Module 1

Financial Management

Topics to be covered

 Introduction – Meaning of Financial Management

 Finance,
 Financial Services,
 Financial Managers,
 Scope of Financial Management
 Finance functions: Investment, Financing and Dividend decisions,
 Key activities of the Financial Manager,
 Objectives of Financial Management - Profit Maximization vs. Wealth
Maximization.

Introduction:

Financial Management is a subject that deals with managing the money factor of
the organization. It includes financial service and financial instruments. It deals
with procurement of funds and effective utilization of these funds.

It is concerned with the acquisition, financing and management of assets to

achieve organizational goals.

Meaning of Financial Management:

According to GUTHMANN and DOUGALL, business finance may be broadly

defined as “the activity concerned with the planning, raising, controlling and
administering the funds used in the business.” Financial decisions refer to
decisions concerning financial matters of a business firm. There are many kinds
of financial management decisions that the firm makers in pursuit of maximizing
shareholder’s wealth, viz., kind of assets to be acquired, pattern of capitalization,
distribution of firm’s income etc. We can classify these decisions into three
major groups:

Finance :

MEANING OF FINANCE Finance may be defined as the art and science of

managing money. It includes financial service and financial instruments.
 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

Financial Services

What is Financial Services?

Financial Services may simply be defined as services offered by different

financial intermediaries such as Banks, Financial
Institutions, Insurance Companies, Brokerage Firms, Consumer Finance
companies, etc.

It is concerned with the design and delivery of services and financial products to
individuals and businesses within the areas of banking and related financial
institutions, financial planning ,investments , real assets, insurance, and so on.

A well-developed financial services industry is absolutely necessary to mobilize

the savings and to allocate them to various investable channels and thereby
promoting industrial development in a country.

Financial services encompass a broad range of more specific services provided

by the finance industry, which encompasses a variety of businesses that manage
money. Here are some common types of financial services:
1. Capital Market Services
2. Money Market Services
3. Retail Services
4. Wholesale Services
5. Banking Services
6. Insurance Services
7. Investment Services
8. Asset Management
9. Private Equity and Venture Capital
10.Accounting and Auditing Services
11.Financial Planning Services
12.Real Estate Services
13.Foreign Exchange Services
14.Retirement and Pension Services
15.Financial Consulting
16.Fintech Services

Capital Market Services: It is the segment of the financial market where long-
term funds (one year and above) are issued and traded. The main instruments
used in the capital markets are shares, debentures, bonds, etc.
Money Market Services: Unlike the capital market, the money market is the
segment in which financial instruments with maturities of less than one year are
traded. Some of the money market instruments are Treasury bills, commercial
paper, trade bills, certificates of deposits, etc.
Retail Services : The financial services which are provided to individual
customers by various financial intermediaries are termed retail services.
Wholesale Services: The services provided to corporate institutions may be
directly or indirectly converted into retail services.
Banking Services : Traditional banking services include checking and savings
accounts, providing short and long-term loans, credit cards, and more.
Insurance Services: Insurance companies provide protection against financial
losses from various risks. This includes life insurance, health insurance, car
insurance, property insurance, and more.
Investment Services: This includes services offered by brokerage firms and
individual investment advisors. These services may involve the buying and
selling of financial instruments like stocks, bonds, mutual funds, or other
investment vehicles.
Asset Management: This involves managing a client’s investments on their
behalf, aiming to grow their wealth over time. This often includes services like
portfolio management and wealth planning.
Private Equity and Venture Capital: These firms provide capital to firms in
exchange for a percentage of equity. Private equity typically focuses on mature
companies, while venture capital is geared toward startups and high-growth
companies.
Accounting and Auditing Services:These services include preparing financial
reports, conducting audits, and ensuring compliance with financial regulations
and standards.
Financial Planning Services : Financial planners help individuals and
businesses create plans to meet long-term financial goals, such as retirement
planning, education funding, estate planning, and more.
Real Estate Services : These services involve the management, sale, and
purchase of real estate properties. This could also include services related to real
estate investments.
Foreign Exchange Services : These services involve the exchange of one
currency for another, facilitating international trade and travel.
Retirement and Pension Services :These services involve managing pension
funds and retirement accounts to ensure individuals have enough money to
support themselves after retirement.
Financial Consulting: Financial consultants provide expert advice on a range
of financial matters such as mergers and acquisitions, business valuation, and
financial risk management.
Fintech Services: This is a relatively new addition to the financial services
industry, leveraging technology to improve traditional financial activities. This
can include things like mobile banking, peer-to-peer lending, and robo-advisors.
Features of Financial Services
The following are the features of financial services:
1. Customer-Centric
2. Intangibility
3. Perishable in Nature
4. Dynamic in Nature
Features of Financial Services

