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FM Mba Ii Unit 1

Financial management involves acquiring and utilizing funds efficiently for business activities, focusing on maximizing the firm's value. It encompasses obtaining funds, utilizing them effectively, and making informed financial decisions regarding investments, financing, and dividends. The role of a financial manager is crucial in overseeing these functions to ensure optimal financial performance and address potential agency problems between management and shareholders.
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0% found this document useful (0 votes)
24 views12 pages

FM Mba Ii Unit 1

Financial management involves acquiring and utilizing funds efficiently for business activities, focusing on maximizing the firm's value. It encompasses obtaining funds, utilizing them effectively, and making informed financial decisions regarding investments, financing, and dividends. The role of a financial manager is crucial in overseeing these functions to ensure optimal financial performance and address potential agency problems between management and shareholders.
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FINANCIAL

MANAGEMNT
MODULE -1
INTRODUCTION TO FINANCIAL MANAGEMNT
Financial management is the operational process of a company that wants to acquire and
utilize the funds efficiently which is required for company activities. It is primarily focusing
on the efficient management of funds in the enterprise. According to the layman,
businesses’ financial management is known as corporation finance/business finance as
practiced by businesses. And you should know about the concept of financial management
to become a financial expert.

The nature of financial management relates to its connection with disciplines such as
economy and accounting, among others. Financial management is an essential component
of managing. And the basic concept of financial management is associated with other
disciplines and fields of study such as economy, accounting, manufacturing, marketing,
human resources, and quantitative techniques.
Two Basic Concepts Of Financial Management
The term financial management means obtaining and managing funds. And the primary
objective of financial management is to increase the firm’s value. So, what is the concept of
financial management? There are two basic concepts of financial management, obtaining
funds and utilising these funds.

1. Obtaining Funds
One of the basic concepts of financial management is obtaining funds. As finances for a
company come from various sources, procuring them can pose a challenge for businesses.
These funds have varying risks, costs, and control that the company’s management should
look into while obtaining funds. The fund’s manager should obtain these funds at the lowest
cost, balanced risk, and control factors.
Funds raised through equity shares are expected to be the least risky, as there is no liability in
terms of repayment. But there is one shortcoming of the funds obtained through equity; they
are expensive because dividends that the shareholders expect are way higher than the
interest rates. Existing shareholders’ shares may be diluted if new shares are issued.
2. Utilizing Obtained Funds Effectively

Another concept of financial management is using the funds effectively. A


financial manager should ensure the proper usage of these funds. They are
also responsible for closely monitoring instances where these funds are idle
or misused.
MEANING AND DEFINITION
Let’s define financial management as the first part of the introduction to financial
management. For any business, it is important that the finance it procures is invested in a
manner that the returns from the investment are higher than the cost of finance. In a
nutshell, financial management –

•Endeavors to reduce the cost of finance


•Ensures sufficient availability of funds
•Deals with the planning, organizing, and controlling of financial activities like the
procurement and utilization of funds

“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
The scope of Financial Management
The introduction to financial management also requires you to understand the scope of
financial management. It is important that financial decisions take care of the shareholders‘
interests.
Further, they are upheld by the maximization of the wealth of the shareholders, which depends
on the increase in net worth, capital invested in the business, and plowed-back profits for the
growth and prosperity of the organization.
The scope of financial management is explained in the diagram below:
Investment Decisions: Managers need to decide on the amount of investment available
out of the existing finance, on a long-term and short-term basis. They are of two types:
•Long-term investment decisions or Capital Budgeting mean committing funds for a long
period of time like fixed assets. These decisions are irreversible and usually include the
ones pertaining to investing in a building and/or land, acquiring new plants/machinery or
replacing the old ones, etc. These decisions determine the financial pursuits and
performance of a business.
•Short-term investment decisions or Working Capital Management means committing
funds for a short period of time like current assets. These involve decisions pertaining to
the investment of funds in the inventory, cash, bank deposits, and other short-term
investments. They directly
Financing Decisions: affect the
Managers alsoliquidity and performance
make decisions ofto
pertaining the business.
raising finance from long-
term sources (called Capital Structure) and short-term sources (called Working Capital). They
are of two types:
•Financial Planning decisions which relate to estimating the sources and application of
funds. It means pre-estimating financial needs of an organization to ensure the availability of
adequate finance. The primary objective of financial planning is to plan and ensure that the
funds are available as and when required.
•Capital Structure decisions which involve identifying sources of funds. They also involve
decisions with respect to choosing external sources like issuing shares, bonds, borrowing from
banks or internal sources like retained earnings for raising funds.
Dividend Decisions: These involve decisions related to the portion of profits that will be
distributed as dividend. Shareholders always demand a higher dividend, while the
Finance Functions Definition
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 function
planning, and decision-making activities.
Objectives of Financial Management
1. Profit Maximization
2. Wealth Maximization

3. Maintenance of Liquidity

4. Proper Mobilization

5. Proper Estimation of Financial Requirements

6. Proper Utilization of Financial Resources


Agency
Problem
What Is an Agency Problem?
An agency problem is a conflict of interest inherent in any relationship where one party is expected
to act in another's best interests. In corporate finance, an agency problem usually refers to a conflict
of interest between a company's management and the company's stockholders. The manager,
acting as the agent for the shareholders, or principals, is supposed to make decisions that will
maximize shareholder wealth even though it is in the manager’s best interest to maximize their own
wealth.
Drawbacks

The agency problem occurs because of the issues with the incentives and the
task to be completed in the discretion. At times the agents can be prompted to
function in a way that is unfavourable to the principal. This happens specifically
if the agents are given with the incentives to act as such.
Role of a Financial Manager
Financial activities of a firm is one of the most important and complex activities of a firm.
Therefore in order to take care of these activities a financial manager performs all the
requisite financial activities.

A financial manger is a person who takes care of all the important financial
functions of an organization. The person in charge should maintain a far sightedness in
order to ensure that the funds are utilized in the most efficient manner.
Following are the main functions of a Financial Manager:
1.Raising of Funds
2.Allocation of Funds
3.Profit Planning
4.Understanding Capital Markets

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