INTRODUCTION TO
FINANCIAL MANAGEMENT
BY
Dr. Mohammed Mujahed Ali
MBA, M.Com , M.Phil, Ph.D
Associate Professor
Mobile: +919849891687
Mubarak_mujahed@yahoo.co.in
FINANCIAL MANAGEMENT IN HEALTH CARE
AFTER LISTENING THIS UNIT YOU
SHOULD BE ABLE TO
1. Understand the significance and definition of
finance
2. Identify the goal of the firm and understand
why shareholders' wealth maximization is
preferred over other goals.
3. Know the functions of finance
INTRODUCTION
Finance is the life blood of business. Before
discussing the nature and scope of financial
management, the meaning of ‘finance’ has to
be explained. In fact, the term, finance has to
be understood clearly as it has different
meanings and interpretation in various context.
The time and extent of the availability of
finance in any organization indicates the health
of a concern.
Intro…
Finance is said to be the circulatory system of
the economy body, making possible the
required cooperation between the innumerable
units of activity.
Finance is called “The science of money”. It
studies the principles and the methods of
obtaining control of money from those who
have saved it, and of administering it by those
into whose control it passes.
Definition of Finance
According to Howard and Uptron, “finance may
be defined as that administrative area or set of
administrative functions in an organization
which relates with the arrangement of each and
credit so that the organization may have the
means to carry out the objectives as
satisfactorily as possible.
Definitions of the Financial Management

Different authors have given different definitions of
the financial management which are as follows:
1) The ways and means of managing money.
This statement can be further expanded to define
F.M. the determination, acquisition, allocation and
utilisation of the financial resources with the aim of
achieving the goals and objectives of the
orgnisation.
1) According to Archer and Ambrosia:
“Financial management is the application
of the planning and control functions to the finance
functions”.
Def of Finance
In simple terms finance is defined as the activity
concerned with the planning, raising,
controlling and administering of the funds used
in the business. Thus, finance is the activity
concerned with the raising and administering of
funds used in business.
MEANING AND DEFINITION OF
FINANCIAL MANAGEMENT
Financial Management is that managerial
activity which is concerned with the planning
and controlling of the firm’s financial
resources.
Definitions of Financial Management
“Financial management is concerned with the
efficient use of an important economic
resource, namely capital funds” - Solomon
Ezra & J. John Pringle.
“Financial management is the operational
activity of a business that is responsible for
obtaining and effectively utilizing the funds
necessary for efficient business operations”J.L. Massie.
Cont….
“Financial Management is concerned with managerial
decisions that result in the acquisition and financing of
long-term and short-term credits of the firm. As such
it deals with the situations that require selection of
specific assets (or combination of assets), the selection
of specific liability (or combination of liabilities) as
well as the problem of size and growth of an
enterprise. The analysis of these decisions is based on
the expected inflows and outflows of funds and their
effects upon managerial objectives”.- Phillippatus.
SCOPE OF FINANCIAL MANAGEMENT :
Financial Management today covers the entire
gamut of activities and functions given below.
The head of finance is considered to be
important ally of the CEO in most
organizations and performs a strategic role. His
responsibilities include:
Cont…
1. Estimating the total requirements of funds for a given
2.
3.
4.
5.
period.
Raising funds through various sources, both national and
international, keeping in mind the cost effectiveness;
Investing the funds in both long term as well as short
term capital needs;
Funding day-to-day working capital requirements of
business;
Collecting on time from debtors and paying to creditors
on time;
Cont..
6. Managing funds and treasury operations;
7. Ensuring a satisfactory return to all the stake
holders;
8. Paying interest on borrowings;
9. Repaying lenders on due dates;
10. Maximizing the wealth of the shareholders
over the long term.
Cont…
11. Interfacing with the capital markets;
12. Awareness to all the latest developments in
the financial markets;
13. Increasing the firm’s competitive financial
strength in the market &
14. Adhering to the requirements of corporate
governance.
Scope of the financial management
 To understand the scope of the financial management,
we must examine the traditional as well as the modern
approach of the financial management.
 The traditional approach to the financial management
is restricted to raising to funds from various sources
and completion of the legal formalities required to do
the same.
 The modern approach to the financial management
says that there are three important functions which are
expected to be performed by the financial management.
These functions are as follows:
 I) How much amount of funds will be required by the
firm?
 II) How to raise the amount required by the firm?
 III) How to invest the amount raised so that the
objectives of the financial management as well as the
firm will be achieved?
FUNCTIONS OF FINANCIAL
MANAGEMENT :
The finance function is the process of acquiring
and utilizing funds of a business. Finance
functions are related to overall management of
an organization. Finance function is concerned
with the policy decisions such as type of
business, size of firm, type of equipment used,
use of debt, liquidity position. These policy
decisions determine the size of the profitability
and riskiness of the business of the firm.
The functions of raising funds, investing them in assets
and distributing returns earned from assets to
shareholders are respectively known as financing
decision, investment decision and dividend decision.
Thus finance function includes:
1) Long-term & Short-term asset mix or Investment
Decision
2) Capital Mix or Financing Decision
3) Profit allocation or Dividend Decision
Investment Decision
The investment decision is concerned with the
selection of assets in which funds will be
invested by a firm. The assets of a business
firm includes long term assets (fixed assets)
and short term assets (current assets). Long
term assets will yield a return over a period of
time in future whereas short term assets are
those assets which are easily convertible into
cash within an accounting period i.e. a year.
CONT..
The long term investment decision is
known as capital budgeting
and the short term investment decision
is identified as working capital
management
CONT..
