Financial Management

Meaning Financial management is broadly concerned with the acquisition and use of funds by a business firm. It deals with the situations that require selection of specific assets, or a combination of assets and the selection of specific problem of size and growth of an enterprise. In other words, FM is planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization. By Financial Management we mean efficient use of economic resources namely capital funds. Financial management is concerned with the managerial decisions that result in the acquisition and financing of short term and long-term credits for the firm. a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

More, precisely (Meaning of 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. Nature [FM is concerned with the efficient use of an important economic resource viz., capital funds - Ezra Solomon in Theory of Financial Management] Managerial finance (Financial Management) is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique. The difference between a managerial and a technical approach can be seen in the questions one might ask of annual reports. The concern of a technical approach is primarily measurement. It asks: is money being assigned to the right categories? Were generally accepted accounting principles GAAP followed? The purpose of a managerial approach, however, is to understand what the figures mean. 1. Someone using such an approach might compare the returns to other businesses in their industry and ask: are we performing better or worse than our peers? If we are performing worse, what is the source of the problem? Do we have the same profit margins? If not, why? Do we have the same expenses? Are we paying more for something than our peers? 2. They may look at changes in asset balances or red flags that indicate problems with bill collection or bad debt. 3. They will analyse working capital to anticipate future cash flow problems. Managerial finance is an interdisciplinary approach that borrows from both managerial accounting and corporate finance.

Sound financial management creates value and organizational agility through the allocation of scarce resources amongst competing business opportunities. It is an aid to the implementation and monitoring of business strategies and helps achieve business objectives.

Scope FM Scope may be defined in terms of the following questions: 4. How large should the firm be and how fast should it grow? 5. What should be the composition of the firms assets? 6. What should be the mix of the firms financing? 7. How should the firm analyse, plan, and control its financial affairs, There are two key objectives of financial management as given below in the financial, as follows:

A. Financial planning.
Financial planning refers to ensuring that an organization has enough funds to meet the requirements of the organization in the short, medium & long term. The financial manager will need to plan to ensure that enough funding is available at the right time to meet the needs of the organization for short, medium & long term capital requirements.

B. Financial control.
Financial control is relevant to the funds that have been raised. For instance ensuring assets are used efficiently is a part of financial control. The financial manager will need to consider whether the organization is meeting its objectives & the assets are being used efficiently. For this purpose, financial manager will have to compare the actual & the forecast performance.

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. Thereby, we can elaborate the Scope/Elements of FM as follows: 1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets is also a part of investment decisions called as working capital decisions. [Investment in the fixed assets. Investments in the fixed assets are made with long-term perspective with a objective to enhance the earning capacity. Such investments are generally irreversible and involve heavy amount. So that this decision regarding the investment in the fixed assets are taken after the proper of cost benefit study Investment in working capital. Working capital funds are necessary for day-to-day requirements of the organisation. In every business organisation there is an operating cycle; working capital funds are recovered back after some period. There should not be excessive amount invested in the working capital otherwise the funds will be remain idle.] 2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. 3. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two: a) Dividend for shareholders- Dividend and the rate of it has to be decided. b) Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

Objectives The objectives or goals of financial management are- (a) Profit maximization, (b) Return maximization, and (c) Wealth maximization. We shall explain these three goals of financial management as under:

(1) Goal of Profit maximization. Maximization of profits is generally regarded as the main objective of a business enterprise. Each company collects its finance by way of issue of shares to the public. Investors in shares purchase these shares in the hope of getting medium profits from the company as dividend It is possible only when the company's goal is to earn maximum profits out of its available resources. If company fails to distribute higher dividend, the people will not be keen to invest their money in such firm and persons who have already invested will like to sell their stocks. On the other hand, higher profits are the barometer of its efficiency

on all fronts, i.e., production, sales an management. A few replace the goal of 'maximization of profits' to 'fair profits'. 'Fair Profits' means general rate of profit earned by similar organisation in a particular area.

(2) Goal of Return Maximization. The second goal of financial management is to safeguard the economic interest of the persons who are directly or indirectly connected with the company, i.e.,shareholders, creditors and employees. The all such interested parties must get the maximum return for their contributions. But this is possible only when the company earns higher profits or sufficient profits to discharge its obligations to them. Therefore, the goal of maximization of returns is inter-related. (3) Goal of Wealth Maximization. Frequently, Maximization of profits is regarded as the proper objective of the firm but it is not as inclusive a goal as that of maximising it value to its shareholders. Value is represented by the market price of the ordinary share of the company over the long run which is certainly a reflection of company's investment and financing decisions. The long run means a considerably long period in order to work out a normalized market price. The management can make decision to maximize the value of its shares on the basis of day-today fluctuations in the market price in order to raise the market price of shares over the short run at the expense of the long run by temporarily diverting some of its funds to some other accounts or by cutting some of its expenditure to the minimum at the cost of future profits. This does not reflect the true worth of the share because it will result in the fall of the share price in the market in the long run. It is, therefore, the goal of the financial management to ensure its shareholders that the value of their shares will be maximized in the long-run. In fact, the performances of the company can well be evaluated by the value of its share. On a more generalised note, the financial management is generally concerned with procurement, allocation and control of financial resources of that concern. Thereby, the objectives of financial management can be stated as follows:

1. To ensure regular and adequate supply of funds to the concern. 2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. 3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. 5. 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.

Functions of Financial Management: [Past What did financial management do in the past? Their main function was to find the sources or with other words to find the money to support the investments. But who decided where will the money go? Who decided where will the company invest? The answer lay with the executive management. How did this function work? First they needed to look for all possible ways of financing. Those were usually bonds, stocks and bank loans. Then they had to take a look at costs of future capital and choose the right source of money. Sources that were the best for company goals and plans for the future were opted for. Now The question is what has changed? Well the main function of financial management is still looking and studying the sources of financing. But financial management

now also study the investments. It takes a look at the ROI, time of return and other similar factors. Financial management then as one of their functions decides which investments will company make and how will they finance them. Of course the executive management still has the last word but financial management is playing bigger and bigger role in every monetary matter in todays corporate industry.] Finance function for the sake of convenience may broadly be classified into groups i.e., executive finance function and incidental finance function. The executive finance function is so termed because it requires some administrative skill in planning, execution and control. On the other hand incidental finance function is so called because it does not require any specialized administrative skill and for the most part it covers routine work, mainly clerical that is necessary to carry into effect the executive decisions. Point vice; the functions of financial management can be briefed as: 1. Estimation of Capital Requirements: A finance manager has to make estimation with regards 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. 2. Determination of Capital Composition: Once the estimation have been made, the capital structure have 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. 3. Choice of Sources of Funds: For additional funds to be procured, a company has many choices likea. Issue of shares and debentures b. Loans to be taken from banks and financial institutions c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of financing. 4. 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. 5. 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 and other benefits like bonus. b. Retained profits - The volume has to be decided which will depend upon expansion, innovation, diversification plans of the company. 6. Management of Cash (Cash Inflow n Cash Outflow): Finance manager has to make decisions with regards 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. 7. Financial Controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.