FINANCIAL MANAGEMENT

CHAPTER 1
Lesson – 1 FINANCE

INTRODUCTION
In our present-day economy, Finance is defined as the provision of money at the time when it is
required. Every enterprise, whether big, medium, or small, needs finance to carry on its
operations and to achieve its targets. Finance is so indispensable today that it is rightly said to
be the lifeblood of an enterprise.

MEANING OF FINANCE
Finance is the lifeblood of business. Without adequate finance, no business can survive, and
without efficient finance management, no business can prosper and grow. Finance is required
for establishing, developing, and operating the business efficiently. The success of a business
depends upon the supply of finance and its efficient management.

DEFINITION
Finance may be defined as the provision of money at the time when it is required. Finance
refers to the management of flow of money through an organization.
According to WHEELER, business finance may be defined as “that business activity which is
concerned with the acquisition and conservation of capital funds in meeting the financial needs
and overall objectives of the business enterprise.”
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.”

TYPES OF FINANCE
Finance is one of the important and integral part of business concerns, hence, it plays a major
role in every part of the business activities. It is used in all the area of the activities under the
different names.
Finance can be classified into two major parts:

a. Private finance

b. Public finance

LOVELY P. PANCHACALA, MM
Private Finance, which includes the Individual, Firms, Business, or Corporate Financial
activities to meet the requirements.
Public Finance, which is concerned with revenue and Disbursement of the Government, such
as the Central Government, State Government, and Semi-Government Financial matters.

CONCLUSION
The secret to a rewarding business is finance and without it, it's virtually impossible to achieve
your primary goal of profitability, not to mention the luxuries like marketing, employees and
further down the line, expansion.

Questions
1. What do you mean by finance?
2. Define finance.
3. What are the types of finance?

LOVELY P. PANCHACALA, MM
Lesson – 2 FINANCIAL MANAGEMENT

INTRODUCTION
Finance is the lifeblood and nerve center of a business, just as circulation of blood is essential
in the human body for maintaining life; finance is essential for the smooth running of the
business. It has been rightly termed as a universal lubricant that keeps the firm dynamic. No
business, whether big, medium or small, can be started without an adequate amount of finance.
Right from the very beginning i.e., conceiving an idea to business, finance is needed to promote
or establish the business, acquire fixed assets, make investigations such as market surveys,
etc., develop a product, keep men and machines at work, encourage management to make
progress, and create value. Finance has thus become an integral part of the firm. Unless the
finance is managed profitably, the firm cannot reach its full potential for growth and success. In
order to manage finance, a new management discipline was conceived. Such discipline is
known as financial management. This chapter is designed to give an overall view on the concept
of financial management.

MEANING OF FINANCIAL MANAGEMENT

 Finance is called science of money.
 It is not only act of making money available, but its administration and control so that it
could be properly utilized.
 The world “Financial Management” is the composition of two words ie. Financial and
Management.
 Financial means procuring or raising money supply (funds) and allocating (using) those
resources (funds) based on the monetary requirements of the business.
 The word Management means planning, organizing, coordinating, and controlling
human activities concerning the financial function for achieving the goals/ objectives of
the organization.
 Besides raising and utilization of funds, finance also includes the distribution of funds in
the form of dividends to shareholders and retention of profit for growth and development.

DEFINITION OF FINANCIAL MANAGEMENT:

The term financial management has been defined differently by various authors. Some of the
authoritative definitions are as follows:
S.C.Kuchhal: 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.

Weston and Brigham: Financial management is an area of financial decision making,

harmonizing and individual motives and enterprise goals.

LOVELY P. PANCHACALA, MM
Solomon: Financial management is concerned with the efficient use of an important economic
resource, namely, capital funds.
J.L. Massie: Financial management is the operational activity of a business that is responsible
for obtaining and effectively utilizing the funds necessary for efficient operations.
Archer and Ambrosio: Financial management is the application of the planning and control
function to the finance function.

