Financial Management: Concepts and Definitions

Financial Management Meaning

• Financial management is a branch of business administration that recognises financial implications of business activities.
• It applies general management principles to financial operations.
• Financial management focuses on raising funds economically, using them profitably, planning operations, and controlling performance through accounting, budgeting, and statistics.
• It guides investment, sets financial norms and helps in resource allocation.
• Financial management is important for effective fund utilization and involves planning to obtain funds at the best cost and time.
• It has evolved beyond treasurership to include controllership, which involves planning analysis and improving company operations with financial metrics.
• It impacts all business activities and decisions.
• Raymond Chambers considers financial management the management of the finance function.

Definitions

• Financial management is the activity responsible for obtaining and using funds efficiently (Joseph and Massie).
• Business finance deals with raising, administering, and disbursing funds by privately owned businesses in non-financial industries (Prather and Wert).
• Financial management harmonizes individual motives and enterprise goals through financial decision-making (Weston and Brigham).
• Key aspects include judicious use of capital and careful selection of capital sources to achieve business goals (J.F. Bradley).
• Financial management involves planning and control applied to the finance function (Archer and Ambrosio).
• Arrangement of cash and credit ensures an organization can meet its objectives (Howard and Opton).
• Business finance includes planning, raising, controlling, and administering funds (H.G. Fathunan and H.E. Dougali).

Objectives of Financial Management

• Financial management evaluates fund usage and procurement through sound judgement and logical decision-making.
• The core financial policy is to maximize long-term earnings and optimize short-term earnings. This involves evaluating fund uses and resource allocation.
• Profit maximization should be the primary criterion for financial managers in privately-owned firms. Each alternative should be examined using an analytical framework.
• Profit maximization is considered a goal or alternative goal, but is narrower than maximizing the firm's value because:
  • EPS maximization does not consider the time value of money.
  • EPS maximization doesn't address risk in alternative earnings streams. Risky projects may be undesirable, even if they maximize EPS.
  • It ignores the impact of dividend policy on the firm's market price.
• Reinvesting earnings to generate future income is key to maximizing EPS. Actions in favor of profit Includes:
  • Barometer of performance.
  • Ensures welfare to stakeholder and on time payments
  • Enhances confidence in expansion
  • Attract investors to invest saving
  • Indicates fund use efficiency
• Actions against actions includes:
  • No clarity on what kind of profit: accounting, economic, pre or after tax etc.
  • It attracts corruption to increase profits
  • Ignorance to risks and time value of money
  • No reflection of true organisation picture
  • Government intervention.
  • Huge profits attracts work problems, demands for salary
  • Disturbs morale of customer, where they feel exploited

Key Considerations

• Long-range profit maximization requires careful consideration.
• Where benefits and costs can be quantified, value maximization is used.
• If only costs are quantifiable, a cost-benefit analysis is done.
• Mutually exclusive alternatives, cost minimization is appropriate.
• Financial management is applicable to business, non-profits and individual's decisions
• The preservation of property and rights, coupled with profit conservation, secures confidence among owners and creditors.
• Profitability, along with sustained growth, fulfills stakeholders interests.
• Though not just about proft, it is important component to the business objective and investor consideration
• Financial management ensures profitability and growth through decision-making.

Wealth Maximization

• Financial management addresses questions about asset purchases, funding volume, and acquisition methods.
• Goals should benefit owners, management, employees, and customers by maximizing the value of the firm based on:
  • Increase in revenue.
  • Reduction in cost.
  • Judicious Funding.
  • Minimized Risk.
  • Long-term Value.
• Increasing sales does not always raise profits, unless there is market demand and overhead costs are controlled.
• Firms must reduce the cost of capital and economize operations, judiciously choose funds and weigh the advantages of financial leverage.
• Management should address uncertainties and consider stockholder interests as central to financial policy.
• Financial management should maximize the firm's long-run value by avoiding tactics that harm long-term prospects.

Advantages of Wealth Maximization

• Wealth maximization is clear in that the present value of cash flow in taken in consideration
• Takes into consideration net effects on benefits and measures effectively
• It accounts for time value of money, where inflows and outflows help achieve the company objective
• The concept is universally accepted as it cater to the interests of all stakeholders
• Guides managemnt to have consistent dividend policy to maximise equity holders reach
• Considers the impact of risk factor

Criticisms of Wealth Maximization

• May involves ethical standard trade to conform, demands in the business world to the socio-economic environment
• Corporations grow to imbalance in the movement the promote social business, urges advisability, corporate officers and academicians
• Produce a rate of earning rewards to owners, creditors and capital
• Financial management helps maintain business in financial health produce a rate of earnings which reward capital, ensure adminstration to keep liquid and solvent
• Should take an account the enterprise's legal obligation to employees, support nurturing with positive result, enterprise legal obligation should be maintain a healthy working conditions.
• A prerequsite for succesful business and more importantly a objective that maximising the wealth.

