INTRODUCTION Financial management is that part of management which is concerned mainly with raising funds in the most economic

and suitable manner; using these funds as profitably (for a given risk level) as possible; planning future operations; and controlling current performances and future developments through financial accounting, cost accounting, budgeting, statistics and other means. It guides investment where opportunity is the greatest, producing relatively uniform yardsticks for judging most of the firms operations and projects, and is continually concerned with achieving an adequate rate of return on investment, as this is necessary for survival and attracting new capital. Financial management provides the best guide-ship for present and future resource allocation of a firm. It provides relatively uniform yardsticks for judging most of the operations and projects. Financial management implies the designing and implementation of a certain plan. Financial plans aim at an effective utilizat ion of funds. The term Financial management connotes that the fund flow is directed according to some plan. Financial management connotes responsibility for obtaining and effectively utilizing funds necessary for the efficient operation of an enterprise. The finance function centres round the management of funds raising and using them effectively. But the dimensions of financial management are much broader than mere procurement of funds. Planning is one of the most important activities of the financial manager. It makes it possible for the financial manager to obtain funds at the best time in relation to their cost and the conditions under which they can be obtained and their effective use by the business firm. Financial management is dynamic, in the making of day- to-day financial decisions in a business of any size. The old concept of finance as treasurer-ship has broadened to include the new, meaningful concept of controllership. While the treasurer keeps track of the money, the controllers duties extend to planning analysis and the improvement of every phase of the companys operations, which are measured with a financial yardstick. Financial management is important because it has an impact on all the activities of a firm. Its primary responsibility is to discharge the finance function successfully. It touches all the other business functions. All business decisions have financial implications, and a single decision may financially affect different departments of an organization.

Financial management, however, should not be taken to be a profit-extracting device. No doubt finances have to be so planned as to contribute the profit-making activities. Financial management implies a more comprehensive concept than the simple objective of profit making or efficiency. Its broader mission is to maximize the value of the firm so that the interests of different sections of the community remain protected. It should be noted, therefore, that financial management does not mean management of a business organization with a view to maximizing profits. Financial management applies to every organization, irrespective of its size, nature of ownership and control - whether it is a manufacturing or service organization. It applies to any activity of an organization which has financial implications. To say that it applies to private profit-making organizations alone is to narrow the scope of the subject. Moreover, financial management does not handle merely routine day-to-day matters. It has to handle more complex problems such as mergers, reorganizations and the like. It plays two distinct roles. Firstly, it safeguards interests of the corporation, which is a separate legal entity. Secondly, this separate legal entity has no meaning unless the interests of owners and other sections of the community, which are directly concerned with the corporation, are properly protected. Financial management is thus an integrated and composite subject. It welds together much of the material that is found in Accounting, Economics, Mathematics, Systems analysis and Behavioral sciences, and uses other disciplines as its tool. For a long time, finance has been considered as a rather sterile function concerned with a certain necessary recording of activities alone. Financial management makes a significant contribution to the management revolution that is taking place. Financial managements central role is concerned with the same objectives as those of the management; with the way in which the resources of the business are employed and how the business is financed. Financial management has been divided into three main areas decisions on the capital structure; allocation of available funds to specific uses and analysis and appraisal of 4 problems. Financial management includes planning or finance, cash budgets and source of finance. Definitions "Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations". - Joseph and Massie. "Financial management is an area of financial decision-making, harmonizing individual motives and enterprise goals". -Weston and Brigham. "Financial management is the area of business management devoted to a judicious used of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals".-J.F.Bradlery. Financial management is the application of the planning and control

