INTRODUCTION

FINANCE
Finance is the life blood of business. Finance may be defined as the art and science of
managing money. Finance also is referred as the provision of money at the time when it is
needed. Finance function is the procurement of funds and their effective utilization in business
concerns.
The term financial management has been defined by Solomon, “It is concerned with
the efficient use of an important economic resource namely, capital funds”. The most popular
and acceptable definition of financial management as given by S. C. Kuchal is that “Financial
Management deals with procurement of funds and their effective utilization in the business.
Financial management is the operational activity of a business that is responsible for obtaining
and effectively utilizing the funds necessary for efficient operations. Thus, Financial
Management is mainly concerned with the effective funds management in the business.
Financial management is that activity of management which is concerned with the
planning, procuring and controlling of the firm's financial resources. It means applyinggeneral
management principles to financial resources of the institutions. Financial activities of an
institutions is one of the most important and complex activities of a firm. Therefore in order to
take care of these activities a financial manager performs all the requisite financial activities.
A financial manager is a person who takes care of all the important financial functions of an
organization. The person in charge should maintain a far sightedness in order to ensure that
the funds are utilized in the most efficient manner. His actions directly affectthe Profitability,
growth and goodwill of the firm.
The scope and coverage of financial management have undergone fundamental changes
over the last half a century. During 1930s and 1940s, it was concerned of raising adequate funds
and maintaining liquidity and sound financial structure. This is known as the 'Traditional
Approach' to procurement and utilization of funds required by a firm. Thus, it was regarded as
an art and science of raising and spending of funds. The traditional approach emphasized the
acquisition of funds and ignored efficient allocation and constructive use of funds. It does not
give sufficient attention to the management of working capital.
During 1950s, the need for most profitable allocation of scarce capital resources was
recognized. During 1960s and 1970s many analytical tools and concepts like funds flow
statement, ratio analysis, cost of capital, earning per share, optimum capital structure,

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 portfolio theory etc. were emphasized. As a result, a broader concept of finance began to be
used. Thus, the modern approach to finance emphasizes the proper allocation and utilization of
funds in addition to their economical procurement. Thus, business finance is defined as" the
activity concerned with the planning, raising, controlling and administering of funds used in
the business."
Modern business finance includes –
(i) Determining the capital requirements of the firm.
(ii) Raising of sufficient funds to make an ideal or optimum capital structure
(iii) Allocating the funds among various types of assets
(iv) Financial control so as to ensure efficient use of funds.

DEFINITION OF FINANCIAL MANAGEMENT

“Financial management is the activity concerned with planning, raising, controlling and
administering of funds used in the business.” – Guthman and Dougal
“Financial management is that area of business management devoted to a judicious use of
capital and a careful selection of the source of capital in order to enable a spending unit to
move in the direction of reaching the goals.” – J.F. Brandley
“Financial management is the operational activity of a business that is responsible for
obtaining and effectively utilizing the funds necessary for efficient operations.”- Massie

NATURE OF FINANCIAL MANAGEMENT

1. Financial Management is an integral part of overall management. Financial
considerations are involved in all business decisions. So financial management is
pervasive throughout the organisation.
2. In most of the organizations, financial operations are centralized. This results in
economies.
3. Financial management involves with data analysis for use in decision making.
4. The central focus of financial management is valuation of the firm. That is financial
decisions are directed at increasing/maximization/ optimizing the value of the firm.
5. Financial management essentially involves risk-return trade-off Decisions on
investment involve choosing of types of assets which generate returns accompanied by
risks. Generally higher the risk, returns might be higher and vice versa. So, the

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 financial manager has to decide the level of risk the firm can assume and satisfy with
the accompanying return.
6. Financial management affects the survival, growth and vitality of the firm. Finance is
said to be the life blood of business. It is to business, what blood is to us. The amount,
type, sources, conditions and cost of finance squarely influence the functioning of the
unit.
7. Finance functions, i.e., investment, rising of capital, distribution of profit, are
performed in all firms - business or non-business, big or small, proprietary or corporate
undertakings.
8. Financial management is a sub-system of the business system which has other
subsystems like production, marketing, etc. In systems arrangement financial sub-
system is to be well-coordinated with others and other sub-systems.
9. Financial Management is the activity concerned with the control and planning of
financial resources.
10. Financial management is multi-disciplinary in approach. It depends on other
disciplines, like Economics, Accounting etc., for a better procurement and utilisation
of finances.

