Financial Management PDF

Financial Management: Meaning, Nature of Financial Management Nature of financial management can be described as: Objectives, Functions, Scope, and  Financial managem...

Financial Management: Meaning, Nature of Financial Management Nature of financial management can be described as: Objectives, Functions, Scope, and  Financial management is a continuous process and an Significance indispensable organ of management.  It is an integral part/ focal point of business decision- Finance making process.  lifeblood of a business organization  It is helpful to top management in projecting trends and  art and science of managing money taking effective decisions.  provision of money at the time it is needed  It helps in performance measurement.  capital, funds, money and amount  It has a wide scope, i.e. concerned with diverse activities of business. Finance  According to Khan and Jain, Finance is the art and Objectives of Financial Management science of managing money. An analysis of the definitions of financial management  Financial Management according to Oxford dictionary, makes it clear that finance directs the flow of economic the word 'finance‘ connotes 'management of money'. activity and facilitates the smooth operation. Finance  Webster’s Ninth New Collegiate Dictionary defines provides the required stimulus for continued business finance as the Science on study of the management of operations of all categories. Finance is essential for expansion, funds‘ and the management of fund as the system that diversification, modernization, establishment, of new includes the circulation of money, the granting of credit, projects and so on. The financial policy of any organization to the making of investments, and the provision of banking a greater extent, determines not only its existence, and facilities. survival but also the performance and success of that organization. Finance is required for investment, purposes as Business Finance well as to meet substantial capital expenditure projects. The  Wheeler - Business finance is that business activity financial management is generally concerned with which concerns with the acquisition and conversation of procurement, allocation, and control of financial resources of capital funds in meeting financial needs and overall a concern. objectives of a business enterprise. 1. Optimal capitalization and sound capital structure: to  Guthmann and Dougall - Business finance can broadly achieve a flexible, productive, effective mix of sources of be defined as the activity concerned with planning, funds that ensure increased profitability through maximum raising, controlling, administering of the funds used in utilization the business.  Parhter and Wert - Business finance deals primarily with 2. Effective utilization of financial resources: to reap benefits raising, administering and disbursing funds by privately in return of their appropriate and time bound utilization. owned business units operating in nonfinancial fields of Financial management ensures that resources are not idle, industry. Corporate finance is concerned with budgeting, blocked or being under utilized over time. financial forecasting, cash management, credit administration, investment analysis and fund 3. Safety of investment: to ensure that funds invested are procurement of the business concern and the business secured and returning expected value through utilization. concern needs to adopt modern technology and application suitable to the global environment. 4. Maximization of profit and profitability: ensures that  Encyclopedia of Social Sciences - Corporation finance enterprise returns are increased with addition of investments deals with the financial problems of corporate including the profit earning capacity. Positive impact on enterprises. shareholders‘ value and capitalization will be the key drivers for this purpose. Financial Management  Solomon - It is concerned with the efficient use of an 5. Maintenance of liquidity and solvency: To ensure regular important economic resource namely, capital funds. and adequate supply of funds to the concern. To ensure  S.C. Kuchal - Financial Management deals with safety on investment, i.e., funds should be invested in safe procurement of funds and their effective utilization in ventures so that adequate rate of return can be achieved the business.  Howard and Upton - Financial management as an 6. Maximization of return on equity: To ensure adequate application of general managerial principles to the area returns to the shareholders. It depends on earning capacity, of financial decision-making. market price of the share and expectations of the  Weston and Brigham - Financial management is an area shareholders. of financial decision-making, harmonizing individual motives and enterprise goals. 7. Maximization of wealth, value of firm, net worth, and  Joshep and Massie - Financial management is the NAV of equity: To maximizing the value of the firm. It is done operational activity of a business that is responsible for through maximization of earning capacity and effective profit obtaining and effectively utilizing the funds necessary management. for efficient operations. 8. Financial discipline: ensure that procured funds are utilized in the efficient manner Scope of Financial Management 5. Effective Utilization of Resources Financial Management entails the process of planning, - A well-oiled finance function would always be wary of how organizing, monitoring, and also controlling the financial funds have been utilized. The monitoring and assessment of resources of an organization. The idea for doing such is to be funds invested in different areas or portfolios are the real able to achieve the vision or goals of the company at the output for finance function to administer the corrective stipulated time frame. Thus, Financial Management is action path, if required. This kind of an assessment would concerned with reveal challenges in utilization, over and underutilization etc. (i) Anticipating financial needs This also provides the view of effectively utilized funds (ii) Acquiring financial resources spreading the best practices for such allocation and (iii) Allocating funds in business utilization. It is important to mention that both right areas to (iv) Assessing risk in business invest and right time to invest are crucial for effective (v) Effective utilization of resources utilization of funds. 