THREE KEY AREAS OF FINANCE

1) Raising of Funds – Based on the total requirements of capital/funds for use in fixed assets,
current assets as well as intangible assets like goodwill, patent, trademark, brand, etc.,
crucial decisions are:
o When to raise (time)
o Sources from which to raise.
o How much (quantum of money)
o In which form (debt or equity)
o Cost of raising funds

2) Investment Of Funds – Funds raised need to be allocated/invested in:

Fixed assets – also known as capital assets or capital budgeting decisions. These
decisions are based upon cost and return analysis through various techniques.
Current assets –also known as working capital management. These are assets for the
day-to-day running of the business, like cash, receivables, inventory, short-term
investments, etc. A decision about the investment of funds is taken keeping in view two
important aspects.
o Profitability - measures a company's success in generating a profit. It tells you how
efficiently a business is turning its resources into income.

o Liquidity - measures a company's ability to meet its short-term financial obligations.

It's about having enough cash, or assets that can be quickly turned into cash, to pay
its immediate debts.

3) Distribution of Funds – Profit earned needs to be distributed in the form of a dividend. The
higher the rates of dividend rates, the higher world is the price of shares in the market.
Another crucial decision under it would be the quantum of profit to be retained. The retained
profit is cost-free money to the organization.
Hence, financial management is the management of funds which can be explained through
the following chart.

LOVELY P. PANCHACALA, MM
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 the finance function.
1) Estimating Financial Requirements:
The first task of a financial manager is to estimate the short-term and long-term financial
requirements of his business. For that, he will prepare a financial plan for the present as well as
for the future. The amount required for purchasing fixed assets, as well as the needs for working
capital, will have to be ascertained.
2) Deciding capital structure:
Capital structure refers to the 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. It may be wise to finance fixed assets through long-term debts. Even here, if the gestation
period is longer than the share capital may be the most suitable. Long-term funds should be
employed to finance working capital, also, if not wholly, then partially. Entirely depending on
overdrafts and cash credits for meeting working capital needs may not be suitable. 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 useful.
4.) Selecting a pattern of investment:
When funds have been procured then a decision about the investment pattern is to be taken. The
selection of an investment pattern is related to the use of funds. 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.

LOVELY P. PANCHACALA, MM
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. The ploughing back of profits is the best policy of further
financing but it clashes with the interests of shareholders. A balance should be struck in using
funds for paying dividend and retaining earnings for financing expansion plans.

IMPORTANCE OF FINANCIAL MANAGEMENT

I. Importance to all types of organizations

a. Business organizations
Financial management is important to all types of business organizations i.e., Small-
sized, medium-sized size or large-sized organizations. As the size grows, financial
decisions become more and more complex as the amount involved is also large.

b. Charitable organization / nonprofit organization / Trust

In all those organizations, finance is a crucial aspect to be managed. A finance manager
has to concentrate more on the collection of donations/ revenues etc., and has to ensure
that every rupee spent is justified and is towards achieving the Goals of the organization.

c. Government / Govt. or public sector undertaking

In central/ state Govt. finance is a key/ important portfolio generally given to most capable
or competent person. Preparation of budget, monitoring capital /revenue receipt and
expenditure are key functions to be performed by the person in charge of finance.
Similarly, in a Govt. or public sector organization, financial controller or Chief finance
officer has to play a key role in performing/ taking all three financial decisions i.e. raising
of funds, investment of funds and distributing funds.

d. Other organizations
In all other organizations or even in a family finance is a key area to be looked in to
seriously by a competent person so that things do not go out of gear.

II. Importance to All Stakeholders:

Financial Management is important to all stakeholders, as explained below:
a. Shareholders – Shareholders are interested in getting the optimum dividend and
maximizing their wealth, which is a basic objective of financial management.

b. Investors/creditors – these stakeholders are interested in the safety of their funds, timely
repayment of the principal amount, as well as interest on the same. All these aspects are
to be ensured by the person managing funds/ finance.

