Corporate Finance (CF)

Topic: Overview of Financial Management

Conducted by: Mr. Kaushik Khakhkhar

 Introduction
• Financial Management is critical to any company,
whether small or big. It is like the lifeline of the business.
It is also a vital activity that must be performed in any
organization.
• Financial Management is a regular practice in a business
environment. It involves managing a company’s financial
resources to ensure there is little or no wastage.
• It controls every single thing regarding the company’s
financial activities which includes the procurement of
funds, use of funds, payments, accounting, risk
assessment, and other things that are related to
finances.
 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
financial resources of the enterprise.
 Definition
• The most popular and acceptable definition of
financial management as given by S.C.Kushal is:  
• “Financial Management deals with procurement of
funds and their effective utilization in the business”.
• Definition of financial management as given by Joshep
and Massie: 
• "Financial Management is the operational activity of a
business that is responsible for obtaining and
effectively utilizing the funds necessary for
efficient operations”
The 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.
 CONTI….
• 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.
 Scope of Financial Management
1. Investment decisions includes investment in fixed assets (called
as capital budgeting). Investment in current assets are also a part
of investment decisions called as working capital decisions.
2. Financial decisions - They relate to the raising of finance from
various resources which will depend upon decision on type of
source, period of financing, cost of financing and the returns
thereby.
3. Dividend decision - The finance manager has to take decision
with regards 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 finalized which will
depend upon expansion and diversification plans of the enterprise.
 Functions of Financial Management
• These are the duties of a fiscal manager. They are there to ensure
that everything concerning finances within a company is in order.
1. Financial Planning and Forecasting
• It is the financial manager’s responsibility to plan and estimate
the business’s financial needs. He needs to provide details
regarding the amount of money that would be required to
purchase different assets for the company.
• The management through the financial manager needs to know
what they need to spend on working capital and fixed assets for
the business too..
• Another vital duty of the financial manager is to make futuristic
plans for funds that the company would need. And the manner in
which the funds will be realized and used is also of
utmost importance to the financial manager.
 Functions of Financial Management
2. Determination of capital composition
• Once the Planning and Forecasting have been made, the
capital structure has to be decided. The mix of debt and
equity used to finance the company’s future profitable
investment opportunities is referred to as capital structure.
3. Fund Investment
• The financial manager has to ensure that funds made
available to the business are used adequately to grow the
business. The cost of acquiring the said fund and value of
the returns need to be compared and balanced.
• The financial manager also needs to look into the channels
of the business that is yielding higher returns and improve
them.
 Functions of Financial Management
4. Maintain Proper Liquidity
• Cash is the best source for maintaining liquidity. The business
requires it to buy raw materials, pay salaries, and tackle other
financial needs of the company.
• However, the financial manager has to determine if there is a
demand for liquid assets. He also has to arrange these assets in
a manner that the business won’t experience scarcity of funds.
5. Disposal of Surplus
• Selling surplus assets and investing in more productive ways will
increase profitability and therefore increase the ROCE.
6. Financial Controls
• Financial control may be construed as the analysis of a
company’s actual results, approached from different
perspectives at different times, compared to its short, medium,
and long-term objectives and business plans
 Financial Goal - Profit Maximization versus
Shareholders’ Wealth Maximization
• There are two paramount objectives of the Financial
Management: Profit Maximization and Wealth
Maximization. 
• Profit Maximization as its name signifies refers that the
profit of the firm should be increased while Wealth
Maximization, aims at accelerating the worth of the
entity.
• Profit maximization is the primary objective of the concern
because of profit act as the measure of efficiency. On the
other hand, wealth maximization aim at increasing the
value of the stakeholders.
• There is always a conflict regarding which one is more
important between the two. 
 Definition of Profit Maximization
• Profit Maximization is the capability of the firm in producing
maximum output with the limited input, or it uses minimum input
for producing stated output. It is termed as the foremost
objective of the company.
• It has been traditionally recommended that the apparent motive
of any business organization is to earn a profit, it is essential for
the success, survival, and growth of the company. Profit is a long
term objective, but it has a short-term perspective i.e. one
financial year.
• Profit can be calculated by deducting total cost from total
revenue. Through profit maximization, a firm can be able to
ascertain the input-output levels, which gives the highest amount
of profit. Therefore, the finance officer of an organization should
take his decision in the direction of maximizing profit although it
is not the only objective of the company.
 Definition of Wealth Maximization
• Wealth maximization is the ability of a company to
increase the market value of its common stock over
time. The market value of the firm is based on
many factors like their goodwill, sales, services,
quality of products, etc.
• It is the versatile goal of the company and highly
recommended criterion for evaluating the
performance of a business organization. This will
help the firm to increase their share in the market,
attain leadership, maintain consumer satisfaction
and many other benefits are also there.
Definition of Wealth Maximization
• It has been universally accepted that the fundamental
goal of the business enterprise is to increase the
wealth of its shareholders, as they are the owners of
the undertaking, and they buy the shares of the
company with the expectation that it will give some
return after a period. This states that the financial
decisions of the firm should be taken in such a manner
that will increase the Net Present Worth of the
company’s profit. The value is based on two factors:
• Rate of Earning per share
• Capitalization Rate
 BASIS FOR PROFIT WEALTH
COMPARISON MAXIMIZATION MAXIMIZATION
Concept The main objective of The ultimate goal of
a concern is to earn a the concern is to
larger amount of improve the market
profit. value of its shares.
Emphasizes on Achieving short term Achieving long term
objectives. objectives.
Consideration of Risks No Yes
and Uncertainty

Advantage Acts as a yardstick for Gaining a large market

computing the share.
operational efficiency
of the entity.

Recognition of Time No Yes

Pattern of Returns
Thanks