OBJECTIVES OF FINANCIAL MANAGEMENT

1. Profit maximization
It is commonly believed that a shareholders objective is to maximise profit. To achieve the goal
of profit maximisation, the financial manager takes only those actions that are expected to make
a major contribution to the firm's overall profits. The total earnings available for the firm's
shareholders is commonly measured in terms of earnings per share (EPS). Hence the decisions
and actions of finance managers should result in higher earnings per share for shareholders.
Points in favour of profit maximisation:
 It is a parameter to measure the performance of a business
 It ensures maximum welfare to the shareholders, employees and prompt
payment to the creditors
 Increase the confidence of management in expansion and diversification.
 It indicates the efficient use of funds for different requirements.
Points against profit maximisation:
 It is not a clear term like accounting profit, before tax or after tax or net profit or gross

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 profit.
 It encourage corrupt practices
 It does not consider the element of risk
 Time value of money is not reflected
 Attracts cut –throat competition
 Huge profits attracts government intervention
 It invites problem from workers.
 It affects the long run liquidity of a company.

2. Wealth Maximisation
The goal of the finance function is to maximise the wealth of the owners for whom the firm is
being carried on. The wealth of corporate owners is measured by the share prices of the stock,
which is turn is based on the timing of return, cash flows and risk. While taking decisions, only
that action that is expected to increase share price should be taken.
It considers :
(a) Time value of money on investment decision
(b) The risk or uncertainty of future earnings and

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 (c) effects of dividend policy on the market price of shares.

Points In favour of Wealth Maximisation

 It is a clear term
 Net effect of investment and benefits can be measured clearly.
 It considers the time value for money.
 It should be accepted universally
 It guides the management in framing a consistent strong dividend policy to reach
maximum return to the equity holders

.Points against wealth maximisation:

 This concept is useful for equity share holders not for debenture holders
 The expectations of workers, consumers and various interest groups create a greater
influence that must be respected to achieve long run wealth maximization and also for
their survival.

Basis Wealth Maximization Profit Maximization

It is defined as the management of

It is defined as the management of
financial resources aimed at
Definition financial resources aimed at
increasing the value of the
increasing the profit of the company.
stakeholders of the company.

Focuses on increasing the value of

Focuses on increasing the profit of
Focus the stakeholders of the company in
the company in the short term.
the long term.

It considers the risks and uncertainty It does not consider the risks and
Risk inherent in the business model of the uncertainty inherent in the business
company. model of the company.

It helps in achieving a larger value of

It helps in achieving efficiency in the
a company‟s worth which may
Usage company‟s day-to-day operations to
reflect in the increased market share
make the business profitable.
of the company.

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 1.2 SCOPE OF FINANCIAL MANAGEMENT

1. The Traditional Approach:

The traditional approach to the finance function relates to the initial stages of its evolution
during 1920s and 1930s . According to this approach, the scope, of finance function was
confined to only procurement of funds needed by a business on most suitable terms.
The utilisation of funds was considered beyond the purview of finance function. It was felt that
decisions regarding the application of funds are taken somewhere else in the organisation.
However, institutions and instruments for raising funds were considered to be a part of finance
function.
The traditional approach suffers from many serious limitations:
(i) It is outsider-looking in approach that completely ignores internal decision making as to
the proper utilisation of funds.
(ii) The focus of traditional approach was on procurement of long-term funds. Thus, it
ignored the important issue of working capital finance and management.
(iii) The issue of allocation of funds, which is so important today, is completely ignored.

2. The Modern Approach:

The modern approach views finance function in broader sense. It includes both rising of funds
as well as their effective utilisation under the purview of finance. The finance function does
not stop only by finding out sources of raising enough funds; their proper utilisation is also to
be considered. The cost of raising funds and the returns from their use should be compared.
The funds raised should be able to give more returns than the costs involved in procuring them.
The utilisation of funds requires decision making. Finance has to be considered as an

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 integral part of overall management. So finance functions, according to this approach, covers
financial planning, rising of funds, allocation of funds, financial control etc.
The modern approach considers the three basic management decisions, i.e., investment
decisions, financing decisions and dividend decisions within the scope of finance function.

Figure showing Scope of financial management

In organizations, managers in an effort to minimize the costs of procuring finance and using it
in the most profitable manner, take the following decisions:
Investment Decisions: Managers need to decide on the amount of investment available out of
the existing finance, on a long-term and short-term basis. They are of two types: Long- term
investment decisions or Capital Budgeting mean committing funds for a long period of time
like fixed assets. These decisions are irreversible and usually include the ones pertaining to
investing in a building and/or land, acquiring new plants/machinery or replacing the old ones,
etc. These decisions determine the financial pursuits and performance of abusiness.Short-term
investment decisions or Working Capital Management means committing funds for a short
period of time like current assets. These involve decisions pertaining to the investment of funds
in the inventory, cash, bank deposits, and other short- term investments. They directly affect
the liquidity and performance of the business.