Functions to the finance function". - Archer and Ambrosia. "Financial management may be defined as that area or set of administrative functions in an organization which relate with arrangement of cash and credit so that the organization may have the means to carry out its objective as satisfactorily as possible." - Howard Objective of Financial Management Financial management evaluates how funds are procured and used. In all cases, it involves a sound judgement, combined with a logical approach to decision-making. The core of a financial policy is to maximize earnings in the long run and to optimize them in the shortrun. This calls for an evaluation of the conditions of alternative uses of funds and allocation of resources after consideration of production and marketing inter-relationships. Financial management is concerned with the efficient use of an improved resource, mainly capital funds. Profit maximization should serve as the basic criterion for decisions arrived at by financial managers of privately owned and controlled firms. Different alternatives are available to a business enterprise in the process of decisions- making. Each alternative has its own implications. Different courses of actions have to be evaluated on the basis of some analytical framework and for this purpose, commercial strategies of an enterprise have to be taken into consideration. The availability of funds depend upon the kind of commercial strategies adopted by a firm during a particular period of time. Various different theories of financial management provides an analytical framework for an evaluation of courses of action. Maximization of profits is often considered to be a goal or an alternative goal of a firm. However, this is somewhat narrow in concept than the goal of maximizing the value of the firm because of the following reasons: (a) The maximization of profits, as reflected in the earnings per share, is not an adequate goal in the first place because it does not take into consideration time value of money. (b) The concept of maximization of earnings per share does not include the risk of streams of alternative earnings. A project may have an earning steam that will attain the goal of maximum earnings per share; but when compared with the risk involved in it, it may be totally unacceptable to a stockholder, who is generally hostile to risk-bearing activities. (c) This concept of maximization of earnings per share does not take into account the impact of dividend policy upon market price or value of the firm. Theoretically, a firm would never pay a dividend if the objective is to maximize earnings per share. Rather, it would reinvest all its earnings so as to generate greater earnings in the future. Financial management techniques, are applicable to decisions of individuals, nonprofit organizations and of business firms. Also, it is applicable to different situations in different organizations. Financial managers are interested in providing answers to the following questions: 1. Given a firms market position, the market demand for its products, its productive capacity and investment opportunities, what specific assets should it purchase? This Indirectly emphasizes the approach to capital budgeting.

2. Given a firms market position and investment opportunities, what is the total volume of funds that it should commit? This indirectly emphasizes the composition of a firms assets. 3. Given a firms market position and investment opportunities, how should it acquire the funds which are necessary for the implementation of its investment decisions? This underscores the approach to capital financing. PROFIT MAXIMIZATION Vs WEALTH MAXIMIZATION Although in general profit maximization is the prime goal of financial management, there are arguments against the same. The following table presents points in favour as well as against profit maximization.

Wealth Maximization: The goals of financial management may be such that they should be beneficial to owners, management, employees and customers. These goals may be achieved only by maximizing the value of the firm. Increase in Profits: A firm should increase its revenues in order to maximize its value. For this purpose, the volume of sales or any other activities should be stepped up. It is a normal practice for a firm to formulate and implement all possible plans of expansion and take every opportunity to maximize its profits. In theory, profits are maximized when a firm is in

equilibrium. At this stage, the average cost is minimum and the marginal cost and marginal revenue are equal. A word of caution, however, should be sounded here. An increase in sales will not necessarily result in a rise in profits unless there is a market for increased supply of goods and unless overhead costs are properly controlled. Reduction in Cost: Capital and equity funds are factor inputs in production. A firm has to make every effort to reduce cost of capital and launch economy drive in all its operations. Sources of Funds: A firm has to make a judicious choice of funds so that they maximize its value. The sources of funds are not risk-free. A firm will have to assess risks involved in each source of funds. While issuing equity stock, it will have to increase ownership funds into the corporation. While issuing debentures and preferred stock, it will have to accept fixed and recurring obligauons. The advantages of leverage, too, will have to be weighed properly. Minimum Risks: Different types of risks confront a firm. "No risk, no gain" - is a common adage. However, in the world of business uncertainties, a corporate manager will have to calculate business risks, financial risks or any other risk that may work to the disadvantage of the firm before embarking on any particular course of action. While keeping the goal of maximization of the value of the firm, the management will have to consider the interest of pure or equity stockholders as the central focus of financial policies. Long-run Value: The goal of financial management should be to maximize long run value of the firm. It may be worthwhile for a firm to maximize profits by pricing its products high, or by pushing an inferior quality into the market, or by ignoring interests of employees, or, to be precise, by resorting to cheap and "get-rich- quick" methods. Such tactics, however, are bound to affect the prospects of a firm rather adversely over a period of time. For permanent progress and sound reputation, it will have to adopt an approach which is consistent with the goals of financial management in the long-run. Advantages of Wealth Maximization v Wealth maximization is a clear term. Here, the present value of cash flow is taken into consideration. The net effect of investment and benefits can be measured clearly. (Quantitatively) v It considers the concept of time value of money. The present values of cash inflows and outflows helps the management to achieve the overall objectives of a company. v The concept of wealth maximization is universally accepted, because, it takes care of interests of financial institution, owners, employees and society at large. v Wealth maximization guide the management in framing consistent strong dividend policy, to earn maximum returns to the equity holders. v The concept of wealth maximization considers the impact of risk factor, while calculating the Net Present Value at a particular discount rate, adjustment is made to cover the risk that is associated with the investments. Criticisms of Wealth Maximization The concept of wealth maximization is being criticized on the following grounds: The objective of wealth maximization is not descriptive. The concept of increasing the wealth of the stockholders differs from one business entity to another. It also leads to

