FINANCIAL MANAGEMENT STUDY NOTES
INTRODUCTION TO FINANCIAL MANAGEMENT
“Financial Management is the operational activity of a business that is responsible for obtaining
and effectively utilizing the funds necessary for efficient operation”- Joseph and Massie
“Financial management is the area of business management devoted to a judicious use 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 Bradley
“Financial management is the application of the planning and control functions to the finance
function” Archer and Ambrosio
Meaning of Financial Management
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying general
management principles to financial resources of the enterprise in order to improve the return on
investments and maximize the wealth of a firm. It involves reducing costs and planning of
resources for its optimal use to generate high profits and withstand the threats arising on account
of competition.
Objectives of Financial Management: Financial management refers to the efficient and effective
management of money (funds) in such a manner as to accomplish the objectives of the
organization. The main objective of any organization is to increase the profitability of the business.
However the scope of activity in financial management extends beyond profitability and it
includes:
Primary Objectives:
Profit Maximization: The main purpose of any kind of economic activity is earning profit. A
business concern operates mainly for the purpose of making profit. Profit has become the
yardstick to measure the business efficiency of a concern. The organizations maximize their
profits by
1. Increasing Revenue/ Turnover
2. Controlling costs
3. Managing Risks
Wealth Maximization: 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. Wealth maximization is the concept of increasing the value of a business in order to
increase the value of the shares held by stockholders. The most direct evidence of wealth
maximization is changes in the price of a company's shares.
Secondary Objectives:
Judicious planning of Funds: A finance manager has to estimate the financial needs with
regards to capital requirements of the company. This will depend upon expected costs and
profits and future programs and policies of a concern. Estimations have to be made in an
adequate manner which increases earning capacity of enterprise. Excess capital can result in
idle resources and a shortage may interrupt the flow of operations.
PREPARED BY MR ANTONY AMBIA Page 1
, Liquidity: Liquidity is the ability of a company to meet its liabilities as and when they arise.
We often come across profitable companies that may not be liquid. The liquidity aspect of a
company also improves the credit worthiness of a company in the market. A company should
maintain its liquidity position in order to safeguard its position in the market.
Credit worthiness: A company deals with various players in the market in the course of
business. Cash as well as credit transactions are transacted. Credibility engenders belief in
your company. The temptation to stretch your promises is overwhelming when you are
trying to raise capital or secure a partner, especially in today's economy. Credibility is more
important in the long run companies that maintain the best credibility survive while others
fail.
Cost Reduction and Cost Control: Cost control and reduction refers to the efforts business
managers make to monitor, evaluate, and trim expenditures. While cost control deals with not
allowing the cost to rise beyond the planned levels, cost reduction involves a real and permanent
reduction in unit cost of production rendered without impairing their suitability for the use
intended.
Eliminating Competition: There exists cut throat competition in the market. Corporations are
exposed to forces of threat of survival from competitors. One of the objectives of financial
management is to plan activities that will give you an edge over your competitors.
Improving Financial Efficiency: Profitability is not the sole indicator of the financial well
being of an enterprise. It is important the business houses are consistent and stable. Policies
and Strategies are implemented for growth and development activities.
Uninterrupted flow of operations: Working Capital management is an important
management function as it ensures the smooth flow of operations in an enterprise. Estimating
Working capital needs of the organization and a steady flow of resources will ensure an
uninterrupted flow of activities of the business.
Avoiding Idle resources: An organization may sometimes possess excess resources. Although
it is not a cost in itself, however it results in idle resources. Keeping resources idle means that
the resources are not being used to its optimum levels and creates costs to the company.
Financial Discipline: Every day we hear of financial scams, fraudulent acts and misuse of
funds for personal gain. Financial discipline includes incorporating financial controls to
monitor and keep a check on the unproductive use of funds. Corporate social responsibility is
gaining importance and businesses are expected to keep up its ethics and value systems high.
Growth and Development: Growth and development is a continuous process. Every business
unit is expected to carry on its activities for an unexpected period of time in future. Therefore
it invests its funds in the most profitable avenues and plans for expansion, growth and
development activities while trying to keep pace with the changing environment of the
market and consumer behavior.
Capital Budgeting: Capital budgeting is a required managerial tool. One duty of a financial
manager is to choose investments with satisfactory cash flows and rates of return. Therefore,
a financial manager must be able to decide whether an investment is worth undertaking and
be able to choose intelligently between two or more alternatives. To do this, a sound
procedure to evaluate, compare, and select projects is needed. This procedure is called
capital budgeting.