Customer-Centric:Financial services are mainly customer focused. The

company providing these services needs to study the requirement of the
customer in terms of liquidity, safety, risk appetite, and duration of the product.
Innovativeness within the regulatory framework is the key to success for the
service providers.
Intangibility: Financial services are intangible in nature. Hence, the brand and
image of the institution providing the service are very important to restore the
confidence of the customers
Perishable in Nature: Financial services do tend to perish if they cannot be
offered as per the requirement of the client. Hence the organization needs to
ensure proper synchronization of demand and supply.
Dynamic in Nature: Financial services vary with the changing requirements of
the customers and the socio-economic environment such as disposable income,
the standard of living, etc.
Importance of Financial Services
For any economy, the success of its financial system depends upon the financial
services offered by its financial services organization. The importance of
financial services can better be understood by studying the following points:
1. Economic Growth
2. Promotion of Savings
3. Capital Formation
4. Creation of Employment
5. Provision of Liquidity

Economic Growth: The economic growth of any country depends upon the
proper channelization of its savings and investments. The role of the financial
services industry is to ensure the proper mobilization of savings of people into
productive investments by providing various services to retail as well as
corporate clients.
 Promotion of Savings: One of the prime importance of financial services is to
promote savings among people. Financial services organizations continuously
innovate products to promote savings among the general public.
Capital Formation: The financial service industry facilitates capital formation
by providing different types of capital market intermediary services.
Creation of Employment:The Financial Services sector employs millions of
people across the globe.
Provision of Liquidity: The financial service industry promotes liquidity in the
financial system. It facilitates the easy conversion of financial assets into liquid
cash.

Scope of Financial Management:

The main objective of financial management is to arrange sufficient finance for

meeting short term and long term needs. A financial manager will have to
concentrate on the following areas of finance function.

1.Estimating financial requirements: The first task of a financial manager is to

estimate short term and long term financial requirements of his business. The
amount required for purchasing fixed assets as well as needs for working capital
will have to be ascertained.

2.Deciding capital structure: Capital structure refers to kind and proportion of

different securities for raising funds. After deciding the quantum of funds
required it should be decided which type of securities should be raised. A
decision about various sources for funds should be linked to the cost of raising
funds.

3. Selecting a source of finance: An appropriate source of finance is selected after

preparing a capital structure which includes share capital, debentures, financial
institutions, public deposits etc. If finance is needed for short term periods then
banks, public deposits and financial institutions may be the appropriate. On the
other hand, if long term finance is required then share capital and debentures may
be the useful.

4. Selecting a pattern of investment: When funds have been procured then a

decision about investment pattern is to be taken. A decision will have to be taken
as to which assets are to be purchased? The funds will have to be spent first on
fixed assets and then an appropriate portion will be retained for working capital
and for other requirements.

5. Proper cash management: Cash management is an important task of finance

manager. He has to assess various cash needs at different times and then make
arrangements for arranging cash. Cash may be required to purchase of raw
materials, make payments to creditors, meet wage bills and meet day to day
expenses. The idle cash with the business will mean that it is not properly used.

6. Implementing financial controls: An efficient system of financial management

necessitates the use of various control devices. They are ROI, break even
analysis, cost control, ratio analysis, cost and internal audit. ROI is the best
control device in order to evaluate the performance of various financial policies.

7. Proper use of surpluses: The utilization of profits or surpluses is also an

important factor in financial management. A judicious use of surpluses is
essential for expansion and diversification plans and also in protecting the
interests of shareholders. A balance should be struck in using funds for paying
dividend and retaining earnings for financing expansion plans.

Finance Function:

Nature of Finance function:

 In most of the organizations, financial operations are centralized. This

results in economies.
 Finance functions are performed in all business firms, irrespective of their
sizes /legal form of organization.
 They contribute to the survival and growth of the firm.
 Finance function is primarily involved with the data analysis for use in
decision making.
 Finance functions are concerned with the basic business activities of a
firm, in addition to external environmental factors which affect basic business
activities, namely, production and marketing.
 Finance functions comprise control functions also
 The central focus of finance function is valuation of the firm.
 Finance makes use of economic tools. From Micro economics it uses
theories and assumptions. From Macro economics it uses forecasting models.
 Even though finance is concerned with individual firm and economics is
concerned with forecasting of an industry

Financial decisions refer to decisions concerning financial matters of a

business firm. There are many kinds of financial management decisions that
the firm makers in pursuit of maximizing shareholder’s wealth, viz., kind of
assets to be acquired, pattern of capitalization, distribution of firm’s income
etc.