LOVELY P. PANCHACALA, MM
 c. Employees – They are interested in getting timely payment of their salary/ wages, bonus,
incentives, and their retirement benefits, which are possible only if funds are managed
properly and the organization is working in profit.

d. Customers – They are interested in quality products at reasonable rates, which are
possible only through efficient management of the organization, including management
of funds.

e. Public – The Public at large is interested in general public welfare activities under
corporate social responsibility, and this aspect is possible only when the organization
earns adequate profit.

f. Government – Govt. is interested in timely payment of taxes and other revenues from
t h e business world, where again an efficient finance manager has a definite role to play.

g. Management – Management is interested in overall image building, an increase in the

market share, optimizing shareholders' wealth and profit, and all these aspects greatly
depend upon efficient management of financial resources.

III. Importance of Financial Management to All Departments of An Organization.

A large-sized company has many departments, like (besides the finance dept)
• Production/ Manufacturing Dept.
• Marketing Dept.
• Personnel Dept.
• Material/ Inventory Dept.
All these departments look for the availability of adequate funds so that they can manage their
responsibilities in an efficient manner. A lot of funds are required in the production/manufacturing
department. for ongoing / completing the production process, as well as maintaining adequate
stock to make available goods for the marketing department. for sale. Hence, the finance
department, through efficient management of funds, has to ensure that adequate funds are
made available to all departments and these departments at no stage starve for want of funds.
Hence, efficient financial management is of utmost importance to all other departments of the
organization.

LOVELY P. PANCHACALA, MM
CONCLUSION
Performance evaluation will help a company to understand different sides of their business
operations on one hand where by analyzing performance in a certain period, and help the
company to forecast their future business performances. This information obtained on business
performances can be used by a number of parties, different stakeholders, which include
shareholders, creditors, employees, tax authorities, government, media, etc. All the mentioned
parties can use this information from the performance evaluation to assess the business
operations of the firm, the future of the company, and can contribute towards the decision-
making process of the company, as the evaluation will bring a clear image of the organization’s
financial health and status, the financial feasibility, profitability, and resource management. Also,
with the right information, investors and shareholders will be able to make the right decision in
terms of their investments where proper opportunities can be identified regarding the potential
of a positive outcome.

Questions
1. Define Financial Management
2. What do you mean by financial management?
3. What are the key areas of finance?
4. State the scope of financial management
5. Explain the importance of financial management.

LOVELY P. PANCHACALA, MM
 Lesson – 3 OBJECTIVES OF FINANCIAL MANAGEMENT

INTRODUCTION
It is an advanced goal compared to profit maximization. Survival of company is an important
consideration when the financial manager makes any financial decisions. One incorrect decision
may lead company to be bankrupt. Maintaining proper cash flow is a short run objective
of financial management.

OBJECTIVES OF FINANCIAL MANAGEMENT

There are two objectives of financial management
1.
Profit maximization
2.
Wealth maximization
There are two schools of thought in this regard i.e. traditional and modern. While the traditional
approach favors profit maximization as the key objective, the modern thinker favors shareholder
wealth maximization as the key objective of financial management. Traditional thinkers believe
that profit is an appropriate yardstick to measure the operational efficiency of an enterprise. They
are of the view that a firm should undertake only those activities that increase profit.

1. PROFIT MAXIMIZATION
Profit maximization is one of the basic objectives of financial management. According to this
concept, a firm should undertake all those activities which add to its profits and eliminate all
others which reduce its profits. This objective highlights the fact that all decisions-financing,
dividend and investment, should result in profit maximization.
Following arguments are given in favor of profit maximization concept.
 Profit is a yardstick of efficiency on the basis of which economic efficiency of a business
can be evaluated.
 It helps in efficient allocation and utilization of scarce means because only such resources
are applied that maximize profits.
 The rate of return on capital employed is considered the best measurement of the profits.
 Profits act as a motivator that helps the business organization to be more efficient through
hard work.
 By maximizing profits, social and economic welfare is also maximized.

