Financial Management

FINANCIAL
MANAGEMENT
FACULTY
DR. DEEPMALA SONI
INTRODUCTION
Businesses whether new or existing may vary from another in terms of
the industry they operate in, the environment in which they function, the
products and/or services they render, or the operations they undertake
to achieve their objective function. However, the basic finance issues
that they grapple with are essentially the same. The key issues that a
business face notwithstanding their industry characteristics
geographical location, product profile etc. are largely universal. These
are:
From where to raise the most cost effective financial resources
needed to carry out the operations and how to manage the risk
associated with such financing?
Where to invest the scarce business resources so as to maximize the
returns on investments i.e. selecting the right nature and optimal scale
of businesses, projects etc. and at most suitable locations?
How to manage the routine production-distribution function in most
optimal and cost-effective manner so as to maximize the wealth of the
stakeholders?
How much of the profit should be retained for future investment needs
NATURE AND SCOPE OF FINANCIAL MANAGEMENT
Financial management is concerned with the planning and controlling of
the financial resources of an organization. The Finance department of an
organization is responsible for financial management of the firm, which
it does through the means of financial decision-making. It performs
facilitation, reconciliation and control functions in an organization. The
sourcing of finances needed by various departments and its rational
allocation for various activities is done by finance department. This
facilitates the attainment of various departmental goals along with the
realization of the over all organizational goal.
All decisions that have monetary implications come under the
purview of financial management.
ROLE OF FINANCE FUNCTION
An organization can be viewed from two different perspectives-
functional and stakeholders. From the functional viewpoint, each
organization can be divided into various functional areas such as
marketing, production, personnel etc. which discharge different duties
and perform different goals to achieve organizational goals. The
functional division of employees is important for focused attention of
people working therein. It helps to translate wider goals into small and
perceivable sub-unit or functional goals. It also helps to establish the
relationship of each individual with the organizational goals.
Like different functions of an enterprise there are different
stakeholders (shareholders, debt-holders, employees, suppliers,
customers, government, society, regulatory bodies) associated with
business. Different stakeholders have different concerns which can
only be addressed by finance function. Shareholders need to know
how their wealth would increase and how safe are they in their
investment with the firm. Creditors want to know whether or not to
supply material on credit to the firm and if yes,
For what period and to what extent. Employees of the firm are also
concerned about the timely receipt of salary and their personal growth
and general well-being. Customers concern is that of value for money
that they spend in buying goods and/or services rendered by the firm.
Lenders would be concerned with the security of the funds and the
receipts of returns promised to them. Government would want to
collect the taxes as projected.
Irrespective of the perspective of different functions and
stakeholders, finance function serve as a common denominator by
taking decisions that are in consonance with the interests of the
different stakeholders and by facilitating the decisions by providing the
information that the stakeholders need for evaluation and the analysis
of the firm’s performance.
FINANCE DECISIONS FOR THE FIRM
The scope of financial management extends to four key decision areas –
investment, financing, dividend and working capital.
INVESTMENT DECISION: Investment decisions involve putting the resources

in avenues that give a return that is in excess of the cost incurred on procuring
such resources. This maximizes the wealth of the shareholders. These decisions
are alternatively referred to as capital budgeting decisions. Basic issues involved
in such decisions are:
Evaluation of alternative investment avenues so as to select the best option;
and
Implementation and monitoring of the selected investment option
These decisions are significantly important for the business not only for
huge capital outlay that they entail and the element of irreversibility in them but
also from the risk-return perspective. A wrong nature or scale of investment is
like a double edged-sword- it cuts both ways. On one hand, it brings down the
return on investment, while on the other it enhances the operating risk.
FINANCING DECISION:
Financing decisions are mainly concerned with the identification of
potential sources of funds and tapping these sources in the light of the
funding requirements. These decisions are loosely referred to as
Capital Structure Decisions. Although capital structure or debt-equity
structure is of prime importance, there are other issues as well that are
covered under the rubric of financing decisions in addition to the
capital structure. The main issues involved in such decisions are :
Where from to procure the requisite capital?
What should be the optimal mix of various sources of capital?
How much should be the proportion of short-term and long-term
capital?
How do the expectations of providers of each source of capital change
with alteration in the capital-mix?
DIVIDEND DECISION:
The dividend decision decides on how much to distribute and how much to
plough back for future financing needs in business. Having generated cash, the
firm must decide whether to retain or to distribute cash to the providers of
capital. And such decision depends not only on the kind of commitment made
by the firm to such suppliers of capital but also on the trade off between future
financing needs of the firm and current consumption reuirement of the
shareholders.
WORKING CAPITAL DECISION:

Besides long-tern assets, the firm also requires short-term assets known as
currents assets. These assets are required for day-to-day routine functioning of
the enterprise. What is the adequate level of these assets and how would this
be funded constitute working capital decision.
Financial Decision Making Framework
Goal
Owner’s wealth maximisation
Activities Manifacturing, trading or service
Needed to carry out the activities

of the organization. They are
Reflected on the asset side of
Economic Resources the balance sheet. Are long-term
and short-term in nature. Decisions
To their procurement are alternatively
Referred to as investing decision and
Capital working
Relate to the liabilities side of balance

Sheet. Concerned with raising of long-
term and short-term financial resources.
Financial Resources Decisions related to their procurement are
referred to as financing decision/capital
structure decisions

Financial Management

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FINANCIAL

INVESTMENT DECISION: Investment decisions involve putting the resources

WORKING CAPITAL DECISION:

Activities Manifacturing, trading or service

Needed to carry out the activities

Relate to the liabilities side of balance

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