PREPARED BY MR ANTONY AMBIA Page 2
, Managing Risks and Uncertainties: A business operates in an environment of risks and
uncertainties. The task of a finance manager is to identify the risks and hedge those risks.
Predicting risks and uncertainties and being prepared for the contingencies reflects sound
business policies.
Functions performed by Financial Managers/ Scope of financial management:
1. Estimation of capital requirements: The primary function of a financial manager is to
estimate the fund requirements. The estimation should be accurate bcos excess of funds
can lead to idle resources and a shortage will affect the liquidity creditability and disrupt
the smooth operations of the business. The estimation of funds for each business will
depend upon the size , nature and risks associated with the business.
2. Determination of the capital structure: Once the estimation has been made, the capital
structure has to be decided. This involves short- term and long- term debt equity analysis.
The proportion of Debt and Equity in the share capital needs to be decided upon. The
capital structure is important is as the cost of capital can be managed by determining the
capital structure.
3. Choice of sources of funds: For funds to be procured, a company has many choices like-
1. Issue of shares and debentures
2. Loans to be taken from banks and financial institutions
3. Public deposits to be drawn like in form of bonds.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible. The choice
of a viable business and most profitable investment proposal should be made in order to reap the
highest return on Investments.
5. Disposal of surplus: The net profits decision has to be made by the finance manager. This
can be done in two ways:
1. Dividend declaration - It includes identifying the rate of dividends to be paid to
the shareholders.
2. Retained profits - A portion of the profits that is retained in the business in order
for expansion, innovation, growth and development.
3. Reserves: A portion of the surplus is kept aside as reserves to serve as a cushion in
times of emergencies.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries, payment
of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of
enough stock, purchase of raw materials, etc. It affects the liquidity position of the company
therefore cash management is important to maintain the creditability and liquidity position.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds
but he also has to exercise control over finances. This can be done through many techniques
like ratio analysis, financial forecasting, cost and profit control, etc. Cost control and
minimizing wastages are important functions performed by the financial manager.
8. Financial Analysis and Interpretation: The analysis and interpretation of the financial
performance of the business is done using several ratios to determine the liquidity,
PREPARED BY MR ANTONY AMBIA Page 3
INTRODUCTION TO FINANCIAL MANAGEMENT
“Financial Management is the operational activity of a business that is responsible for obtaining
and effectively utilizing the funds necessary for efficient operation”- Joseph and Massie
“Financial management is the area of business management devoted to a judicious use 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 Bradley
“Financial management is the application of the planning and control functions to the finance
function” Archer and Ambrosio
Meaning of Financial Management
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying general
management principles to financial resources of the enterprise in order to improve the return on
investments and maximize the wealth of a firm. It involves reducing costs and planning of
resources for its optimal use to generate high profits and withstand the threats arising on account
of competition.
Objectives of Financial Management: Financial management refers to the efficient and effective
management of money (funds) in such a manner as to accomplish the objectives of the
organization. The main objective of any organization is to increase the profitability of the business.
However the scope of activity in financial management extends beyond profitability and it
includes:
Primary Objectives:
Profit Maximization: The main purpose of any kind of economic activity is earning profit. A
business concern operates mainly for the purpose of making profit. Profit has become the
yardstick to measure the business efficiency of a concern. The organizations maximize their
profits by
1. Increasing Revenue/ Turnover
2. Controlling costs
3. Managing Risks
Wealth Maximization: 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. Wealth maximization is the concept of increasing the value of a business in order to
increase the value of the shares held by stockholders. The most direct evidence of wealth
maximization is changes in the price of a company's shares.
Secondary Objectives:
Judicious planning of Funds: A finance manager has to estimate the financial needs with
regards to capital requirements of the company. This will depend upon expected costs and
profits and future programs and policies of a concern. Estimations have to be made in an
adequate manner which increases earning capacity of enterprise. Excess capital can result in
idle resources and a shortage may interrupt the flow of operations.
PREPARED BY MR ANTONY AMBIA Page 1
, Liquidity: Liquidity is the ability of a company to meet its liabilities as and when they arise.
We often come across profitable companies that may not be liquid. The liquidity aspect of a
company also improves the credit worthiness of a company in the market. A company should
maintain its liquidity position in order to safeguard its position in the market.
Credit worthiness: A company deals with various players in the market in the course of
business. Cash as well as credit transactions are transacted. Credibility engenders belief in
your company. The temptation to stretch your promises is overwhelming when you are
trying to raise capital or secure a partner, especially in today's economy. Credibility is more
important in the long run companies that maintain the best credibility survive while others
fail.
