Chapter 1
FINANCIAL MANAGEMENT
In the modern
money using economy FINANCE means the provision of money at the time it is
needed. Business needs money to make more money, but it is possible only when
money is properly managed. So management of finance is an essential one for the
attainment of business goals.
Financial Management:
Financial
management is that branch of general management, which involves planning,
organising, directing and controlling the financial activities of an
organisation. It deals with procurement and effective utilisation of finance by
applying the management principles and techniques. It involves
a. estimation
of capital requirements
b.
determination of sources of finance
c. method of
procurement
d. utilisation
of finance.
In the words of
JOSEPH MASSIE “Financial management is the operational activity of a business
that is responsible for obtaining and effectively utilizing the funds necessary
for efficient operation”.
Evolution and Scope of Financial Management:
Generally
financial management is a branch of general management. It is a separate
discipline which is largely depends up on economics for making its theories. It
also uses accounting knowledge, rules of mathematics, some parts of system
analysis and behavioural science for giving guidance to managers to handle
finance. Now this subject is more interested to both academicians and managers
for handling finance.
The scope of
financial management can be discussed on the basis of the following two
approaches:
a. The Traditional approach:
Under this
approach the scope of finance function is very narrow. It is only for the
procurement of finance needed for the business. Utilisation of procured finance
is not the function of finance under this approach.
b. The modern approach:
Under this
approach the scope of finance function is very wide. It is not only for
procuring finance but also for the effective utailistion of the procured
finance. Raise fund wisely and allocate funds to various uses without waste. So
the major decision areas under this approach are investment decision, finance
decision and dividend decision.
Objectives
The objective of financial management can be discuss
on the basis of two approaches like
a. Profit maximization approach.
b. Wealth maximization approach.
a. Profit maximization approach.
According to this approach making maximum profit is
the objective of financial management. They take all the actions not only to
avoid decrease in profit but also to make increase in the profit. They give importance to maximise the earning
per share (EPS). This approach is suitable only for sole proprietor business.
b. Wealth maximization approach.
Under this approach objective of financial management
is to maximise the market value of the shares of the firm, i.e., to maximise
the wealth of the share holders. This approach is accepted universally as the
objective of financial management.
Finance Function
In every business organisation the function of finance
is the most important function and all other functions of finance are based on
this function. The function of financial management is base on the following
decision area:
1. The Investment decision
2. The Finance decision.
3. The Dividend decision.
1. The Investment decision
It is the first and important decision which a
business concern must take. It is the decision relating to invest both in fixed
and current assets. For investing in fixed assets, should evaluate various
investment proposals and select the best which gives maximum to the business. This
decision are known as Capital budgeting. Such decisions are important due to
the following reasons:
a. Investment in fixed
assets cannot be revised without a loss.
b. Required a large amount of funds
c. Important in terms of
profitability and future of the firm.
The investment in current assets should be determined
on the basis of credit and inventory policies of a business. It ensures
profitability and liquidity. This decision is known as Working capital
decisions.
2. The Finance decision.
The second major decision related to finance is when
where and how to acquire finance to meet the investment needs of the company. Through this decision, the company decides the
proper mix of securities like shares, debentures and loans. Thus this decision
helps the company for planning a balanced capital structure.
3. The Dividend decision.
This decision is concerned with the disposal of
profits. How much to be retained for growth and expansion and how much to be
paid out as dividend to share holders are decided through this decision.
Dividend policy of the company helps the management to take good decision in this
area.
Importance of Financial management
Every type of organisation financial management is
very important and has universal applicability. Its importance can be understood
from the following points:
1. Helps in acquiring funds when it required at
minimum cost.
2. Helps in financial planning.
3. Ensures proper use and distribution of funds.
4. Enables to improve profitability through
financial
control.
5. Helps to take suitable decision of finance.
6. Increase the wealth of the investors and there by
the wealth of the
7. Promote and collect individual and corporate
savings.
Financial Planning