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 Financing Decisions: Managers also make decisions pertaining to raising finance from long-
term sources and short-term sources. They are of two types:

Financial Planning decisions which relate to estimating the sources and application of funds.
It means pre-estimating financial needs of an organization to ensure the availability ofadequate
finance. The primary objective of financial planning is to plan and ensure that the funds are
available as and when required.

Capital Structure decisions which involve identifying sources of funds. They also involve
decisions with respect to choosing external sources like issuing shares, bonds, borrowing from
banks or internal sources like retained earnings for raising funds. The decisions are made
in the light of the cost of capital, risk factor involved and returns to the shareholders.

Dividend Decisions: These involve decisions related to the portion of profits that will be
distributed as dividend. Dividend is that portion of divisible profits that is distributed to the
owners i.e. the shareholders. Retained earnings is the proportion of profits kept in, that is,
reinvested in the business for the business. Shareholders always demand a higher dividend,
while the management would want to retain profits for business needs. Dividend decision is
to whether to distribute earnings to shareholder as dividends or retain earnings to finance long-
term profits of the firm. It must be done keeping in mind the firms overall objective of
maximizing the shareholders wealth.

1.3 ORGANIZATION OF FINANCE FUNCTION

Finance, being an important portfolio, the finance functions is entrusted to top management.
The Board of Directors, who are at the helm of affairs, normally constitutes a „Finance
Committee‟ to review and formulate financial policies. Two more officers, namely „treasurer‟
and „controller‟ – may be appointed under the direct supervision of CFO to assist him/her. In
larger companies with modern management, there may be Vice-President or Director of
finance, usually with both controller and treasurer. The organization of finance function is
portrayed below

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 The terms „controller‟ and „treasurer‟ are in fact used in USA. This pattern is not popular in
Indian corporate sector. Practically, the controller / financial controller in India carried out
the functions of a Chief Accountant or Finance Officer of an organization. Financial controller
who has been a person of executive rank does not control the finance, but monitors whether
funds so augmented are properly utilized.
The function of the treasurer of an organization is to raise funds and manage funds. The
treasures functions include forecasting the financial requirements, administering the flow of
cash, managing credit, flotation of securities, maintaining relations with financial institutions
and protecting funds and securities. The controller‟s functions include providing information
to formulate accounting and costing policies, preparation of financial reports, direction of
internal auditing, budgeting, inventory control payment of taxes, etc.
1.4 DUTIES AND RESPONSIBILITIES OF FINANCIAL MANAGER (OR)
FUNCTIONS OF FINANCIAL MANAGER (OR) ROLE OF FINANCIAL MANAGER.
Finance manager is an integral part of corporate management of an organization. With his
profession experience, expertise knowledge and competence, he has to play a key role in

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 optimal utilization of financial resources of the organization. With the growth in the size of the
organization, degree of specialization of finance function increases. In large undertakings, the
finance manager is a top management executive who participants in various decision making
functions.
A) Determining financial needs:-
One of the most important functions of the financial manager is to ensure the availability
of adequate financing, financial needs have to be assessed for different purposes. Money may
be required for initial promotional expenses, fixed capital and working capital needs.
Promotional expenditure includes expenditure incurred in the process of company formation.
B) Determining sources of funds:-
The financial manager has to choose source of funds. He may issue different types of
securities and debenture, may borrow form a number of finance institutional and the public.
The financial manager must definitely know what he is doing, workout strategies to ensure
good financial health of the firm.
C) Financial analysis:-
It is the evaluation & interpretation of a firm‟s financial position and operation and involves a
comparison and interpretation of accounting data. The financial manager has to interpret
different statements.
D) Optimal capital structure:-
The financial manager has to establish an optimum capital structure and ensure the
maximum rate of return on investment and the liabilities carrying – fixed charges has to be
defined.
E) Cost –volume profit analysis;-
This is popularly known as the CVP relationship for this purpose are fixed cost, variable
cost and semi-variable cost have to be analyzed.
F) Profit planning and control:-
Profit planning and control have assumed great importance in the financial activities of
morden business. Profit planning ensures the attainment of stability and growth. The break
even analysis and cost volume profit it analysis are important tools in profit planning and
control of the firms.
G) Fixed assets management:-
A firms fixed assets are land, building, machinery and equipment, furniture and such
intangibles as patents, copy rights and goodwill. These fixed assets are justified to the extent

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 of the utility or their production capacity

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