INTRODUCTION TO FINANCIAL MANAGEMENT
By Sanyah Saad
FINANCE
Finance is the life blood of business. Finance is an art &
science of managing money. Finance is the set of
activities dealing with the management of funds. More
specifically, it is the decision of collection and use of
funds.
DEFINITION OF FINANCE
to Oxford dictionary, the word ‘finance’
connotes ‘management of money’.
 According

Webster’s Ninth New Collegiate Dictionary defines
finance as “the Science on study of the management of
funds and the management of fund as the system that
includes the circulation of money, the granting of
credit, the making of investments, and the provision
of banking facilities”.
FINANCIAL MANAGEMENT
It concerned with the ( 3 A’s of Financial Management)
 Anticipation of financial requirements(estimation of financial
needs of a company
 Acquisition of fund (gathering funds from different sources
 Allocation of funds (use of funds to buy fixed and current assets)
FINANCIAL MANAGEMENT
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.
OBJECTIVES OF FINANCIAL MANAGEMENT
To ensure regular and adequate supply of funds to the concern.
• To ensure optimum funds utilization. Once the funds are
procured, they should be utilized in maximum possible way at least
cost.
• To ensure safety of investment, i.e., funds should be invested in
safe ventures so that adequate rate of return can be achieved.
• 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.
•
OBJECTIVES OF FINANCIAL MANAGEMENT
 To ensure profit maximization
 To ensure adequate returns to the shareholders which
will depend upon the earning capacity, market price of
the share, expectations of the shareholders. It aims at
maximization of wealth of the shareholders
PROFIT MAXIMIZATION AS THE MAIN OBJECTIVE OF BUSINESS
Profit earning is the main aim of every economic activity. A
business being an economic institution must earn profit to
cover its costs and provide funds for growth. No business
activity can survive without earning profit. Profit is a measure
of efficiency of a business enterprise. Profits also serve as
protection against risks which cannot be ensured. The
accumulated profits enable a business to face risks like fall in
prices, competition from other units, adverse government
policies etc. Thus profit maximization is considered as the
main objective of business
WEALTH MAXIMIZATION AS AN IMPORTANT OBJECTIVE
OF FINANCIAL MANAGEMENT
Wealth maximization has been accepted by the finance
managers, because it overcomes the limitations of profit
maximization. Wealth maximization means maximizing the net
wealth of the company’s share holders. Wealth maximization is
possible only when the company pursues policies that would
increase the market value of shares of the company.
FUNCTIONS OF FINANCIAL MANAGEMENT/ROLE OF FINANCE
MANAGERS
Estimation of capital requirements: A finance manager has to
make estimation with respect 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 estimations
have been made, the capital structure has to be decided. This
involves short- term and long- term debt equity analysis. This
will depend upon the proportion of equity capital a company is
possessing and additional funds which have to be raised from
outside parties.
•
FUNCTIONS OF FINANCIAL MANAGEMENT/ROLE OF FINANCE
MANAGERS
Choice of sources of funds: For additional funds to be procured,
a company has many choices like- Issue of shares, debentures,
loans from banks and financial institutions, public deposits
etc. Choice of the source will depend on relative merits and
demerits of each source and period of financing.
• 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.
•
FUNCTIONS OF FINANCIAL MANAGEMENT/ROLE OF FINANCE
MANAGERS
 Disposal of surplus: The net profits decision have to be made by
the finance manager. This can be done in two ways:
(a) Dividend declaration - It includes identifying the rate of
dividends to be declared and paid to share holders
(b) Retained earnings - The volume has to be decided which
will depend upon expansional, innovational, diversification plans
of the company.
FUNCTIONS OF FINANCIAL MANAGEMENT/ROLE OF FINANCE
MANAGERS
 Management of cash: Finance manager has to make
decisions with respect 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,
maintenance of enough stock, purchase of raw
materials, etc.
FUNCTIONS OF FINANCIAL MANAGEMENT/ROLE OF FINANCE
MANAGERS
 Financial controls: The finance manager should not
only plan, procure and utilize the funds but also
exercise control over finances. This can be done
through many techniques like ratio analysis, financial
forecasting, cost and profit control, budgetary control
etc.
SCOPE OF FM - FINANCIAL DECISIONS
Financial decisions refers to the decisions concerning financial
matters of a business concern. There are many kinds of
financial management decisions that the firm makes in pursuit
of maximizing shareholder’s wealth, viz, kind of assets to be
acquired, pattern of capitalization, distribution of firm’s
income
TYPES OF FINANCIAL DECISIONS/SCOPE OF FINANCIAL
MANAGEMENT
Investment
decisions
Financing
decisions
Dividend
decisions
INVESTMENT DECISIONS
Investment decisions pertain to the determination of total amount
of assets to be held in the firm. It is the most important decision
since funds involve cost and are available in a limited quantity. Its
proper utilization is necessary to achieve the goal of wealth
maximization
Investment decisions can be classified into two categories
 Long term investment decisions
 Short term investment
LONG TERM INVESTMENT DECISIONS
The long term investment decision is referred to as the capital
budgeting decisions. Capital budgeting is the process of making
investment decisions in capital expenditure. These are
expenditure, the benefit of which is expected to be received
over a long period of time. The finance manager has to assess
the profitability of various projects before committing funds. The
investment proposal should be evaluated in terms of
profitability, cost involved and risk associated with the
project
SHORT TERM INVESTMENT DECISIONS
They are also called as working capital decisions. It
related to allocation of funds towards current assets.
Short term decisions ensure sound liquidity position
FINANCING DECISIONS
The financial manager must decide the mode of rising the
funds to meet the firm’s investment requirement. He has to
select such sources which will minimize the cost of capital
and maximize the profitability. The debt equity ratio should
be fixed in such a that it helps in maximizing profitability of
the concern. Raising of more debt will involve fixed interest. It
may help in increasing the return on equity but will also
enhance risk. Therefore a financial manager has to strike a
balance between debt and equity.
DIVIDEND DECISION
The term dividend decision refers to quantum of profits
to be distributed among shareholders and the quantum of
profits to be retained earnings. The higher rate of
dividend may increase the market price of the shares
and thus maximize the wealth of the shareholders.
Organization of Finance Function
Board of Directors
President
VP: Sales
VP: Finance
Treasurer
VP: Operations
Controller
Credit Manager
Cost Accounting
Inventory Manager
Financial Accounting
Capital Budgeting Director
Tax Department
From the chart it is clear that treasurer and financial controller
work under VP finance . VP finance is responsible to the
president for his actions.
Treasurer performs the functions of procurement of essential
funds, their utilization, investment, banking, cash management
credit management, dividend distribution, pension,
management etc.
Financial controller is responsible for general accounting,
cost accounting, auditing, budget, reporting and preparing
financial statement etc.
Approache
s to FM
Traditional
Modern
approach
approach
TRADITIONAL APPROACH
 Traditional approach is the initial stage of financial management,
which was followed, in the early part of during the year 1920 to
1950. This approach is based on the past experience and the
traditionally accepted methods. Main part of the traditional
approach is rising of funds for the business concern. Traditional
approach consists of the following important area.
 Arrangement of funds from lending body.
 Arrangement of funds through various financial
instruments.
 Finding out the various sources of funds.
 It ignored effective utilization of funds
MODERN APPROACH
Since 1950s, the approach and utility of financial management
has started changing in a revolutionary manner. Financial
management is considered as vital and an integral part of
overall management.
The emphasis of Financial Management has been shifted
from raising of funds to the effective and judicious
utilization of funds. The modern approach is analytical way
of looking into the financial problems of the firm.