FINANCIAL MANAGEMENT

DEFINITION OF BUSINESS FINANCE

• According to the Wheeler, “Business finance is that business activity which concerns with the Acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise”.

• According to the Guthumann and Dougall, “Business finance can broadly be defined as the activity concerned with planning, raising, controlling, administering of the funds used in the business”.

Introduction:

Business Finance refers to money or funds

available to a business enterprise .

It is th aggregate of funds needed to purchase

assets and to run day to day operations of business

like buying supplies, payng bills, salaries etc.

Objectives of Financial Management

To ensure availability of sufficient funds at

reasonable cost.

To ensure that the available funds are

effectively and properly utilised.

To ensure safety of funds through creation of

reserves, reinvetmentof profits, etc.

Introduction to Financial Management

• 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 OF FINANCIAL MANAGEMENT

• Financial management is an integral part of overall management. It is concerned with the duties of the financial managers in the business firm.

• The term financial management has been defined by Solomon, “It is concerned with the efficient use of an important economic resource namely, capital funds”.

• The most popular and acceptable definition of financial management as given by S.C.Kuchal is that “Financial Management deals with procurement of funds and their effectiveutilization in the business”.

• Howard and Upton : Financial management “as an application of general managerial principles to the area of financial decision-making.

• Weston and Brigham : Financial management “is an area of financial decision-making, harmonizing individual motives and enterprise goals”.

• Joshep and Massie : Financial management “is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficientoperations.

Functions of Financial Management

• Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.

• Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.

• Choice of sources of funds: For additional funds to be procured, a company has many choices like-– Issue of shares and debentures– Loans to be taken from banks and financial institutions– Public deposits to be drawn like in form of bonds.

• Choice of factor will depend on relative merits and demerits of each source and period of financing.

• Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.

• Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways:– Dividend declaration - It includes identifying the rate of

dividends and other benefits like bonus.– Retained profits - The volume has to be decided which will

depend upon expansional, innovational, diversification plans of the company.

• Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc.

• Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Role of 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. His actions directly affect the Profitability, growth and goodwill of the firm.

Main Functions of a Financial Manager

• Raising of Funds• In order to meet the obligation of the business

it is important to have enough cash and liquidity. A firm can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the ratio between debt and equity. It is important to maintain a good balance between equity and debt.

• Allocation of Funds• Once the funds are raised through different

channels the next important function is to allocate the funds. The funds should be allocated in such a manner that they are optimally used. In order to allocate funds in the best possible manner the following point must be considered

• Profit Planning• Profit earning is one of the prime functions of any

business organization. Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm. Profit arises due to many factors such as pricing, industry competition, state of the economy, mechanism of demand and supply, cost and output. A healthy mix of variable and fixed factors of production can lead to an increase in the profitability of the firm.

SCOPE OF FINANCIAL MANAGEMENT

• Financial management is one of the important parts of overall management, which is directly related with various functional departments like personnel, marketing and production.

• Financial management covers wide area with multidimensional approaches. The following are the important scope of financial management.

1. Financial Management and Economics

• Economic concepts like micro and macroeconomics are directly applied with the financial management approaches. Investment decisions, micro and macro environmental factors are closely associated with the functions of financial manager.

• Financial management also uses the economic equations like money value discount factor, economic order quantity etc. Financial economics is one of the emerging area, which provides immense opportunities to finance, and economical areas.

2. Financial Management and Accounting

• Accounting records includes the financial information of the business concern. Hence, we can easily understand the relationship between the financial management and accounting. In the olden periods, both financial management and accounting are treated as a same discipline and then it has been merged as Management Accounting because this part is very much helpful to finance manager to takedecisions. But nowaday’s financial management and accounting discipline are separate and interrelated.

• 3. Financial Management & Mathematics• Modern approaches of the financial management

applied large number of mathematical and statistical tools and techniques. They are also called as econometrics. Economic order quantity, discount factor, time value of money,present value of money, cost of capital, capital structure theories, dividend theories,ratio analysis and working capital analysis are used as mathematical and statistical tools and techniques in the field of financial management.

4. Financial Management and Production Management

• Production management is the operational part of the business concern, which helps to multiple the money into profit. Profit of the concern depends upon the production performance. Production performance needs finance, because production department requires raw material, machinery, wages, operating expenses etc. These expenditures are decided and estimated by the financial department.

5. Financial Management and Marketing• Produced goods are sold in the market with

innovative and modern approaches.• For this, the marketing department needs

finance to meet their requirements.

6. Financial Management and Human Resource• Financial management is also related with human

resource department, which provides manpower to all the functional areas of the management. Financial manager should carefully evaluate the requirement of manpower to each department and allocate the finance to the human resource department as wages, salary, remuneration, commission, bonus, pension and other monetary benefits to the human resource department. Hence, financial management is directly related with human resource management.

• OBJECTIVES OF FINANCIAL MANAGEMENT• Effective procurement and efficient use of

finance lead to proper utilization of the finance by the business concern. It is the essential part of the financial manager. Hence, the financial manager must determine the basic objectives of the financial management.

• Objectives of Financial Management may be broadly divided into two parts such as:

• 1. Profit maximization• 2. Wealth maximization.

• Profit Maximization Vs. Wealth Maximization

• The objective of Financial Management is profit maximisation.

• However, It cannot be the sole objective of a company as there is a directs/relationship between risk and profit.

• If profit maximisation is the only goal, then risk factor is ignored.

• Sometimes, higher the risk, higher is the possibility of profits. Hence, risk has to be balanced with the objective of profit maximisation.

• In addition, a firm has to take into account the social considerations, and normal obligations to the interests of workers, consumers, society, government, as well as ethical trade practices.

• However, as profit maximisation ignores risk and uncertainty and timing of returns, a firm can’t solely depend on the objective.

• Wealth Maximisation:• Hence, the objective of a firm is to maximise

its wealth and the value of its shares. • Wealth maximisation is represented by the

market price of the company’s common stock.

• The market price of a firm’s stock takes into account

• Present and prospective future earnings per share (EPS),

• The timing and risk of these earnings,• The dividend policy of the firm and many

other factors that bear upon the market price of the stock.

• The concept of wealth in the context of wealth maximisation objective refers to the shareholders’ wealth as reflected by the market price of their shares in the share market. Hence, maximisation of wealth means maximisation of the market price of the equity shares of the company.

• To conclude, total profits are not as important as earnings per share. Even maximisation of earnings per share is not enough because it does not specify the timing or duration of expected returns. Further, it does not consider the risk of uncertainty of the future earnings. Hence, wealth maximisation is appropriate and it is possible by maximising the market price per share.