Unit -4
Financial Management
Meaning of Financial Management
Finance is the lifeline of any business. However, finances, like most other resources, are always limited. On
the other hand, wants are always unlimited. Therefore, it is important for a business to manage its finances
efficiently. As an introduction to financial management, we will look at the nature, scope, and significance of
financial management, along with financial decisions and planning.
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.
Financial Management is about preparing, directing and managing the money activities of a company
such as buying, selling and using money to its best results to maximize wealth or produce best value for
money. It is basically applying general management concepts to the cash of the company. Financial
Management can also be defined as – The management of the finances of a business / organization in
order to achieve financial objectives
Definitions of Financial Management
“Financial management is the activity concerned with planning, raising, controlling and administering of
funds used in the business.” – Guthman and Dougal
Nature of Financial Management
Nature of financial management is concerned with its functions, its goals, trade-off with conflicting
goals, its system, its relation with other sub-systems in the firm, its environment, the procedural aspects
and its equation with other divisions within the organization. Nature of financial management could be
explained with reference to the following aspects of this discipline:
1. Financial management is an integral part of overall management.
2. The central focus of financial management is valuation of firm, i.e., financial decisions are
directed at increasing/ maximization/ optimizing the value of firm.
3. Financial management involves essentially risk-return trade-off. Decisions on investment involve
choosing of types of assets which generate returns accompanied by risks. Generally, higher the risk,
return might be higher and vice-versa. So, the financial manager has to decide the level of risk, the
firm can assume and satisfy with the accompanying return.
4. Financial management affects the survival, growth and vitality of the firm. Finance is said to be the
life blood of business. The amount, type, sources, conditions & cost of finance squarely influence the
functioning of unit.
5. Financial management is a concern of every business concern. As finance functions, i.e.,
investment, rising of capital, distribution of profit is performed in all firms.
6. Financial management is multi-disciplinary in approach. It depends on other disciplines, like
Economics, Accounting etc., for a better procurement and utilization of finances.
,7. The finance manager is often called the Controller; and the financial management function is given
name of controllership function; in as much as the basic guideline for the formulation and
implementation of plans-throughout the enterprise-come from this quarter.
8. Financial management is not simply a basic business function along with production and marketing;
it is more significantly, the backbone of commerce and industry. It turns the sand of dreams into the
gold of reality.
Objectives of Financial Management
Objectives of financial management may be multiple; as this branch of general management
encompasses the entire organizational functioning. The objectives of financial management are
considered usually at two levels: (1) At macro-level; and (2) At micro-level.
(1) At Macro-level: The chief objective of financial management at macro-level is to make an
intensive and economical use of scarce capital resources. It is an indirect social responsibility of
financial management, which is readily defined although not easily put into practice.
(2) At Micro-level: The objectives of financial management at micro-level are considered at firm’s
level. The goals of finance can be reasonably associated with overall goals of business. At firm’s
level, the objectives of financial management are as follows:
To maintain liquidity of firm: The main objective of financial management is to keep the
liquidity of the firm to such an extent that the firm is always able to meet its financial obligations
on time, so that the solvency of firm is not endangered.
To maximize the profitability of firm: the primary objective of financial management has been
held to be profit-maximization. That is to say, that financial management ought to take financial
decisions and implement them in a way so as to lead the enterprise along lines of profit
maximization. The support for these objectives could be derived from the philosophy, that ‘profit
is a test of economic efficiency’. The overall efficiency of the firm is judged by its operations
result. Hence, all financial decisions should be directed towards the goal of profit maximization.
Profit/EPS maximization should be undertaken and those that decrease profit/EPS are to be
avoided. Financial management is mainly concerned with the efficient economic resources
namely capital.
To maximize wealth of shareholders: Wealth maximisation is also known as value-
maximisation or the net present worth maximisation. Since wealth of owners is reflected in the
market-value of shares; wealth maximisation means the maximisation of the market price of
shares. Accordingly, wealth maximisation is measured, by the market value of shares.
According to wealth maximisation objective, financial management must select those decisions,
which create most wealth for the owners. If two or more financial courses of action are mutually
exclusive (i.e., only one can be undertaken at a time); then that decision-which creates most
wealth, must be selected.