We can classify these decisions into three major groups:

 Investment decisions
 Financing decision.
 Dividend decisions

Investment decisions

 This decision is also known as capital budgeting

 It is concerned with the selection of an investment proposal/proposals and the

investment of funds in the selected proposal/proposals

 Investment decisions can be internal as well as external

 Internal decision –in which finance manager has to determine which capital
expenditure projects to be undertaken, funds that need to be committed and
allocated to certain project.

 External decision – it is concerned with investment of funds outside the business

for M&A’s

Factors affecting investment decision are

 Cash flow of venture: the venture’s cash flow helps the manager take a strong
decision on the investments that are to be made by the firm.

 Profit : the profits earned by the company will give the financial manager a
flexibility to look for investment options available to him and also to make an
investment dependent on the amount of profits.
 Investment criteria : The investment criteria helps in the analysis of the risk
involved in the proposal, future returns of the proposal and son on. Hence
investment criteria affect the decision making.

Financing decision.

 Financing decision relates to the choice of the proportion of debt and equity
sources.

 Financial decision is the utmost important decision which is to be made by

business individuals.

 These are wise decisions indeed that are to be chalked out with proper analysis.
He decides when, where and how should the business acquire the fund.

 An organization’s increase in share is not only a sign of development for the firm
but also to boost the investor’s wealth.

Factors Affecting Financing Decisions

 Cost: Financing decisions are based on the allocation of funds and cost-cutting.
The cost of fundraising from different sources differs a lot and the most cost-
efficient source should be chosen.
 Risk: The dangers of starting a venture with funds differ based on various
sources. Borrowed funds have a larger risk compared to equity funds.
 Cash flow position: Cash flow is the daily earnings of the company. A good cash
flow position gives confidence to the investors to invest funds in the company.
 Control: In this case where existing investors hold control of the business and
raise finance through borrowing money, however, equity can be utilized for
raising funds when they are prepared for diluting control of the business.
 Condition of the market: The condition of the market plays a major role in
financing decisions. Issuance of equity is in majority during the boom period, but
debt of a firm is used during a depression.

Dividend decisions.

 Dividend decisions relate to the distribution of profit that are earned by the
organization.
 The main criteria in this decision are whether to distribute to the shareholders or
to retain the earnings.

 Dividend decisions are affected by the earnings of the business, dependency on

earnings.

Factors affecting dividend decision

 Growth and Profitability of business

 Liquidity capability of business

 Cost and availability of other forms/sources of financing

 Management control

 Legal factors

 Reach to the capital Market

 Other external restrictions

Financial Managers

Financial managers are responsible for overseeing the financial health of an

organization. They are responsible for creating financial reports, developing and
implementing financial strategies, and managing investments. Financial managers
work in a variety of settings, including corporations, non-profit organizations, and
government agencies.

The primary goal of a financial manager is to maximize the value of an

organization's investments and ensure that financial resources are used in the most
effective way possible. This involves analyzing financial data and market trends,
developing financial plans and budgets, and making strategic investment decisions.
Financial managers also work closely with other members of an organization's
leadership team to ensure that financial goals are aligned with overall
organizational goals and objectives. Additionally, financial managers are
responsible for managing risk, ensuring compliance with financial regulations and
laws, and ensuring that financial statements are accurate and transparent.
 Key activities of financial Manager:

The role of a financial manager is to oversee the financial health of an

organization. They generate financial reports, direct investment activities and
create an organisation's long-term financial goals. They are often responsible for
analysing fiscal data and advising senior managers on any opportunities to
maximise profits. Some of their specific responsibilities include:

. Maintaining cash flow by reviewing banking activity and reconciling monthly

reports

• Developing and interpreting databases and financial models

• Managing the company budget to maximise revenue and identify potential areas
for savings

• Promoting process improvements in specified budget areas

• Implementing report production, productivity and quality standards

Duties and Responsibilities

The duties and responsibilities of a financial manager vary depending on the
organization and the specific role, but generally include:

 Financial Planning and Analysis: Financial managers are responsible for

developing and implementing financial plans and strategies that help the
organization achieve its goals. This involves analyzing financial data and market
trends, developing budgets, and forecasting financial performance.

 Investment Management: Financial managers are responsible for managing the

organization's investments and ensuring that investment decisions are aligned with
the organization's goals and objectives. They may also be responsible for
managing the organization's relationships with investment firms and other
financial institutions.

 Risk Management: Financial managers are responsible for identifying and

managing potential risks that could impact the organization's financial health. This
involves developing risk management strategies, monitoring financial
 performance, and ensuring compliance with regulations and laws related to risk
management.