Modern thinkers criticize the profit maximization objective on the following grounds:
 Profit is an ambiguous concept–Profit can be long-term or short-term, profit before Tax or
after Tax, profit can be operating profit or gross profit etc. The economist’s concept of profit
is different the accountant’s concept of profit.

LOVELY P. PANCHACALA, MM
  Profit motto may lead to exploitation of customers, workers, employees and ignore ethical
trade practices.
 Profit motto also ignores social considerations or corporate social responsibility or public
welfare.
 Profit always goes hand- to hand with risk. The owners of business would not like to earn
more and more profit by accepting more risk.
 The profit maximization was taken as objective when business was self-financed and self-
controlled.

Today, most of large business under undertaking witness a divergence between ownership and
management and business is dependent largely on loan and borrowed funds and only a small
fraction being financed out of owner’s funds. Hence, profit maximization will only act as a narrow
objective.

2. WEALTH MAXIMIZATION

Wealth maximization is one of the modern approaches, which involves the latest innovations
and improvements in the field of business concern. The term wealth means shareholder wealth
or the wealth of the persons who are involved in the business concern. Wealth maximization is
also known as value maximization or net present worth maximization.
In simple terms, wealth maximization is the main goal for a modern company. Instead of just
focusing on making the most profit right now, this approach is all about making the company
more valuable in the long run.

What it Means
Think of it as this: the company's job is to make its owners (the shareholders) richer. This isn't
just about the company's accounting profit, which can be misleading. It's about increasing the
market value of the company's stock. Every decision the company makes should aim to add
value, leading to a higher share price.

Why It's Better than Profit Maximization

Maximizing wealth is a smarter, more modern approach for a few key reasons:
 Long-Term Focus: It considers the future, not just short-term gains. A company might
spend money on a project that doesn't make a profit for a few years but will create a lot
of value down the line.
 Accounts for Risk: It looks at the risks involved in different business decisions. A
company will choose a less risky, but still valuable, project over a high-risk one that could
lead to huge losses.

LOVELY P. PANCHACALA, MM
  Considers the Time Value of Money: It understands that a dollar today is worth more
than a dollar tomorrow. This is a key financial principle that makes decisions more
accurate and effective.
In short, wealth maximization is the smarter, more complete goal because it focuses on building
real, lasting value for the company and its owners. It's a long-term strategy that considers all the
important factors, not just a simple number on a spreadsheet.

Here’s a simple way to understand why aiming for wealth maximization is a smarter
business strategy than just focusing on profit maximization.
1. Focuses on Real Money, Not Just Paper Profits
Wealth maximization looks at cash flows, the actual money coming in and out of the business.
Profit can sometimes be a bit of an illusion, based on accounting rules. By focusing on real cash,
you get a clearer picture of the company's financial health.
2. Understands the Value of Time
This approach recognizes that a dollar today is worth more than a dollar tomorrow. This is called
the time value of money. Wealth maximization takes this into account, making it a more
accurate way to evaluate long-term projects and investments.
3. Accounts for Risk
Every business decision comes with a certain amount of risk. Wealth maximization considers
this by using a "risk-adjusted discount rate." This essentially means that riskier projects are held
to a higher standard, ensuring the potential reward is worth the potential danger.
4. Keeps the Owners Happy
A company's main goal is to serve its owners, or shareholders. By focusing on increasing the
company's long-term value, wealth maximization ensures the market price of the stock goes up,
which is exactly what shareholders want. It’s a win-win for everyone involved.

CONCLUSION
Financial management is essentially about making smart decisions with a company's money,
which is a limited and valuable resource. These decisions fall into four main categories:
investment decisions, which determine where to spend money; capital structure decisions,
which decide how to fund those investments; working capital decisions, which manage the
day-to-day finances of the business; and dividend policy decisions, which dictate how profits
are distributed to owners. The ultimate goal of all these decisions is to get the highest possible
return while taking the lowest amount of risk. By doing so, financial management aims to
maximize the wealth of the owners, which is the primary objective of any private company.