confusion in, and misinterpretation of financial policy because different yardsticks may be used by different interests in a company. As corporations have grown bigger and more powerful, their influence has become more pervasive; they have created an imbalance which is widely believed to have been instrumental in generating a movement to promote more socially conscious business behaviour. Academicians and corporate officers alike have urged the advisability of more socially conscious business management. Financial management will then have to rise equal to the acceptance of social responsibility of business. Financial management should not only maintain the financial health of a business,but should also help to produce a rate of earning which will reward the owners adequately for the use of the capital they have provided. To the creditors, the management must ensure administration, which will keep the business liquid and solvent. Moreover, financial management will have to ensure that expectations raised by the corporation are fulfilled with a proper use of several tools at is disposal. In other words, it should ensure an effective management of finance so that it may bear the desired fruits for the organization. If it is properly supported and nurtured by efficient activities at all stages, it will positively ensure desired results. Financial management should take into account the enterprises legal obligations to its employees. It should try to have a healthy concern which can maintain regular employment under favourable working conditions. However, a good financial management alone cannot guarantee that a business will succeed. But it is a necessary condition for business success, though not the only one. It may, however, be described as a pre-requisite of a successful business. In other words, there are various other factors which may support or frustrate financial management by supportive or non- supportive policies. Wealth maximization is as important objective as profit maximization. The operating objective for Financial Management is to maximize wealth or the net present worth of a firm. Wealth maximization is an objective which has to be achieved by those who supply loan capital, employees, society and management. The objective finds its place in these segments of the corporate sector, although the immediate objectives of Financial Management may be to maintain liquidity and improve profitability. The wealth of owners of a firm is maximized by raising the price of the common stock. This is achieved when the management of a firm operates efficiently and makes optimal decisions in areas of capital investments, financing, dividends and current assets management. If this is done, the aggregate value of the common stock will be maximized. DIMENSIONS OF FINANCIAL MANAGEMENT The different dimensions of financial management are dealt below: Anticipating Financial Needs: The financial manager has to forecast expected events in business and note their financial implications. Financial Manager anticipates financial needs by consulting an array of documents such as the cash budget, the pro-forma income statement, the pro-forma balance sheet, the statement of the sources and uses of funds,

etc. Financial needs can be anticipated by forecasting expected funds in a business and their financial implications. Acquiring Financial Resources: This implies knowing when, where and how to obtain the funds which a business needs. Funds should be acquired well before the need for them is actually felt. The financial manager should know how to tap the different sources of funds. He may require short-term and long-term funds. The terms and conditions of the different financial sources may vary significantly at a given point of time. Much will also depend upon the size and strength of the borrowing firm. The financial image of a corporation has to be improved in appropriate financial circles which are primarily responsible for supplying finance. Allocating Funds in Business: Allocating funds in a business means investing them in the best plans of assets. Assets are balanced by weighing their profitability against their liquidity. Profitability refers to the earning of profits and liquidity means closeness to money. The financial manager should steer a prudent course between over-financing and under-financing. He should preserve a proper balance among the various assets. He may adopt the famous marginal principle which states that the last rupee invested in each kind of an asset should have the same usefulness as the last rupee invested in any other kind of an asset. He should, moreover, allocate funds according to their profitability, liquidity and leverage. So, while the primary financial responsibility from the owners viewpoint may be to maximize value, the financial executives primary managerial responsibility is to preserve the continuity of the flow of funds so that no essential decision of the top management is frustrated for lack of corporate purchasing power. Administering the Allocation of Funds: Once the funds are allocated to various investment opportunities it is the basic responsibility of the finance manager to watch the performance of each rupee that has been invested. He has to adopt close supervision and marking of flow of funds. This will ensure continuous flow of funds as per the requirements of the organisation. This helps the management to increase efficiency by reducing the cost of operations & earn fair amount of profits out of investments. Analysing the performance of finance: Once the funds are administered, it is very comfortable for the finance manager to take decisions. Through the budgeting, he will be able to compare the actual with standards. The returns on the investments must be continuous and consistent. The cost of each financial decision and returns of each investment must be analysed. Where ever the deviations are found, necessary steps or strategies are to be adopted to overcome such events. This helps in achieving Liquidity of a business unit. Accounting and Reporting to Management: Now, the role of the finance manager is changing. The department of finance has gained substantial recognition. He not only acts as line executive but also as staff. He has to advise and supply information about the performance of finance to top management. He is also responsible for maintaining upto date records of the peformance of financial decisions. If need arises, he has to offer his suggestion to improve the overall functioning of the organisation. The financial manager will