Scope and Functions of Financial Management

• The general objective of Financial management is to get the wise use of funds.
• Two roles of Financial management:
  • Put the funds into work - Control their Productivit
  • Identify the need of funds and the obtainment.
• Classified on the basis of Liquidity, Profitability and Management. Details of points are:
  • Liqiudity, the essential considerations
    • Cash Flow with Inflow vs Outflow
    • Raising of fund, Ascertain fund may be raised and funded
    • Manage the flow internal funds, account ensure accounts with a number of accounts and banks helps ensure liquidity
  • Profitability consider the following:
    • Cost Control: Different area helps analyse with Cost accounting system that enables the manager bring cost under control. Pricing is important for Image, sales level and marketing
    • Pricing Policies should lead to profitability, help intact the organisation
    • Forecasting Profits: Predict and Evaluate
    • Measuring the cost of capital: measure the cost and the measures
  • Financial management divided under two responsibility like:
    • Long term funds, for development and expansive funds and land, machinery, equipment transport, builds, research project
    • Short term funds, the activities and described the capital of activities

Role and Functions of the Financial Manager

• Financial mangers need to consider the decision making while the overall functions of management
• Grouping activities, accountability and responsibility,
• The function budget programme that aids the nature and extent of staffing, the directions is based on considerable extent report, planning involves heavily relies on financial tools and analyss
• Irrespective to size, should have money and taking key decisions
• The manager should anticipate financial need and allocate financial resources
• A financial manager's concern that:
  • Determine the funds, allocation and overall relation finance.
• Decisions are critical and integral to the top management team. Their concern is to:
  • Supervise the operation with organisation and matter executives
  • Acquired fund, plan the fund and economy for funds
  • Allowance for uncertain, cash receivable that administratives
  • Revitalise enterprises growth liquid.

Functional areas of financial management

• Concerned for Allocation where its used for the various types of sectors, short terms that leads for profits. Detail of the 4 points:
  • Fund Requirment Decision, estimation that has high importance
  • Investment desicion. Allocation to recovery not only that the costs but also the to get from profits, generally used in budget and investing
  • The funds are available through banks, finacial, primary funds.
  • Finiancinal: The equities maximised to returns stakeholders, viz ,Government, inflation and etc to consider
  • Decisons for regular and Assrued percentage for the suppliers

Sources of Short-Term Borrowing

• An example of the source for short term borrowing:
  • Trade credit is suppliers with sell material good.
  • Trade credits are agreements on current accounts, vendor entries, purchaser.
  • Many discount and encourages accounts giving cash payment
  • Bank Credits, which are big resources for industrial bank, also offers innovative village schemes.
  • Commercial banks source to short terms bank from banks, lends and under a year

Working Capital Financing

• Working capital are required irregardless.
• Situation that easy fixed the capital
• The dilemma finance with a business
• The factors and influenced by the capital include
  • Nature, seasonal operations.
  • Production and supply conditions with market conditions

Sources of Long-Term Borrowing

• Details of the equities:
  • Equity is a common way of the shareholders who benefits the limits to capital.
  • Terms authorises, issued, Subscribed, and etc and it means that company that potential issue
• Right to income with the the claim of the firm. Example of Company pays 3mm: includes shareholders gains as 2 ways:
  • Income of 3mm and capital appreciates as 7mm

Long-Term Funds

• They can do two things
  • Redeem is preference amount
  • Reduce cost
• Most of shares do better results.

Overcapitalization

• Meaning:
  • Overcapitalisation
  • A fair return
  • And has asset needs

Effects

• They are many different stakeholders such the corporation, society owner.

Remedies and OverCapitalisation VS UnderCapitalisation

• Overcapitalisation: that cannot disappear

UnderCapitalisation

• When there is not implying the fund and it can affect the economy is adjusted
• UnderCaplisation:
  • An estimate to promote
  • An increase resulting developer,
  • Meets intrest which the dividend is charge. And higher the shares and business.

Causes and Effects

Effects and causes for the under