WHAT IS FINANCIAL MANAGEMENT?

financial management
is the business function that deals with investing the available
financial resources in a way that greater business success and
return-on-investment (ROI) is achieved. Financial
management professionals plan, organize and control all
transactions in a business. They focus on sourcing the capital
whether it is from the initial investment by the entrepreneur,
debt financing, venture funding, public issue, or any other
sources. Three Major Decisions in Financial Management-1.
INVESTMENT DECISIONS-The investment decision relates to
the selection of assets in which funds will be invested by a
firm. The assets as per their duration of benefits, can be
categorized into two groups: (i) long-term assets which yield a
return over a period of time in future (ii) short-term or current
assents which in the normal course of business are convertible
into cash usually with in a year. Accordingly, the asset
selection decision of a firm is of two types. The investment in
long-term assets is popularly known as capital budgeting and
in short-term assets, working capital management. 2.
FINANCE DECISIONS -The second major decision involved in
financial management is the financing decision, which is
concerned with the financing — mix or capital structure of
leverage. The term capital structure refers to the combination
of debt (fixed interest sources of financing) and equity capital
(variable — dividend securities/source of funds).3.DIVIDEND
POLICY DECISIONS-The third major decision of financial
management is relating to dividend policy. The firm has two
alternatives with regard to management of profits of a firm.
They can be either distributed to the shareholder in the form
of dividends or they can be retained in the business or even
distribute some portion and retain the remaining. The course
of action to be followed is a significant element in the
dividend decision.

FINANCE AND OTHER RELATED DISCIPLINES-Finance and

Economics-The relationship in between these two disciplines
are studied in two different headings viz Micro and Macro
economics.The major part of the financial management is to
raise the financial resource to the requirements. Finance and
Accounting-The two are embedded with different disciplines.
The finance is the discipline which is mainly based on the cash
basis of operations but the accounting is totally governed by
the accrual system.Finance and Marketing: These two are
disciplines are interrelated to plan for introduction of new
product. The major reason is that the introduction of new
product normally warrants huge sum of money for research
and development; which needs immense planning and
execution to succeed over the other competitors Finance and
Production: The changes in the production policy of the
organization will impact the capital expenditures. The fixed
assets of the organization should be effectively utilized which
neither over capitalization nor under capitalization.Finance
and Quantitative methods: These are inter related to solve
complex problems in order to take decisions.The objectives of
the financial management are classified into two categories
viz 1.Profit maximization 2.Wealth maximization

SCOPE OF FINANCIAL MANAGEMENT-Planning-The financial

manager projects how much money the company will need in
order to maintain positive cash flow, allocate funds to grow or
add new products or services and cope with unexpected
events, and shares that information with business
colleagues.Budgeting-The financial manager allocates the
company’s available funds to meet costs, such as mortgages
or rents, salaries, raw materials, employee T&E and other
obligations. Managing and assessing risk-Line-of-business
executives look to their financial managers to assess and
provide compensating controls for a variety of risks,
including:1.Market risk2.Credit risk3.Liquidity
risk4.Operational risk.Procedures-The financial manager sets
procedures regarding how the finance team will process and
distribute financial data, like invoices, payments and reports,
with security and accuracy.

FUNCTIONS OF FINANCIAL MANAGEMENT-More practically, a

financial manager’s activities in the above areas revolve
around planning and forecasting and controlling
expenditures.The FP&A function includes issuing P&L
statements, analyzing which product lines or services have the
highest profit margin or contribute the most to net
profitability, maintaining the budget and forecasting the
company’s future financial performance and scenario
planning.Managing cash flow is also key. The financial
manager must make sure there’s enough cash on hand for
day-to-day operations, like paying workers and purchasing
raw materials for production. This involves overseeing cash as
it flows both in and out of the business, a practice called cash
management. Importance of Financial Management-Solid
financial management provides the foundation for three
pillars of sound fiscal governance:Strategizing-Identifying
what needs to happen financially for the company to achieve
its short- and long-term goals. Leaders need insights into
current performance for scenario planning, for
example.Decision-making-Helping business leaders decide the
best way to execute on plans by providing up-to-date financial
reports and data on relevant KPIs.Controlling-Ensuring each
department is contributing to the vision and operating within
budget and in alignment with strategy.