LOVELY P. PANCHACALA, MM
Lesson – 4 APPROACHES OF FINANCIAL MANAGEMENT

INTRODUCTION
Financial management is a multifaceted field that plays a pivotal role in the success of any
business organization. To excel in this area, it’s crucial to understand the various approaches to
financial management. In this blog, we will delve into the traditional and modern approaches,
shedding light on how they guide financial decision-making.

Traditional Approach
Traditionally, financial management focused on the procurement of funds and their optimal
utilization. The primary aim was to ensure that the company had enough money to meet its
operational needs and growth aspirations. This approach emphasized cost control and
budgeting.

Modern Approach
In the modern era, financial management has evolved into a more dynamic and strategic role.
It’s not just about raising funds but also about making strategic investments that yield high
returns. Financial managers now play a vital role in decision-making processes, providing
insights into the financial feasibility of various projects and strategies.

Traditional Approach to Financial Management

The traditional approach to financial management primarily focuses on two key aspects:
1. Procurement of Funds
In the traditional sense, financial management revolves around acquiring the necessary funds
for the company’s operations and growth. This involves:
 Raising Capital: Deciding whether to raise funds through equity (issuing shares) or debt
(taking loans).
 Budgeting: Creating budgets to allocate funds effectively across different departments
and projects.
 Cost Control: Monitoring and minimizing expenses to ensure optimal resource utilization.

2. Utilization of Funds
Once funds are procured, the traditional approach emphasizes their efficient utilization. Key
components include:
 Investment Decisions: Evaluating investment opportunities and selecting projects or
assets that align with the company’s goals.
 Working Capital Management: Ensuring that the company has enough liquidity to meet
its short-term obligations while minimizing excess cash holdings.

LOVELY P. PANCHACALA, MM
  Dividend Policy: Deciding how much of the profits should be distributed to shareholders
as dividends and how much should be retained for reinvestment.

Modern Approach to Financial Management

In contrast to the traditional approach, modern financial management takes on a broader and
more strategic role within an organization. It encompasses:
1. Strategic Financial Decision-Making
Modern financial management views financial decisions as integral to the overall strategy of the
company. It involves:
 Strategic Planning: Aligning financial goals with the organization’s long-term objectives.
 Risk Management: Identifying and mitigating financial risks associated with various
decisions.
 Capital Structure Optimization: Determining the optimal mix of equity and debt to
minimize the cost of capital while maintaining financial stability.
 Value Creation: Focusing on creating shareholder value through sound investment
decisions.
2. Data-Driven Insights
Modern financial managers rely on data and analytics to make informed decisions. They use
tools like financial modeling, scenario analysis, and forecasting to assess the potential impact of
various financial strategies.
3. Stakeholder Engagement
In today’s business landscape, financial management extends beyond shareholders to consider
the interests of other stakeholders, such as customers, employees, and the broader community.
This approach emphasizes responsible and sustainable financial practices.

Significance of Understanding Approaches

Understanding these approaches is essential for aspiring finance professionals and MBA
students. It enables them to navigate the complexities of financial decision-making in the real
world. Here’s why it matters:

 Strategic Thinking: Modern financial managers must think strategically, considering how
their decisions align with the company’s long-term goals.

 Risk Management: Financial management is about managing risk as much as it is about

maximizing returns. The modern approach equips professionals to handle uncertainties
effectively.

LOVELY P. PANCHACALA, MM
  Adaptability: In today’s rapidly changing business environment, financial managers need
to adapt to new challenges and opportunities. A modern approach allows for greater
adaptability and innovation.

 Stakeholder Relations: Recognizing the importance of stakeholders beyond

shareholders fosters responsible corporate behavior and sustainability.

Conclusion
Financial management is a dynamic field that has evolved over time. While the traditional
approach focused on the basics of raising and managing funds, the modern approach takes a
strategic, data-driven, and stakeholder-oriented perspective. BSBA/MBA students and aspiring
finance professionals should embrace both approaches to excel in the complex world of financial
decision-making.

LOVELY P. PANCHACALA, MM