1. Anticipating Financial Needs - Core responsibility underlying the financial management is Relationship of Financial Management with Other Subjects to identify the future financial needs of the enterprise which The success of a business – small or big depends on can be split into short-term and long-term needs. Short term efficient financial management as finance is both cause and needs stipulate the financial resources to dispense revenue effect of diligent planning and management. The objectives nature needs like routine incomes and expenses viz, sales and scope of financial management should tune with and purchases. Long term needs are emphasized on investing objectives of the organization in general and specific schemes. in capital nature resources like fixed assets to business Financial management aims at wealth maximization of the expansion portfolio. These needs can be ascertained after shareholders and stake holders by optimum utilization of reviewing the empirical data associated with enterprise, scarce resources in a planned direction. Financial competitors, national and global market trends etc. management provides a conceptual and analytical framework for financial decision making. This covers not only acquisition 2. Acquiring Financial Resources of funds but also judicious allocation towards various - Once the financial needs are identified, it is extremely functions thus forming an integral part of the overall important to review the current financial profile. Financial management. Financial Management is a sub-system in an profile provides a landscape view of resources available organization which must coordinate with other subsystems within the enterprise to feed the financial needs. Obviously, such as production, marketing etc. financial management underscores the importance of 1. Financial Management and Economics arrangement of funds to secure the financial needs. The - Economic concepts of micro and macroeconomics are of financial management approach is multi-faceted to secure great relevance in financial management. Micro economic the financial needs initiating from Revenue generated from concepts like demand and supply, cost theory, production sales, gains from sale of securities and investments through theory etc. are extremely useful for any financial manager. to dividends from shareholding and interests from lending For example, cost theory has an implication to cost of capital etc. while demand and supply functions in microeconomics lay base for availability, procurement, and utilization of finance. 3. Allocating Funds in Business In the same way, Macroeconomics concepts of inflation, per - For the survival and growth of any enterprise, allocation is capital income, aggregate-demand, aggregate supply etc. are one critical indicator of financial health. Finance function, also useful for finance manager. These concepts are particularly resources responsible for the execution, needs to important in the application and investment of funds in review the flow of money into portfolios from time to time to productive areas through analysis and assessment of profits. determine if the allocation has been done effectively. To reach this objective, financial management has to identify 2. Financial Management and Accounting “areas of investment for funds” from which it has planned to - A finance manager must make decisions about future. earn revenue and ultimately profit, to achieve the business Forecasting is a powerful tool for the same and historic goals. accounting information and cost data are key inputs to 4. Assessing Risk in Business Forecasting. - Risk Management has become indispensable to Finance function over time. It has also become a niche area for 3. Financial Management and Mathematics professionals associated with Assessment of Financial Risk in - Finance functions make use of statistical, mathematical and business. It is imperative for enterprise to face inherent and econometrics tools and techniques. These may include time invited risks to exploit the weaknesses within the financial value of money, correlation, regression analysis and financial system controlled by financial management. There is always modelling techniques. an emergency risk that can severely impact the enterprise in many forms. Pandemic is one such example of emergency 4. Financial Management and Marketing risks getting converted into inherent risks. Financial - Various marketing decisions, such as product, pricing, management is not only responsible to identify and assess promotion, product mix, market segmenting, targeting, and the risks enterprise is exposed to, but also for mitigation of positioning, choice of distributional channels etc. are taken in risks through the application of different methods. We must consultation with finance department. consider rapidly changing local and global business environment including the significant changes in state economic policy. 5. Financial Management and Human Resource deposits and financial institutions may be appropriate; on the - HR decisions about requirement, recruitment, selection, other hand, if long-term finances are required then share training & development of manpower are based on allocated capital and debentures may be useful. funds. 4. Formulation of financial policies and systems 6. Financial Management and Production Management - For having appropriate control over utilization of funds, it is - Product planning and engagement of factors of productions important to formulate financial policies and systems. The is based on cost benefit analysis carried out by finance financial policies may include investment policy, dividend department. policy, credit policy etc. These policies enable firm and its various sections to work in right direction. The financial Therefore, scope of financial management is not limited systems also help the organization to have effective control to finance functions or the principles of management, but it on wastage and leakage of funds. is closely associated with many other subjects and areas which crossroads with the Finance on a daily basis. 5. Profit planning and assessment - Profit planning is one of the prime functions of financial Finance Function management. It is done through sales assessment and The ultimate of finance function lies in maximization of forecasting, effective cost-volume profit (CVP) analysis, add the value of the firm. Thus, it is not confined to procurement or drop decisions, make or buy decisions, leverage analysis of funds but of utilizing the scarce resources in an optimum and the ratio analysis. manner. The task of procuring and utilizing funds should be in consonance with proper timing, at proper cost, the sale of 6. Capital budgeting and investment decisions stock, the types and duration of obligations, the condition of - It refers to planning and execution of investment in long- money market etc. One predominant feature which term and short-term assets. It is done through effective cost- differentiates finance from other managerial functions is the benefit analysis and the risk-return analysis ‘time’. 