OBJECTIVES OF FINANCIAL MANAGEMENT-PROFIT

MAXIMISATION/WEALTH MAXIMATION-Profit
maximisation-it is a process business firms undergo to ensure
the best output and price levels are achieved in order to
maximise its returns.Influential factors such as sale price,
production cost and output levels are adjusted by the firm as a
way of realising its profit goals. ADVANTAGES OF PROFIT
MAXIMISATION- Economic survival: Profit is vital for the
survival of any businessMeasurement standard: Profits are
the right measurement of the viability of a business model. In
the absence of profits, the business loses its key goal and
incurs a direct risk to its survival.Social and economic welfare:
In a business, profits demonstrate proficient use and
allotment of resources. Resource allocation and payments for
land, labour, capital and the organisation lends itself to social
and economic welfare. DISADVANTAGES OF PROFIT
MAXIMISATION‘Profit’ definition is unclear: Different
perceptions of the term exist among organisations and
individuals. For example, profit can be the gross profit, net
profit, before tax profit or the profit rate.Time value of money
is ignored: The formula is based on the idea that the higher
the profit, the better the proposal, but what about its timing?
In finance, when considering present value, we know that
cash now won’t have the same value in the future.Attention
not paid to risk: In the pursuit of profit, risks involved are
ignored, which may prove unaffordable at times, simply
because higher risk directly questions the survival of a
business.WEALTH MAXIMIZATION-Wealth maximization is
the concept of increasing a firm's worth to increase the value
of stockholders' shares.Wealth maximization is also known as
net worth maximization. A stockholder's wealth increases
when a company's net worth maximizes. Advantages-It is
more related to cash flows than profits. 1.Cash flows are more
certain and regular, and there is a lack of uncertainty that
otherwise is associated with profit.2.Profits are more
manipulative, but cash flows are not. Thus, wealth
maximization is less prone to manipulation than profit
maximization, which relies on profit. Disadvantages-1.It is
more based on an idea that is prospective and not
descriptive.2.The objectives laid in such a technique are not
clear.

###MAIN MODERN FUNCTION APPROACH OF FINANCIAL

MANAGEMENT DECISION/ SCOPE/ELEMENT--Investment
Decision-One of the most important finance functions is to
intelligently allocate capital to long term assets. This activity is
also known as capital budgeting. It is important to allocate
capital in those long term assets so as to get maximum yield in
future. Financial decision is yet another important function
which a financial manger must perform. It is important to
make wise decisions about when, where and how should a
business acquire funds. Funds can be acquired through many
ways and channels. Dividend Decision-Earning profit or a
positive return is a common aim of all the businesses. But the
key function a financial manger performs in case of
profitability is to decide whether to distribute all the profits to
the shareholder or retain all the profits Liquidity Decision-It is
very important to maintain a liquidity position of a firm to
avoid insolvency. Firm’s profitability, liquidity and risk all are
associated with the investment in current assets.

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-1.To ensure regular and adequate supply of
funds to the concern.2.To ensure adequate returns to the
shareholders which will depend upon the earning capacity,
market price of the share, expectations of the
shareholders.3.To ensure optimum funds utilization. Once the
funds are procured, they should be utilized in maximum
possible way at least cost.4.To ensure safety on investment,
i.e, funds should be invested in safe ventures so that adequate
rate of return can be achieved.5.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.

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. 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.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.