have to keep the assets intact, which enable a firm to conduct its business. Asset management has assumed an important role in Financial Management. It is also necessary for the finance manager to ensure that sufficient funds are available for smooth conduct of the business. In this connection, it may be pointed out that management of funds has both liquidity and profitability aspects. Financial Management is concerned with the many responsibilities which are the main thrust of a business enterprise. Scope and Functions of Financial Management A priori definition of the scope of financial management falls into three groups. One view is that finance is concerned with cash. At the other extreme is the relatively narrow definition that financial management is concerned with raising and administering of funds to an enterprise. The third approach is that it is an integral part of overall management rather than a staff specialty concerned with fundraising operations. In this connection. Financial Management plays two significant roles: v To participate in the process of putting funds to work within the business and to control their productivity; and v To identify the need for funds and select sources from which they may be obtained. The functions of financial management may be classified on the basis of liquidity, profitability and management. (1) Liquidity: Liquidity is ascertained on the basis of three important considerations: (a) Forecasting cash flows, that is, matching the inflows against cash outflows; (b) Raising funds, that is, financial management will have to ascertain the sources from which funds may be raised and the time when these funds are needed; (c) Managing the flow of internal funds, that is, keeping its accounts, with a number of banks to ensure a high degree of liquidity with minimum external borrowing. (2) Profitability: While ascertaining profitability, the following factors are taken into account: (a) Cost Control: Expenditure in the different operational areas of an enterprise can be analysed with the help of an appropriate cost accounting system to enable the financial manager to bring costs under control. b) Pricing: Pricing is of great significance in the companys marketing effort, image and sales level. The formulation of pricing policies should lead to profitability, keeping, of course, the image of the organization intact. (c) Forecasting Future Profits: Expected profits are determined and evaluated. Profit levels have to be forecasted from time to time in order to strengthen the organization. (d) Measuring Cost of Capital: Each source of funds has a different cost of capital which must be measured because cost of capital is linked with profitability of an enterprise. (3) Management: The financial manager will have to keep assets intact, for assets are resources which enable a firm to conduct its business. Asset management has assumed an important role in financial management. It is also necessary for the financial manager to ensure that sufficient funds are available for smooth conduct of the business. In this connection, it may be pointed out that management of funds has both liquidity and

profitability aspects. Financial management is concerned with the many responsibilities which are thrust on it by a business enterprise. Although a business failure may not always be the result of financial failures, financial failures do positively lead to business failures. The responsibility of financial management is enhanced because of this peculiar situation. Financial management may be divided into two broad areas of responsibilities, which are not by any means independent of each other. Each, however, may be regarded as a different kind of responsibility; and each necessitates very different considerations. These two areas are: v The management of long-term funds, which is associated with plans for development and expansion, and which involves land, buildings, machinery, equipment, transport facilities, research project, and so on; v The management of short-term funds, which is associated with the overall cycle of activities of an enterprise. These are the needs which may be described, as working capital needs. One of the functions of financial management is co-ordination of different activities of a business house. A business depends upon availability of funds which, in turn, depends upon the extent to which a firm is able to effect cash sales. Financial management must offer a solution for decisions in areas of capital structure, investment, dividend distribution, and retention of surplus inter-alia. The investment decision involves current cash outlay in anticipation of benefits to be realised in the future. The uncertain nature of future benefits necessitates evaluation of investment proposals in relation to their expected rate of return and risk. Once the investment proposals are evaluated and combined into a capital expenditure programme or planned capital budget, the next decision involves finalisation of sources for a given capital outlay. In other words, the financing decision involves the determination of the ideal financing mix or capital structure. For deciding the dividend policy, the percentage of earnings paid to shareholders becomes an important consideration. It is obvious that the percentage of dividend policy paid affects the quantum of retained earnings. The dividend policy is thus instrumental for changes in market price of shares in the capital market. A prudent financial management policy calls for an optimal mix of different decisions in line with organizational objectives. Today, financial management extends itself to the broad subject of international money management which refers to the problem of collecting, utilising and protecting the financial assets of internationally involved companies. This includes both operating responsibilities of a multi-national corporation and providing the array of techniques and tools available to co-ordinate that task. This task is already difficult in domestic companies. But the task becomes more onerous on account of grated structural and environmental impediments confronting multi-national companies. New problems in managing and administering finances of companies have emerged following the increasing international financing of domestic companies and the entry of foreign collaborations, problems of dealings between parents and subsidiaries speaking in multiple languages,