Capital Budgeting may be defined as long – term
planning for making and financing proposed capital
outlay. In other words Capital Budgeting means the
long-range planning of allocation of funds among the
various investment proposals. Another important
element of capital budgeting decision is the analysis
of risk and uncertainity. Since, the return on the
investment proposals can be derived for a longer time
in future, the capital budgeting decision should be
evaluated in relation to the risk associated with it.
CONT..
On the other hand, the financial manager is
also responsible for the efficient management
of current assets i.e. working capital
management. Working capital constitutes an
integral part of financial management. The
financial manager has to determine the degree
of liquidity that a firm should possess.
There is a conflict between profitability and
liquidity of a firm. Working capital
management refers to a Trade – off between
liquidity
(Risk)
and
Profitability.
Insufficiency of funds in current assets
results liquidity and possessing of excessive
funds in current assets reduces profits.
Hence, the finance manager must achieve a
proper trade – of between liquidity and
profitability.
2. Financing Decision
The second important decision is financing
decision. The financing decision is concerned
with capital – mix, (financing – mix) or capital
structure of a firm. The term capital structure
refers to the proportion of debt capital and
equity share capital.
Financing decision of a firm relates to the
financing – mix. This must be decided taking
into account the cost of capital, risk and return
to the shareholders. Employment of debt
capital implies a higher return to the share
holders and also the financial risk. There is a
conflict between return and risk in the
financing decisions of a firm.
So, the financial manager has to bring a trade –
off between risk and return by maintaining a
proper balance between debt capital and equity
share capital. On the other hand, it is also the
responsibility of the financial manager to
determine an appropriate capital structure.
3. Dividend Decision
The third major decision is the dividend policy
decision. Dividend policy decisions are concerned
with the distribution of profits of a firm to the
shareholders. How much of the profits should be
paid as dividend? i.e. dividend pay-out ratio. The
decision will depend upon the preferences of the
shareholder, investment opportunities available
within the firm and the opportunities for future
expansion of the firm.
The dividend pay out ratio is to be determined
in the light of the objectives of maximizing the
market value of the share. The dividend
decisions must be analysed in relation to the
financing decisions of the firm to determine the
portion of retained earnings as a means of
direct financing for the future expansions of the
firm.
Goals of Financial Management
Financial management is concerned with mobilization
of financial resources and their effective utilization to
wards achieving the organization its goals.
The financial decisions can rationally be made only
when the business enterprise has certain well thought
out objectives. It is argued that the achievement of
central goal of maximisation of the owner's economic
welfare depends upon the adoption of two criteria,
viz., i) profit maximisation; and (ii) wealth
maximisation.
Profit Maximisation
The term ‘profit maximization’ implies generation of
largest amount of profits over the time period because
business profits play a functional role in three
different ways.
i) profits indicate the effectiveness of business profits
ii) they provide the premium to cover costs of staying
in business
iii) they ensure supply of future capital.
Maximization of profits for a long term is
desirable and appreciable. The tendency to
maximize profits in the short run may invite
innumerable problems to the organization
concerned. In fact, maximization of profits in
the short run may give an impression of being
exploitative.
Criticism on Profit Maximisation
However, profit maximization objective has been
criticized on innumerable grounds. Under the changed
economic and corporate environment, profit
maximisation is regarded as unrealistic, difficult, un
appropriate and socially not much liked goal for
business organizations. Profit maximization as an
objective of financial management has been
considered inadequate and rejected because of the
following drawbacks.
1) There are several goals towards which a business
firm / organization should direct themselves profit
maximization is one of the goals of the organization
and not the only goal.
2) Maintenance of firm’s share in the market,
development and growth of the firm, expansion and
diversification are other goals of business concern.
3) Rendering social responsibility
4) Enhancing the shareholders’ wealth maximization.
Wealth Maximisation
Wealth Maximisation refers to all the efforts
put in for maximizing the net present value (i.e.
wealth) of any particular course of action
which is just the difference between the gross
present value of its benefits and the amount of
investment required to achieve such benefits.
As Van Horne aptly remarks, the market price
of the shares of a company (firm) serves as a
performance index or report card of its
progress. It indicates how well management is
doing on behalf of its shareholders.
The wealth maximization objective serves the
interests of suppliers of loaned capital, employees,
management and society. This objective not only
serves shareholders interests by increasing the value
of holding but also ensures security to lenders also.
According to wealth maximization objective, the
primary objective of any business is to maximize
share holders wealth. It implies that maximizing the
net present value of a course of action to shareholders.
The objective of wealth maximization is an appropriate and
operationally feasible criteria to chose among the
alternative financial actions. It provides an
unambiguous measure of what financial
management should seek to maximize in making
investment and financing decisions on behalf of
shareholders. However, while pursuing the
objective of wealth maximization, all efforts must
be employed for maximizing the current present
value of any particular course of action. It implies
that every financial decision should be based on
cost – benefit analysis.
Profit Maximisation versus
Shareholder Wealth Maximization
Profit maximization is basically a single-period or, at
the most, a short-term goal. It is usually interpreted to
mean the maximization of profits within a given
period of time. A firm may maximize its short-term
profits at the expense of its long-term profitability and
still realize this goal. In contrast, shareholder wealth
maximization is a long-term goal shareholders are
interested in future as well as present profits.
Wealth maximization is generally preferred
because it considers (1) wealth for the long
term, (2) risk or uncertainty. (3) the timing of
returns, and (4) the "shareholders' return. The
following table provides a summary of the
advantages and disadvantages of these two
often conflicting goals.