Cost Reduction and Cost Control: Cost control and reduction refers to the efforts business
managers make to monitor, evaluate, and trim expenditures. While cost control deals with not
allowing the cost to rise beyond the planned levels, cost reduction involves a real and permanent
reduction in unit cost of production rendered without impairing their suitability for the use
intended.
Eliminating Competition: There exists cut throat competition in the market. Corporations are
exposed to forces of threat of survival from competitors. One of the objectives of financial
management is to plan activities that will give you an edge over your competitors.
Improving Financial Efficiency: Profitability is not the sole indicator of the financial well
being of an enterprise. It is important the business houses are consistent and stable. Policies
and Strategies are implemented for growth and development activities.
Uninterrupted flow of operations: Working Capital management is an important
management function as it ensures the smooth flow of operations in an enterprise. Estimating
Working capital needs of the organization and a steady flow of resources will ensure an
uninterrupted flow of activities of the business.
Avoiding Idle resources: An organization may sometimes possess excess resources. Although
it is not a cost in itself, however it results in idle resources. Keeping resources idle means that
the resources are not being used to its optimum levels and creates costs to the company.
Financial Discipline: Every day we hear of financial scams, fraudulent acts and misuse of
funds for personal gain. Financial discipline includes incorporating financial controls to
monitor and keep a check on the unproductive use of funds. Corporate social responsibility is
gaining importance and businesses are expected to keep up its ethics and value systems high.
Growth and Development: Growth and development is a continuous process. Every business
unit is expected to carry on its activities for an unexpected period of time in future. Therefore
it invests its funds in the most profitable avenues and plans for expansion, growth and
development activities while trying to keep pace with the changing environment of the
market and consumer behavior.
Capital Budgeting: Capital budgeting is a required managerial tool. One duty of a financial
manager is to choose investments with satisfactory cash flows and rates of return. Therefore,
a financial manager must be able to decide whether an investment is worth undertaking and
be able to choose intelligently between two or more alternatives. To do this, a sound
procedure to evaluate, compare, and select projects is needed. This procedure is called
capital budgeting.
PREPARED BY MR ANTONY AMBIA Page 2
, Managing Risks and Uncertainties: A business operates in an environment of risks and
uncertainties. The task of a finance manager is to identify the risks and hedge those risks.
Predicting risks and uncertainties and being prepared for the contingencies reflects sound
business policies.
Functions performed by Financial Managers/ Scope of financial management:
1. Estimation of capital requirements: The primary function of a financial manager is to
estimate the fund requirements. The estimation should be accurate bcos excess of funds
can lead to idle resources and a shortage will affect the liquidity creditability and disrupt
the smooth operations of the business. The estimation of funds for each business will
depend upon the size , nature and risks associated with the business.
2. Determination of the capital structure: Once the estimation has been made, the capital
structure has to be decided. This involves short- term and long- term debt equity analysis.
The proportion of Debt and Equity in the share capital needs to be decided upon. The
capital structure is important is as the cost of capital can be managed by determining the
capital structure.
3. Choice of sources of funds: For funds to be procured, a company has many choices like-
1. Issue of shares and debentures
2. Loans to be taken from banks and financial institutions
3. Public deposits to be drawn like in form of bonds.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible. The choice
of a viable business and most profitable investment proposal should be made in order to reap the
highest return on Investments.
5. Disposal of surplus: The net profits decision has to be made by the finance manager. This
can be done in two ways:
1. Dividend declaration - It includes identifying the rate of dividends to be paid to
the shareholders.
2. Retained profits - A portion of the profits that is retained in the business in order
for expansion, innovation, growth and development.
3. Reserves: A portion of the surplus is kept aside as reserves to serve as a cushion in
times of emergencies.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries, payment
of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of
enough stock, purchase of raw materials, etc. It affects the liquidity position of the company
therefore cash management is important to maintain the creditability and liquidity position.
7. Financial controls: The finance manager has not only to plan, procure and utilize the funds
but he also has to exercise control over finances. This can be done through many techniques
like ratio analysis, financial forecasting, cost and profit control, etc. Cost control and
minimizing wastages are important functions performed by the financial manager.
8. Financial Analysis and Interpretation: The analysis and interpretation of the financial
performance of the business is done using several ratios to determine the liquidity,
PREPARED BY MR ANTONY AMBIA Page 3
