INTRODUCTION

Finance is called “The science of money”. It studies the principles and the methods of
obtaining, control of money from those who have saved it, and of administering it by those
into whose control it passes. It is the process of conversion of accumulated funds to
productive use. Financial management is the science of money management .It is that
managerial activity which is concerned with planning and controlling of the firms financial
resources. In other words it is concerned with acquiring, financing and managing assets to
accomplish the overall goal of a business enterprise.

MEANING, DEFINITION AND NATURE OF FINANCIAL MANAGEMENT:

Meaning and Definition Financial management is that managerial activity which is concerned
with the planning and controlling of the firm’s financial resources. In other words it is
concerned with acquiring, financing and managing assets to accomplish the overall goal of a
business enterprise (mainly to maximise the shareholder’s wealth).“Financial management is
concerned with the efficient use of an important economic resource, namely capital funds”-
Solomon Ezra & J. John Pringle.

SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT:

The scope of financial management has undergone changes over the years. Until the middle
of this century, its scope was limited to procurement of funds. In the modern times, the
financial management includes besides procurement of funds ,the three different kinds of
decisions well namely investment, financing and dividend .Scope and importance of financial
management includes-Estimating the total requirements of funds for a given period.

Raising funds through various sources, both national and international, keeping in mind the
cost effectiveness;

Investing the funds in both long term as well as short term capital needs;

Funding day-to-day working capital requirements of business;

Collecting on time from debtors and paying to creditors on time;

Managing funds and treasury operations;

Ensuring a satisfactory return to all the stake holders;

Repaying lenders on due dates;

Maximizing the wealth of the shareholders over the long term;Interfacing with the capital
markets;

Awareness to all the latest developments in the financial markets;

Increasing the firm’s competitive financial strength in the market; and

Adhering to the requirements of corporate governance.The above scope of activities can be

FUNCTIONS OF FINANCIALMANAGEMENT:

The modern approach to the financial management is concerned with the solution of major
problems like investment financing and dividend decisions of the financial operations of a
business enterprise. Thus, the functions of financial management can be broadly classified
into three major decisions, namely:

(a) Investment decisions,

(b) Financing decisions,

(c) Dividend decisions.

1. Investment decisions: These decisions relate to the selection of assets in which funds will
be invested by a firm .Funds procured from different sources have to be invested in various
kinds of assets. Long term funds are used in a project for various fixed assets and also for
current assets. The investment of funds in a project has to be made after careful assessment of
the various projects through capital budgeting .A part of long term fund is also to be kept for
financing the working capital requirements.

2. Financing decision: These decisions relate to acquiring the optimum finance to meet
financial objectives and seeing that fixed and working capital are effectively managed. It
includes sources of available funds and their respective cost, capital structure, i.e. a proper
balance between equity and debt capital. It segregates profit and cash flow; financing
decisions also call for a good knowledge of evaluation of risk.
3.Dividend decision-These decisions relate to the determination as to how much and how
frequently cash can be paid out of the profits of an organisation as income for its
owners/shareholders, and the amount to be retained to support the growth of the
organisation .The level and regular growth of dividends represent a significant factor in
determining a profit making company’s market value i.e. the value placed on its shares by the
stock market. All the above three type of decisions are interrelated ,the first two pertaining to
any kind of organisation while the third relates only to profit making organisations, thus it
can be seen that financial management is of vital importance at every level of business
activity ,from a sole trader to the largest multinational corporation.

FUNCTIONAL AREAS OF FINANCIAL MANAGEMENT

Capital Budgeting
Working Capital Management
Dividend Policies
Acquisitions and Mergers
Corporate Taxation
Determining Financial Needs
Determining Sources of Funds
Financial Analysis
Optimal Capital Structure
Cost Volume Profit Analysis
Profit Planning and Control
Fixed Assets Management
Project Planning and Evaluation.
OBJECTIVE 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 maximizat ion
2. Wealth maximization.
Profit Maximization Main aim of any kind of economic activity is earning profit. A business
concern is also functioning mainly for the purpose of 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, maximizes the profit of the concern.
Favourable Arguments for Profit Maximization
The following important points are in support of the profit maximization
objectives of the business concern
:(i) Main aim is earning profit.
(ii) Profit is the parameter of the business operation.
(iii) Profit reduces risk of the business concern.
(iv) Profit is the main source of finance.
(v) Profitability meets the social needs also.
Unfavourable Arguments 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 sake holders such as customers, suppliers, public
shareholders, etc. Drawbacks of Profit Maximization Profit maximization objective consists
of certain drawback also:
Wealth Maximization
Wealth maximization is one of the modern approaches, which involves latest innovations and
improvements in the field of the business concern. 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 an universally accepted concept in the field of business.
Favourable 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.
Unfavourable 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 is nothing, it is also profit
maximization, it is the indirect name of the profit maximization.(iii) Wealth maximization
creates ownership-management controversy
FUNCTIONS OF FINANCE MANAGER

Finance function is one of the major parts of business organization permanent, and
continuous process of the business concern. Finance is one of the interrelated functions which
deal with personal function, marketing function, production function and research and
development activities of the business concern. At present, every business concern
concentrates more on the field of finance because, it is a very emerging part which reflects
the entire operational and profit ability position of the concern. Deciding the proper financial
function is the essential and ultimate goal of the business organization. Finance manager is
one of the important role players in the field of finance function. He must have entire
knowledge in the area of accounting, finance, economics and management. His position is
highly critical and analytical to solve various problems related to finance. A person who deals
finance related activities may be called finance manager. Finance manager performs the
following major functions:
1. Forecasting Financial Requirements It is the primary function of the Finance Manager. He
is responsible to estimate the financial requirement of the business concern. He should
estimate, how much finances required to acquire fixed assets and forecast the amount needed
to meet the working capital requirements in future.
2. Acquiring Necessary Capital After deciding the financial requirement, the finance manager
should concentrate how the finance is mobilized and where it will be available. It is also
highly critical in nature.
3. Investment Decision
The finance manager must carefully select best investment alternatives and consider the
reasonable and stable return from the investment. He must be well versed in the field of
capital budgeting techniques to determine the effective utilization of investment. The finance
manager must concentrate to principles of safety, liquidity and profitability while investing
capital. Introduction to Financial Management
4. Cash Management Present days cash management plays a major role in the area of finance
because proper cash management is not only essential for effective utilization of cash but it
also helps to meet the short-term liquidity posit ion of the concern.

5. Interrelation with Other Departments Finance manager deals with various functional
departments such as marketing, production, personnel, system, research, development, etc.
Finance manager should have sound knowledge not only in finance related area but also well
versed in other areas. He must maintain a good relationship with all the functional
departments of the business organization.