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.
Important Business Activities.

• Production
• Marketing
• Finance

• Firms create manufacturing capacities for production of goods, some provide

services to customers.
• They sell their goods and services to earn profit.
• They raise finds to acquire manufacturing and other facilities
Real And Financial Assets
• Real Assets: Can be Tangible or Intangible
• Tangible real assets are physical assets that include plant, machinery, office,
factory, furniture and building.
• Intangible real assets include technical know-how, technological collaborations,
patents and copyrights.
• Financial Assets are also called securities, are financial papers or instruments such
as shares and bonds or debentures.

• A bond is typically a loan that is secured by a specific physical asset.

• A debenture is secured only by the issuer's promise to pay the interest and loan
principal.
Equity and Borrowed Funds
• Shares represent ownership rights of their holders. Shareholders are owners of
the company. Shares can of two types:
• Equity Shares
• Preference Shares
• Loans, Bonds or Debts: represent liability of the firm towards outsiders. Lenders
are not owners of the company. These provide interest tax shield.
Equity and Preference Shares
• Equity Shares are also known as ordinary shares.
• Do not have fixed rate of dividend.
• There is no legal obligation to pay dividends to equity shareholders.
• Preference Shares have preference for dividend payment over ordinary
shareholders.
• They get fixed rate of dividends.
• They also have preference of repayment at the time of liquidation.
Finance and Management Functions
• All business activities involve acquisition and use of funds.
• Finance function makes money available to meet the costs of
production and marketing operations.
• Financial policies are devised to fit production and marketing decisions
of a firm in practice.
 Finance Functions
Finance functions or decisions can be divided as follows 
• Long-term financial decisions
• Long-term asset-mix or investment decision or capital budgeting decisions.
• Capital-mix or financing decision or capital structure and leverage
decisions.
• Profit allocation or dividend decision
• Short-term financial decisions
• Short-term asset-mix or liquidity decision or working capital management.
Financial Procedures and Systems
For effective finance function some routine functions have to be performed. Some
of these are:
Supervision receipts and payments and safeguarding of cash balances
Custody and safeguarding of securities, insurance policies and other
valuable papers
Taking care of the mechanical details of new outside financing
Record keeping and reporting
 Definition of Financial Management

 According to Guthman and Dougal, financial management means, “the activity

concerned with the planning, raising, controlling and administering of funds used in the
business.” It is concerned with the procurement and utilisation of funds in the proper
manner
Objectives of Financial Management
• To ensure regular and adequate supply of funds to the concern.
• To ensure adequate returns to the shareholders which will depend upon the
earning capacity, market price of the share, expectations of the shareholders.
• To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
• To ensure safety on investment, i.e., funds should be invested in safe ventures so
that adequate rate of return can be achieved.
• To plan a sound capital structure-There should be sound and fair composition of
capital so that a balance is maintained between debt and equity capital.
Scope Financial Management
Financial Management

Investment Financing Dividend Working Capital

Decisions Decision Decision decision
Role of Financial Manager
Raising of Funds
Allocation of Funds
Profit Planning
Understanding Capital Markets
Goals of Financial Management
 Profit Maximization:
Profit Maximization consists of the activities that manage the financial resources with the aim to
increase the profitability of the company
Wealth maximization:Wealth Maximization consists of a set of activities that manage the financial
resources with the aim to increase the value of the stakeholders
Objections to profit Maximization:
• Definition of profit
• Time value of money
• Maximizing profit after tax
• Maximising EPS
• Wealth Maximization
• Wealth Maximization is the ability of the company to increase the value for the stakeholders of the
company mainly through an increase in the market price of the company’s share over a period of
time. The value depends on a number of tangible and intangible factors like sales, quality of
products or services etc.
• It is mainly achieved over a course of long-term as it requires the company to attain leadership
position which in turn translates to larger market share and higher share price ultimately benefiting
all the stakeholders of the company.
• To be more specific, the universally accepted goal of a business entity has been to increase the
wealth for the shareholders of the company as they are the actual owners of the company who
have invested their capital given the risk inherent in the business of the company with expectations
of high returns.
Profit Maximization
• Profit Maximization is the ability of the company to operate efficiently in order to produce
maximum output with limited input or to produce the same output using much lesser input. So, it
goes without saying that it becomes the most important goal of the company to survive and grow
in the current cut-throat competitive landscape of the business environment.
• Given the nature of this form of financial management, companies mainly have a short-term
perspective when it comes to earning profits and that is very much limited to the current financial
year.
• If we get into the details, profit is actually what remains out of the total revenue after paying for all
the expenses and taxes for the financial year. Now in order to increase the profit companies can
either try to increase their revenue or try to minimize their cost structure. This may need some
analysis of the input-output levels to diagnose the operating efficiency of the company in order to
identify the key improvement areas where processes could be tweaked or changed in their entirety
to earn larger profits.
 Difference between wealth maximization and profit maximization

Basis Wealth Maximization Profit Maximization

 It is defined as the management of financial

It is defined as the management of financial resources
Definition resources aimed at increasing the value of the
aimed at increasing the profit of the company.
stakeholders of the company.

Focuses on increasing the value of the stakeholders Focuses on increasing the profit of the company in the
Focus
of the company in the long term. short term.

It considers the risks and uncertainty inherent in the It does not consider the risks and uncertainty inherent in
Risk
business model of the company. the business model of the company.

It helps in achieving a larger value of a company’s

It helps in achieving efficiency in the company’s day-to-
Usage worth which may reflect in the increased market
day operations to make the business profitable.
share of the company.
Agency Problems

An agency relationship occurs when a principal hires an agent to

perform some duty. A conflict, known as an "Agency Problem" arises
when there is a conflict of interest between the needs of the principal
and the needs of the agent.
Agency relationship occur when one party ,the principal (shareholders)
employs another party the agent (Directors/Managers)
Assignment
Emerging role of Finance manager in India.