FINANCIAL MANAGEMENT

1.​ The term Financial Management is a combination of two words.

2.​ Finance refers to the money or cash.
3.​ Management refers to managing anything.
4.​ Here, financial management means management of money or cash in a
business firm.
5.​ Finance is the banagementlood of business. From starting the business to the
end of the business, companies need funds.
6.​ In a narrow sense, financial management refers to the acquisition and
utilization of funds. (SOURCE+Utilization)
7.​ To earn higher profit. If i have 100000 for investment that i took from loan
source at 10% interest rate. It means total cost is 110000. I will invest
100000 Rs. that will generate more than 10% revenue.
8.​ Wider Concept-
Financial Management refers to the
●​ Predicting finance need and source of fund
●​ Utilization of fund
●​ Investment decision - Profit ( Re Invest Dividend).
●​ Working capital Decision

IMPORTANCE
1.​ Helpful in predicting the finance need.
2.​ Helpful in selection of source of fund (Own Fund+ Loan) (Cost of Capital)
3.​ Allocation of Fund- Capital Budgeting( Long Term Project) Risk and
Return, Rationing.
 4.​ Increase shareholder value through dividend, sourcing and utlization of fund.
5.​ Measurement of performance - Ratio analysis, variance analysis, budget.
6.​ Decision making
7.​ Helpful in cash management
8.​ Helpful for investor
9.​ Helpful for shareholder.
10.​Helpful for manager.

SCOPE
1.​ Financial Planning - Requirement of Fund
2.​ Source of Fund - Capital structure
3.​ Dividend decision
4.​ Allocation of Fund - Capital Budgeting
5.​ Working capital Management
6.​ Receivable Management
7.​ Risk and Return analysis - CAPM/Protfolio Management /Capital Allocation
Line/ APT.
NATURE OF FINANCIAL MANAGMENT

1. Perpetual Process

Till the company exists, Financial management is going to exist. It is not a

one-time activity; instead, it’s a perpetual or never-ending process. It is evolved
and evaluated on a consistent basis which matches the trending technology,
resources, market conditions and tools. This adaptability is crucial for steering a
company through economic uncertainties and market fluctuations.
2. Interdisciplinary Approach

Financial management takes a lot of factors and disciplines such as accounting,

economics, statistics, and mathematics into consideration while managing the
organization’s finances. Financial managers need to integrate knowledge from
these diverse fields to make informed decisions that impact the organization’s
financial health positively.

3. Goal-oriented

Financial management is all about managing the financial goals of the company.
The primary objective of financial management is to maximize shareholder wealth.
This goal underpins all financial decisions, steering them towards actions that
enhance the company’s value and ensure sustained profitability.

4. Risk and Return Trade-off

Financial management involves a delicate balance between risk and return. The
sign of sound financial management is the maximization of returns with less risk.
There are multiple decisions like investment choices, financing options, and
dividend policies that require an assessment of potential risks against the expected
returns. Striking the right balance is essential for long-term sustainability. A
manager or authorized person has to ensure the right balance between risk and
return which will benefit the organization and its stakeholders.

5. Utilization of Funds

Managing the financial resources is a tough task and efficient utilization of funds is
a key of financial management. It involves allocating resources optimally to ensure
the organization’s operational efficiency, growth, and overall competitiveness in
the market. Managing the flow of funds plays a big role in determining the success
of the business. To ensure the right flow, monitoring on a regular basis needs to be
done.

GOAL OF FINANCIAL MANAGEMENT

Profit maximization is the traditional approach where the primary goal of a

business is to increase its profits within a specified period. This objective focuses
on short-term gains, emphasizing revenue maximization and cost minimization.
Profit maximization is often quantified by the company’s net income or earnings
per share (EPS) and is seen as a key indicator of a company’s operational
efficiency.

Key features of profit maximization include:

Short-term focus: Emphasis on immediate financial results.
Quantitative measure: Easy to calculate and report.
Operational efficiency: Focuses on maximizing output and minimizing costs.

Exploring Wealth Maximization

Wealth maximization, on the other hand, shifts the focus from short-term profits to
the long-term growth and sustainability of shareholder value. It is considered a
more comprehensive and realistic goal in financial management as it takes into
account the time value of money, future cash flows, and market volatility. Wealth
maximization aims to increase the net present value (NPV) of a business, thus
enhancing its market value.
Key features of wealth maximization include:
​Long-term perspective: Focuses on future growth and sustainable earnings.
​Risk and return considerations: Balances potential risks against expected returns.
​Shareholder value: Aims to enhance the overall value for shareholders.