heavy reliance on communication environments, following diverse legal practices, different tax umbrellas and exchange, control system among others. It has become imperative to have reporting systems and optimal use of financial institutions attempting to forecast liquidity and foreign exchange risks of companies. International cash management deals with more mechanical areas of cash collection, holding and disbursement. International cash management involves longer distances, exchange controls different currency units and multiple financial institutions. A variety of instruments exist for effecting international transfer of funds. There may be payment instructions in written or documentary form incorporating some form of credit. The standard method of transferring funds internationally is by mail payment order, which is a lengthy process. Cable transfers reduce remittance time appreciably. Other international modes of payment include bank drafts, cheques and trade bills. Sight and time drafts, acceptances and letters of credit are termed as documentary credits. The international liquidity management is regulated by exchange control and other barriers which usually prohibit the flow of funds in desired directions. Funds held by individual subsidiaries in different countries cannot be considered fungible and there is little or no chance of international pooling of funds. Even intra-country liquidity management may be affected by weak capital markets which offer few investment media or banking systems which delay transfers. This area is also affected by impediments in banking and mail systems. Role and Functions of the Financial Manager The financial manager performs important activities in connection with each of the general functions of the management. He groups activities in such a way that areas of responsibility and accountability are cleared defined. The profit centre is a technique by which activities are decentralised for the development of strategic control points. The determination of the nature and extent of staffing is aided by financial budget programme. Direction is based, to a considerable extent, on instruments of financial reporting. Planning involves heavy reliance on financial tools and analysis. Control requires the use of the techniques of financial ratios and standards. Briefly, an informed and enlightened use of financial information is necessary for the purpose of co-ordinating the activities of an enterprise. Every business, irrespective of its size, should, therefore, have a financial manager who has to take key decisions on the allocation and use of money by various departments. Specifically the financial manager should anticipate financial needs; acquire financial resources; and allocate funds to various departments of the business. If the financial manager handles each of these tasks well, his firm is on the road to good financial health. The financial managers concern is to: v Determine the total amount of funds to be employed by a firm; v Allocate these funds efficiently to various assets; v Obtain the best mix of financing in relation to the overall evaluation of the firm. Since the financial manager is an integral part of the top management, he should so shape his decisions and recommendations as to contribute to the overall progress of the business,

on which depends the value of the firing. That is his primary objective is to maximise the value of the firm to its stockholders. Although, decisions are the end product of the financial managers task, his day -to-day work consists of more than just decision-making. A great deal of his time is spent on financial planning, which may be described as the co-ordination of a series of inter-dependent decisions over an extended period. Of the many environments in which the firm operates, the one closest to the financial manager is the financial market, which ultimately determines whether a firms policies are a success or a failure. In a fundamental sense, financial management is nothing more or less than a continuing two-way interaction between a firm and its financial environment. It has been explained earlier that financial management is related to the environment, which is external to a firm. This environment is the macro-economic environment, which includes the study of the financial market. The logic here is very simple. A firm is a part of the entire business activity, which is reflected in the financial market. The financial market is sensitive to the reactions of firms to the supply of, and demand for, its securities. No firm can, therefore, exempt itself from undertaking a study of the financial market. It is in this sense that financial management makes a kind of an integrated approach to the external environment. The financial manager should: v Supervise the overall working of an organization instead of confining himself to technical matters as a top management executive v Make sure that funds have been acquired in sufficient, but not excessive amounts v Ensure that disbursements do not create shortage of funds v Analyse, plan and control the use of funds v Maintain liquidity while retaining the acceptable level of profits v Economise on the acquisition of funds and hold down their cost v Make allowances for uncertainties that exist in the business world v Administer effectively cash, receivables, inventory and other components of working capital v Analyse financial aspects of external growth v Develop the means to rejuvenate and revitalise the enterprise or to assist in liquidity and distribution of its assets to the various claimants. A financial manager is often up against a dilemma. He has to choose between profitability and liquidity. Although both are desirable, sometimes one has to be sacrificed for the other. Since cash earns no return, a firm increases its liquidity at the cost of its profitability. The financial manager does something more than co-ordinate business activities in a mechanical way. His central role requires that he understands the nature of problems so that he may take proper decisions. In several situations, he faces a challenge: should he choose profitability or liquidity? Despite the knowledge that a particular investment is quite profitable, he is forced to sacrifice this option, if the investment is going to lock up funds for an unreasonable period; the longer the period, the greater is the risk. Most financial

managers are, therefore, tempted to compromise between profitability and liquidity, and select projects which are reasonably profitable and, at the same time, sound from the liquidity point of view. An insight into the policies of the government and private institutions through which money flows, credit flows and general economic activity are controlled.