1. Money Management: This includes efficient management 7. Management of assets of monetary resources i.e. resource mobilization, working - The selection of an investment pattern is related to the use capital management and investment decisions. of funds, i.e., what proportion of funds is to be allocated for 2. Record Keeping and Reporting: This includes financial long term investment in assets and for working capital. The accounting, cost accounting and management accounting. investment decisions are also concerned with the assets to 3. Control Functions: This includes budgeting, cost control be purchased. The decision-making techniques such as and internal audit. capital budgeting, opportunity cost analysis, etc. may be 4. Auditory Functions: This includes pricing, acquisitions, applied in making decisions about capital expenditures. expansion, diversification, dividend policy, etc. 8. Management of working capital and liquidity Functions of Financial Management - While spending on various assets, principles of safety, According to Weston and Brigham, ‘financial profitability and liquidity should not be ignored. The management is an area of financial decision making, investment made in long term assets and short-term assets, harmonizing individual motives and enterprise goals.’ In the such as inventory, receivables and cash are required to be words of Phillippatus, ‘financial management is concerned monitored so that maximum advantage of investment can with the managerial decisions that result in the acquisition be taken. The actions required for this purpose include and financing of long-term and short-term credits for the proper valuation of assets, replacement of depreciated firm.’ As such it deals with the situations that require assets, optimization of investment in working capital i.e., selection of specific assets/ combination of assets, the inventory, receivables, and cash. selection of specific liability/ combination of liabilities as well as the problem of size and growth of an enterprise. 9. Management of profit and dividend decisions 1. Financial planning and estimation - The profit allocation decisions are taken in two ways, by - To estimate short-term and long-term financial dividend declaration and profit retention. The dividend requirements of his business a sound financial plan is decisions are taken by identifying the rate of dividends and prepared for present as well as for future reference. The other benefits to shareholders, such as interim dividend and estimation of financial needs is done by using (i) cost bonus shares. The volume of retained earnings is decided approach, and (ii) earning yield approach. according to expansion, diversification or innovation needs, profitability of further investment and other purposes 2. Deciding the sources of funds specified by the firm. - It refers to the kind and proportion of different sources of funds. After deciding about the quantum of funds required, it 10. Financial analysis and control should be decided which type of securities (equity) - The finance manager not only plans, procures, and utilizes the funds; he also exercises controls over finances. This can 3. Optimal capital structure be done through many techniques like ratio analysis, Cost - Various sources, from which finance may be raised, include Volume Profit analysis, financial forecasting, cost control etc. long term loans from financial institutions and banks, issue of debentures and bonds, share capital, public deposits etc. If finances are needed for short periods then banks, public 11. Acquisitions and Mergers 5. Helps in purposeful allocation of financial resource. - Mergers refers to integration of two entities into one big organization. Acquisition consists of purchase of smaller firms 6. It ensures profitability, liquidity and solvency of the by a bigger organization with minimum cash outlay. This business. requires a proper valuation of firm’s securities to arrive at the exchange rate. 7. Helps in maximizing return on investment and the value of firm. 12. Corporate Taxation - Corporation as a separate entity is subject to income tax 8. Ensures growth, expansion, diversification, and long run structure which is distinct from personal taxation. A proper survival of business. planning is necessary for finance manager in this area. 9. Helps in critical financial decisions and trend projection. 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. Broadly, financial management includes investment decisions, financing decisions and dividend decisions. 1. Investment decisions - These are concerned with planning and estimation of investment in total asset (both long term and short term). Planning for long-term assets, popularly referred to as ‘capital budgeting’ is defined as the firm’s decision to invest its current funds most efficiently in fixed assets with an expected flow of benefits over a series of years. The investment in short-term asset, popularly termed as ‘working capital’ is estimated by considering cash conversion that takes place within a year. This is vital as liquidity of today determines tomorrow’s long-term success. 2. Financing decision - After planning investment, the next issue is how to finance the same. This speaks about weighing the proportion between debt and equity i.e. the finance mix or leverage. The finance mix should be optimum to balance risk and return and pay the investors maximum. 3. Dividend decision - The dividend policy of the organization is one crucial area as the two basic issues – dividend and retained earnings are to be balanced. Dividend is today’s return on investment and retained earnings strengthen the capital base. Both they have impact on the market value of the share and thereby of the firm. An optimal dividend policy gives an assured and reasonable return to investors today and protects tomorrow. Significance or Importance of Financial Management The importance or significance of financial management can be expressed as: 1. Financial management helps organizations in financial planning and Administration. 2. It is focal point of decision making; it coordinates various functional activities of the organization. 3. Financial management makes funds available from right source, right price and at the right time. 4. It ensures that procurement of funds does not affect right of management as well as control over affairs of the company.