Profit Maximization vs Wealth Maximization

●​ Time Frame:- Profit Maximization: Prioritizes immediate financial

performance, potentially at the expense of long-term stability. Wealth
Maximization: Considers long-term impacts, aiming for sustainable growth.
●​ Risk Management: Profit Maximization: May overlook risks in pursuit of
quick profits. Wealth Maximization: Incorporates risk assessment in
decision-making to protect shareholders’ interests.
●​ Stakeholder Impact: Profit Maximization: Mainly focuses on improving the
bottom line, which can sometimes lead to decisions that are not in the best
interest of other stakeholders. Wealth Maximization: Seeks to balance the
interests of all stakeholders, including shareholders, employees, and the
community.
●​ Financial Health: Profit Maximization: Can lead to aggressive strategies that
may jeopardize the company’s financial health. Wealth Maximization:
Encourages prudent financial management and investment in value-adding
projects.

CONCLUSION
There is always a contradiction between Profit Maximization and Wealth
Maximization. We cannot say that which one is better, but we can discuss which is
more important for a company. Profit is the basic requirement of any entity.
Otherwise, it will lose its capital and cannot be able to survive in the long run. But,
as we all know, the risk is always associated with profit or in the simple language
profit is directly proportional to risk and the higher the profit, the higher will be the
risk involved with it. So, for gaining the larger amount of profit a finance manager
has to take such decision which will give a boost to the profitability of the
enterprise.
In the short run, the risk factor can be neglected, but in the long-term, the entity
cannot ignore the uncertainty. Shareholders are investing their money in the
company with the hope of getting good returns and if they see that nothing is done
to increase their wealth. They will invest somewhere else. If the finance manager
takes reckless decisions regarding risky investments, shareholders will lose their
trust in that company and sell out the shares which will adversely effect on the
reputation of the company and ultimately the market value of the shares will fall.

Motive Maximizing a company’s profits. Maximizing the wealth of

shareholders.

Strategy Time Short term Long term

Period

Maximization Increasing the business’s earning Enhancing stock value for

Procedure capacity. stakeholders and
shareholders.

Main Focus Increasing a company’s capacity to Improving the business’s

generate maximum returns with the share price.
minimum input.

Time Value of Does not acknowledge the time Takes into account the time
Money value of money. value of money.
Role and Functions of Financial Manager
​Forecasting and planning

The financial manager needs to be aware of the current market trends and should
be able to assume the future too. He needs to interact with other executives and lay
the business plans carefully, shaping the future of the business firm.

​Coordination and control

He should exhibit proper coordination with other departments and control the
overall business enterprise financially. He needs to consider all the decisions and
activities of the organization and integrate them into his financial planning.

​Raising of funds

A business will need enough cash and liquidity to meet all its obligations. It can
raise funds in the form of debt or equity. A financial manager needs to tactfully
decide the ratio between equity and debt. Maintaining this ratio is quite necessary.

​Allocation of funds

After raising funds through various channels, it is necessary to allocate the funds
properly. While allocating the funds, the finance should be used in an optimum
manner. While the allocation of funds, the following points should be kept in mind:

1.​ Size of firm and growth capacity

2.​ Mode of fundraising
3.​ Long-term or short-term assets
 ​Planning for the profit

Rational distribution of profit is also an important functoin of financial

management. Net profit after tax can be distributed among shareholders as a return
on their investment or retained in business for expansion or distribution among
employee as bonus.

​Risk management

Each and every business is vulnerable to risks. Natural disasters like floods, fire,
cyclone, or change in the rates of interests, uncertainties in the prices of
commodities and shares, fluctuation of foreign exchange rates, etc., all lead to risks
for a business. But, it is possible to cope with these risks in the form of insurance
purchases or by hedging.

A financial manager has the responsibility to take care of and tackle all the
business risks. He should undertake the risk management programs like
identification of risks, and then hedge the risks effectively.

​Liquidity Management

An important function of financial management is to maintain adequate liquidity.

This enables the firm in paying its obligations in time and meeting day to day cash
need. It requrie forecasting of cash flow. A financial manager has to coordiate cash
inflow and outflow to maintain optimal cash flow.

●​ Reporting -

It is a duty of financial manager to analyse the financial performance of the

enterrise and report the result to board of directors. This facilitates changes to be
made in future polices and plans by pointing out the error committed.