, Scope of Financial Management
Financial management helps a particular organization to utilize its finances most profitably. This can be
achieved through these three fields of decisions:
1. Investment Decisions: Investment decisions represent investing in a fixed asset; it also referred
to as capital budgeting. Investment decisions can be of either long-term or short-term basis:
Long-term investment decisions allow committing funds towards resources like fixed
assets. Long-term investment decisions determine the performance of a business and its ability to
achieve financial goals over time.
Short-term investing decisions or working capital financing decisions allow committing
funds towards resources like current assets. It occupies funds for a shorter period like investment
in inventory, debtors, liquid cash etc. These decisions directly affect the liquidity and
performance of business operations.
2. Financing Decisions: This field of financial management indicates the possible sources of
raising funds from various resources. These decisions are of two types:
Financial Planning Decisions attempt to estimate the sources and possible application of
accumulated funds. A proper financial planning decision is crucial to ensure the availability of
funds whenever required.
Capital Structure Decisions involve identifying various sources of funds & facilitates the
selection of best source for short-term / long-term financial requirements.
3. Dividend Decisions: It involves decisions regarding net profit distribution. These decisions are
also of two categories:
Dividend for shareholders; &
Retained earnings (the accumulated portion of a business’s profits that are not distributed as
dividends to shareholders but instead are reserved for reinvestment back into the business).
Significance/Importance of Financial Management
Financial management is an organic function of any business. Any organization needs finances to obtain
physical resources, carry out the production activities and other business operations, pay compensation to the
suppliers, etc. The Financial management is important for various reasons. Take a look at some of these
reasons:
Helps organizations in financial planning;
Assists organizations in the planning and acquisition of funds;
Helps organizations in effectively utilizing and allocating the funds received or acquired;
Assists organizations in making critical financial decisions;
Helps in improving the profitability of organizations;
Increases the overall value of the firms or organizations;
Provides economic stability;
Encourages employees to save money, which helps them in personal financial planning.
Financial Management
Meaning of Financial Management
Finance is the lifeline of any business. However, finances, like most other resources, are always limited. On
the other hand, wants are always unlimited. Therefore, it is important for a business to manage its finances
efficiently. As an introduction to financial management, we will look at the nature, scope, and significance of
financial management, along with financial decisions and planning.
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.
Financial Management is about preparing, directing and managing the money activities of a company
such as buying, selling and using money to its best results to maximize wealth or produce best value for
money. It is basically applying general management concepts to the cash of the company. Financial
Management can also be defined as – The management of the finances of a business / organization in
order to achieve financial objectives
Definitions of Financial Management
“Financial management is the activity concerned with planning, raising, controlling and administering of
funds used in the business.” – Guthman and Dougal
Nature of Financial Management
Nature of financial management is concerned with its functions, its goals, trade-off with conflicting
goals, its system, its relation with other sub-systems in the firm, its environment, the procedural aspects
and its equation with other divisions within the organization. Nature of financial management could be
explained with reference to the following aspects of this discipline:
1. Financial management is an integral part of overall management.
2. The central focus of financial management is valuation of firm, i.e., financial decisions are
directed at increasing/ maximization/ optimizing the value of firm.
3. Financial management involves essentially risk-return trade-off. Decisions on investment involve
choosing of types of assets which generate returns accompanied by risks. Generally, higher the risk,
return might be higher and vice-versa. So, the financial manager has to decide the level of risk, the
firm can assume and satisfy with the accompanying return.
4. Financial management affects the survival, growth and vitality of the firm. Finance is said to be the
life blood of business. The amount, type, sources, conditions & cost of finance squarely influence the
functioning of unit.
5. Financial management is a concern of every business concern. As finance functions, i.e.,
investment, rising of capital, distribution of profit is performed in all firms.
6. Financial management is multi-disciplinary in approach. It depends on other disciplines, like
Economics, Accounting etc., for a better procurement and utilization of finances.
