risk
Favourable Arguments for Wealth
Maximization
 Wealth maximization is superior to the profit maximization
because the main aim of the business concern under this concept is
to improve the value or wealth of the shareholders.
 Wealth maximization considers the comparison of the value to
cost associated with the business concern. Total value detected
from the total cost incurred for the business operation. It provides
extract value of the business concern.
 Wealth maximization considers both time and risk of the business
concern.
 Wealth maximization provides efficient allocation of resources.
 It ensures the economic interest of the society.
Unfavourable Arguments for Wealth
Maximization
 Wealth maximization leads to prescriptive idea of the
business concern but it may not be suitable to present day
business activities.
 Wealth maximization creates ownership-management
controversy.
 Management alone enjoy certain benefits.
 The ultimate aim of the wealth maximization objectives is to
maximize the profit.
 Wealth maximization can be activated only with the help of
the profitable position of the business concern.
Profit Maximization Wealth Maximization

Profits are earned maximized, so that firm Wealth is maximized, so that wealth of
can over-come future risks which are share-holders can be maximized.
uncertain.
Profit maximization is a yards stick for In wealth maximization stockholders current
calculating efficiency and economic wealth is evaluated in order to maximize the
prosperity of the concern value of shares in the market.
Profit is measured in terms of efficiency of Wealth is measured in terms of market price
the firm. of shares.
Profit maximization Involves problem of Wealth maximization involves problems
uncertainty because profits are uncertain. related to maximizing shareholder's wealth
or wealth of the firm
Profit = total receivables-total cost Wealth = number of shares * current stock
price per share
It has a short term perspective It has a long term perspective
Does not consider risk and time value of It considers risk and time value of money
money