ORGANIZATION OF THE FINANCE FUNCTIONS-Today, finance

function has obtained the status of a science and an art. As
finance function has far reaching significance in overall
management process, structural organization for further
function becomes an outcome of an important organization
problem. The ultimate responsibility of carrying out the
finance function lies with the top management. However,
organization of finance function differs from company to
company depending on their respective requirements. In
many organizations one can note different layers among the
finance executives such as Assistant Manager (Finance),
Deputy Manager (Finance) and General Manager (Finance).
The designations given to the executives are different. They
are 1.Chief Finance Officer (CFO)2.Vice-President
(Finance)3.Financial Controller4.General Manager (Finance)
5.Finance Officers

RISK AND RETURN IN FINANCIAL MANAGEMENT&&

RELATION- Risk and return in investing are perhaps the most
crucial parameters considered by investors while choosing
an investment option. Individuals who invest on a large scale
analyze the risks involved in a particular investment and the
returns it can yield. Let’s take a step-by-step approach to
understand the concept.First, let’s begin with risk. A risk can
be defined as the uncertainty related to the investment,
market, or company. Investors want profits, and the risks
can potentially reduce the profits, sometimes even making a
loss for them.Many types of risk are involved in investments
– market-specific, speculative, industrial, volatility, inflation,
etc. However, studying the market thoroughly can help
investors make the right decisions. They can analyze the
trends and forecast the situation. RELATIONSHIP BETWEEN
RISK AND RETURN -The correlation between financial risk
and return is fairly simple to comprehend. The risk in
choosing a certain investment is directly proportional to the
returns. Therefore, selecting a high-risk investment can give
higher profits, while a low-risk investment will minimize the
returns.

WHAT IS CAPITAL BUDGETING?- Capital budgeting is the

process a business undertakes to evaluate potential major
projects or investments. Construction of a new plant or a big
investment in an outside venture are examples of projects
that would require capital budgeting before they are
approved or rejected.As part of capital budgeting, a
company might assess a prospective project's lifetime cash
inflows and outflows to determine whether the potential
returns that would be generated meet a sufficient target
benchmark. The capital budgeting process is also known as
investment. IMPORTANCE OF CAPITAL BUDGETING (1) Large
Investments:Capital budgeting decisions, generally, involve
large investment of funds. But the funds available with the
firm are always limited and the demand for funds far
exceeds the resources. Hence, it is very important for a firm
to plan and control its capital expenditure.(2) Long-term
Commitment of Funds:Capital expenditure involves not only
large amount of funds but also funds for long-term or more
or less on permanent basis. The long-term commitment of
funds increases the financial risk involved in the investment
decision. Greater the risk involved, greater is the need for
careful planning of capital expenditure, i.e. Capital
budgeting.(3) Irreversible Nature:The capital expenditure
decisions are of irreversible nature. Once the decision for
acquiring a permanent asset is taken, it becomes very
difficult to dispose of these assets without incurring heavy
losses.(4) Long-Term Effect on Profitability:Capital
budgeting decisions have a long-term and significant effect
on the profitability of a concern. Not only the present
earnings of the firm are affected by the investments in
capital assets but also the future growth and profitability of
the firm depends upon the investment decision taken today.
(5) Difficulties of Investment Decisions:The long term
investment decisions are difficult to be taken because:(i)
Decision extends to a series of years beyond the current
accounting period,(ii) Uncertainties of future and(iii) Higher
degree of risk.(6) National Importance:Investment decision
though taken by individual concern is of national importance
because it determines employment, economic activities and
economic growth. Thus, we may say that without using
capital budgeting techniques a firm may involve itself in a
losing project.

CASH FLOW ESTIMATION&TERMINAL VALUE -A definition

often used for relevant cash flows states that they must be
cash flows that occur in the future and are incremental.In
simple terms, cash flow estimation (or cash flow forecasting)
is a prediction of how much inflow and outflow of cash a
business will have at any given time.It’s a bit more
complicated than that, of course, especially when non-cash
factors, like depreciation and compound interest, come into
play.TERMINAL VALUE There are several terminal value
formulas. Like discounted cash flow (DCF) analysis, most
terminal value formulas project future cash flows to return
the present value of a future asset. The liquidation value
model (or exit method) requires figuring the asset's earning
power with an appropriate discount rate, then adjusting for
the estimated value of outstanding debt.