,7. The finance manager is often called the Controller; and the financial management function is given
name of controllership function; in as much as the basic guideline for the formulation and
implementation of plans-throughout the enterprise-come from this quarter.
8. Financial management is not simply a basic business function along with production and marketing;
it is more significantly, the backbone of commerce and industry. It turns the sand of dreams into the
gold of reality.
Objectives of Financial Management
Objectives of financial management may be multiple; as this branch of general management
encompasses the entire organizational functioning. The objectives of financial management are
considered usually at two levels: (1) At macro-level; and (2) At micro-level.
(1) At Macro-level: The chief objective of financial management at macro-level is to make an
intensive and economical use of scarce capital resources. It is an indirect social responsibility of
financial management, which is readily defined although not easily put into practice.
(2) At Micro-level: The objectives of financial management at micro-level are considered at firm’s
level. The goals of finance can be reasonably associated with overall goals of business. At firm’s
level, the objectives of financial management are as follows:
To maintain liquidity of firm: The main objective of financial management is to keep the
liquidity of the firm to such an extent that the firm is always able to meet its financial obligations
on time, so that the solvency of firm is not endangered.
To maximize the profitability of firm: the primary objective of financial management has been
held to be profit-maximization. That is to say, that financial management ought to take financial
decisions and implement them in a way so as to lead the enterprise along lines of profit
maximization. The support for these objectives could be derived from the philosophy, that ‘profit
is a test of economic efficiency’. The overall efficiency of the firm is judged by its operations
result. Hence, all financial decisions should be directed towards the goal of profit maximization.
Profit/EPS maximization should be undertaken and those that decrease profit/EPS are to be
avoided. Financial management is mainly concerned with the efficient economic resources
namely capital.
To maximize wealth of shareholders: Wealth maximisation is also known as value-
maximisation or the net present worth maximisation. Since wealth of owners is reflected in the
market-value of shares; wealth maximisation means the maximisation of the market price of
shares. Accordingly, wealth maximisation is measured, by the market value of shares.
According to wealth maximisation objective, financial management must select those decisions,
which create most wealth for the owners. If two or more financial courses of action are mutually
exclusive (i.e., only one can be undertaken at a time); then that decision-which creates most
wealth, must be selected.
, Scope of Financial Management
Financial management helps a particular organization to utilize its finances most profitably. This can be
achieved through these three fields of decisions:
1. Investment Decisions: Investment decisions represent investing in a fixed asset; it also referred
to as capital budgeting. Investment decisions can be of either long-term or short-term basis:
Long-term investment decisions allow committing funds towards resources like fixed
assets. Long-term investment decisions determine the performance of a business and its ability to
achieve financial goals over time.
Short-term investing decisions or working capital financing decisions allow committing
funds towards resources like current assets. It occupies funds for a shorter period like investment
in inventory, debtors, liquid cash etc. These decisions directly affect the liquidity and
performance of business operations.
2. Financing Decisions: This field of financial management indicates the possible sources of
raising funds from various resources. These decisions are of two types:
Financial Planning Decisions attempt to estimate the sources and possible application of
accumulated funds. A proper financial planning decision is crucial to ensure the availability of
funds whenever required.
Capital Structure Decisions involve identifying various sources of funds & facilitates the
selection of best source for short-term / long-term financial requirements.
3. Dividend Decisions: It involves decisions regarding net profit distribution. These decisions are
also of two categories:
Dividend for shareholders; &
Retained earnings (the accumulated portion of a business’s profits that are not distributed as
dividends to shareholders but instead are reserved for reinvestment back into the business).
Significance/Importance of Financial Management
Financial management is an organic function of any business. Any organization needs finances to obtain
physical resources, carry out the production activities and other business operations, pay compensation to the
suppliers, etc. The Financial management is important for various reasons. Take a look at some of these
reasons:
Helps organizations in financial planning;
Assists organizations in the planning and acquisition of funds;
Helps organizations in effectively utilizing and allocating the funds received or acquired;
Assists organizations in making critical financial decisions;
Helps in improving the profitability of organizations;
Increases the overall value of the firms or organizations;
Provides economic stability;
Encourages employees to save money, which helps them in personal financial planning.
