INTRODUCTION TO FINANCIAL MANAGEMENT

ByProsenjit Banerjee

Finance Defined as the art and science of

managing money. Major areas of finances are

1. Financial Service2. Financial Management

Financial Management It is that managerial activity which is

concerned with planning & controlling of firm’s financial resources.

In other words, it is concerned with the duties of the financial managers.

Scope of Financial Management Provides a conceptual and

analytical framework for financial decision making.

Roles and Duties of Financial Mangers Performing financial

analysis and planning Making investment

decision Making financing

Decision

Objectives of Financial Management Profit Maximization Wealth Maximization

Profit Maximization Primary objectives: Earn Profit Key decision is to maximize profit Logic: Efficiency Limitations

Term “Profit” is vague Time value of money Uncertainty of returns Too narrow objective

Wealth or Value Maximization Focuses on increasing the net worth of a

company or firm Increasing shareholder’s wealth, Hence,

try to get shareholders the most earnings per share

Wealth Maximization Focuses the management's attention on investment

opportunities that enhance the value of a firm and its goodwill in the market.

Increase in EPS as well as in market price of the shares; prompts to buy more share

Attracts potential investors Creates goodwill of the company Fund procurement becomes easy and economical for such

firms. Demand for such firm's shares

Wealth or Profit Maximization?Wealth Maximization Profit Maximization

1. Emphasizes the long term gain

2. Recognizes risk and uncertainty

3. Recognizes timing of returns

1. Emphasizes the short term gains2. Ignores risk or uncertainty3. Ignores the timing of returns

Wealth Maximization is preferred more over profit Maximization

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