FINANCIAL
MANAGEMENT
LECTURE 1
WHAT IS 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 the financial resources of the
enterprise.
Objectives of Financial Management
Financial management is generally concerned with procurement,
allocation, and control of financial resources of a concern. The objectives
can be:
1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will
depend upon the earning capacity, market price of the share,
expectations of the shareholders?
3. To ensure optimum funds utilization. Once the funds are
procured, they should be utilized in maximum possible way at
least cost.
Objectives of Financial Management
Financial management is generally concerned with procurement,
allocation, and control of financial resources of a concern. The
objectives can be:
4.To ensure safety on investment, i.e, funds should be invested in
safe ventures so that an adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be the sound
and fair composition of capital so that a balance is maintained
between debt and equity capital.
Functions of Financial Management
1. Estimation of capital requirements: A finance manager has to
make estimation with regards to capital requirements of the
company. This will depend upon expected costs and profits and
future programmes and policies of a concern. Estimations have to
be made in an adequate manner which increases earning capacity
of enterprise.
2. Determination of capital composition: Once the estimation has
been made, the capital structure have to be decided. This involves
short- term and long- term debt equity analysis. This will depend
upon the proportion of equity capital a company is possessing and
additional funds which have to be raised from outside parties.
Functions of Financial Management
3. Choice of sources of funds: For additional funds to be procured, a
company has many choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each
source and period of financing.
4. Investment of funds: The finance manager has to decide to allocate
funds into profitable ventures so that there is safety on investment and
Functions of Financial Management
5. Disposal of surplus: The net profits decision has to be made by the
finance manager. This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends
and other benefits like bonuses.
b. Retained profits - The volume has to be decided which will depend
upon expansional, innovational, diversification plans of the
company.
6. Management of cash: The finance manager has to make decisions with
regard to cash management. Cash is required for many purposes like
payment of wages and salaries, payment of electricity and water bills,
Functions of Financial Management
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.
Role of a Financial Manager
financial activities of a firm A financial manger is a person
are one of the most important who takes care of all the
and complex activities of a important financial functions of
firm. Therefore in order to an organization. The person in
take care of these activities, a charge should maintain a far
financial manager performs sightedness in order to ensure that
all the requisite financial the funds are utilized in the most
activities efficient manner. His actions
directly affect the Profitability,
growth and goodwill of the firm.
Following are the main functions of a
Financial Manager:
1. Raising of Funds
In order to meet the obligation of the business it is important
to have enough cash and liquidity. A firm can raise funds by
the way of equity and debt. It is the responsibility of a
financial manager to decide the ratio between debt and
equity. It is important to maintain a good balance between
equity and debt.
Following are the main functions of a Financial Manager:
2. Allocation of Funds
Once the funds are raised through different channels the next important
function is to allocate the funds. The funds should be allocated in such a
manner that they are optimally used. In order to allocate funds in the best
possible manner the following point must be considered
• The size of the firm and its growth capability
• Status of assets whether they are long-term or short-term
• Mode by which the funds are raised
These financial decisions directly and indirectly influence other managerial
activities. Hence formation of a good asset mix and proper allocation of funds is
one of the most important activity
Following are the main functions of a Financial Manager:
3. Profit Planning
Profit earning is one of the prime functions of any business organization. Profit
earning is important for survival and sustenance of any organization. Profit planning
refers to proper usage of the profit generated by the firm.
Profit arises due to many factors such as pricing, industry competition, state of the
economy, mechanism of demand and supply, cost and output. A healthy mix of
variable and fixed factors of production can lead to an increase in the profitability of
the firm.
Fixed costs are incurred by the use of fixed factors of production such as land and
machinery. In order to maintain a tandem it is important to continuously value the
depreciation cost of fixed cost of production. An opportunity cost must be calculated
Following are the main functions of a Financial Manager:
4. Understanding Capital Markets
Shares of a company are traded on stock exchange and there is a
continuous sale and purchase of securities. Hence a clear understanding of
capital market is an important function of a financial manager. When
securities are traded on stock market there involves a huge amount of risk
involved. Therefore a financial manger understands and calculates the risk
involved in this trading of shares and debentures.
Its on the discretion of a financial manager as to how to distribute the profits. Many
investors do not like the firm to distribute the profits amongst share holders as
dividend instead invest in the business itself to enhance growth. The practices of a
financial manager directly impact the operation in capital market.
https://www.managementstudyguide.com/role-of-financial-manager.htm https://www.educba.com/accounting-vs-financial-management/
Both Accounting vs Financial management play a crucial role in any organization.
Accounting is a necessary input for the financial management function of any
business. Good financial management is important for the effective utilization of the
economic resources of the organization. Accounting restricts up to reporting and
summarizing of financial transactions for the external and internal users whereas
financial management is about planning, directing, monitoring, organizing, and
controlling of the monetary resources of an organization to achieve the objective.
Every person or business gets involved in some kind of economic activity. All
business carries some kind of economic/financial activity. Accounting and Financial
management are related to the extent that accounting is an important input in
financial decision-making. Still, they differ in the treatment of funds and with
regards to decision-making. Accounting involves preparing and examining past
financial records whereas, financial management involves planning to achieve its