 Financial Accounting and Reporting: Financial managers are responsible for

overseeing financial accounting and reporting, ensuring that financial statements
are accurate and comply with accounting standards and regulations.

 Cash Flow Management: Financial managers are responsible for managing the
organization's cash flow and ensuring that there is sufficient liquidity to meet
financial obligations. This involves developing cash flow projections, managing
debt and financing, and managing relationships with banks and other financial
institutions.

 Compliance and Regulation: Financial managers are responsible for ensuring that
the organization complies with financial regulations and laws. This involves
staying up-to-date on changes to financial regulations and laws, developing
compliance policies and procedures, and monitoring compliance with regulatory
requirements.

Objectives of Financial Management .

Effective procurement and efficient use of finance lead to proper utilization of

the finance by the business concern. It is the essential part of the financial
manager. Hence, the financial manager must determine the basic objectives of the
financial management. Objectives of Financial Management may be broadly
divided into two parts such as:

1. Profit maximization

2. Wealth maximization

1 .Profit Maximization

Profit Maximization Main aim of any kind of economic activity is earning profit.
Profit is the measuring techniques to understand the business efficiency of the
concern. Profit maximization is also the traditional and narrow approach, which
aims at, maximizing the profit of the concern.
 Profit maximization consists of the following important features.

1. Profit maximization is also called as cashing per share maximization. It leads

to maximize the business operation for profit maximization.

2. Ultimate aim of the business concern is earning profit, hence, it considers all
the possible ways to increase the profitability of the concern.

3. Profit is the parameter of measuring the efficiency of the business concern. So

it shows the entire position of the business concern.

4. Profit maximization objectives help to reduce the risk of the business.

Unfavourable Arguments and Drawbacks for Profit Maximization

The following important points are against the objectives of profit maximization:

(i) Profit maximization leads to exploiting workers and consumers.

(ii) Profit maximization creates immoral practices such as corrupt practice, unfair
trade practice, etc.
(iii) Profit maximization objectives leads to inequalities among the stake holders such
as customers, suppliers, public shareholders, etc.

Profit maximization objective consists of certain drawback also:

(i) It is vague: In this objective, profit is not defined precisely or correctly. It
creates some unnecessary opinion regarding earning habits of the business
concern.

(ii) It ignores the time value of money: Profit maximization does not consider
the time value of money or the net present value of the cash inflow. It leads
certain differences between the actual cash inflow and net present cash flow
during a particular period.

(iii) It ignores risk: Profit maximization does not consider risk of the business
concern. Risks may be internal or external which will affect the overall operation
of the business concern.

Wealth Maximization
Wealth maximization is one of the modern approaches. The term wealth means
shareholder wealth or the wealth of the persons those who are involved in the
business concern. Wealth maximization is also known as value maximization or
 net present worth maximization. This objective is a universally accepted concept
in the field of business. Stockholder’s current wealth in a firm = (Number of
shares owned) x (Current Stock Price share)
Favorable Arguments for Wealth Maximization
(i) Wealth maximization is superior to the profit maximization because the main aim
of the business concern under this concept is to improve the value or wealth of
the shareholders.
(ii)Wealth maximization considers the comparison of the value to cost associated
with the business concern. Total value detected from the total cost incurred for
the business operation. It provides extract value of the business concern.
(iii) Wealth maximization considers both time and risk of the business concern.
(iv) Wealth maximization provides efficient allocation of resources.
(v) It ensures the economic interest of the society.
Unfavorable Arguments for Wealth Maximization
(i) Wealth maximization leads to prescriptive idea of the business concern
but it may not be suitable to present day business activities.
(ii) Wealth maximization creates ownership-management controversy.
(iii) Management alone enjoy certain benefits.
(iv) The ultimate aim of the wealth maximization objectives is to maximize
the profit.
(v) Wealth maximization can be activated only with the help of the profitable
position of the business concern.

Profit maximization Vs wealth maximization.

Profit Maximization Wealth Maximization

Profits are earned maximized, so that Wealth is maximized, so that wealth of

firm can over-come future risks which share-holders can be maximized.
are uncertain.

Profit maximization is a yards stick for In wealth maximization stockholders

calculating efficiency and economic current wealth is evaluated in order to
prosperity of the concern maximize the value of shares in the
market.
Profit is measured in terms of efficiency Wealth is measured in terms of market
of the firm. price of shares.

Profit maximization Involves problem Wealth maximization involves

of uncertainty because profits are problems related to maximizing
uncertain. shareholder's wealth or wealth of the
firm
Profit = total receivables-total cost Wealth = number of shares * current
stock price per share
It has a short term perspective It has a long term perspective

Does not consider risk and time value of It considers risk and time value of
money money