FINANCIAL
MANAGEMENT
OBJECTIVES
DEFINITION OF FINANCE
According to Khan and Jain, “Finance is
the art and science of managing money”
Guthumann and Dougall, “Business
finance can broadly be defined as the
activity concerned with planning, raising,
controlling, administering of the funds used
in the business”.
DEFINITION OF FINANCIAL MANAGEMENT
“Financial Management is the application of the
planning and control functions to the finance
function.”
- Howard and Upton.
“Financial Management is concerned with the
procurement of funds and their effective utilization in
business.”
- M C Kuchhal
FINANCE FUNCTION
Procurement of Funds:
Effective utilisation of funds
Allocation of Profits
Objectives of Financila Management
Profit Maximisation
(i) Profit acts as a measure of efficiency and
(ii) It serves as a protection against risk.
Arguments in favor of profit maximization:
(i) When profit earning is the main aim of business
the ultimate objective should be profit maximization.
(ii) Future is uncertain. A firm should earn more and
more profit to meet the future contingencies.
iii) Profit maximization is justified on the grounds of
rationality as profits act as a measure of efficiency
Arguments against profit maximization:
(i) It leads to exploitation of workers and consumers.
(ii) It ignores the risk factors associated with profits.
(iii) Profit in itself is a vague concept and means
differently to different people.
(iv) It is a narrow concept at the cost of social and
moral obligations
Wealth Maximization:
Wealth maximization is considered as the appropriate
objective of an enterprise. When the firms maximizes
the stakeholder‘s wealth, the individual stakeholder
can use this wealth to maximize his individual utility.
Arguments in favor of wealth maximization:
(i) Due to wealth maximization, the short term money
lenders get their payments in time.
(ii) The long time lenders too get a fixed rate of
interest on their investments.
(iii) The employee share in the wealth gets increased.
(iv) The various resources are put to economical and
efficient use.
Arguments against wealth maximization
(i) It is socially undesirable
(ii) It is not a descriptive idea
(iii) Only stock holders wealth
maximization is endangered when
ownership and management are separate
Profit Maximisation Vs. Wealth Maximization
Profit maximization is In contrast, shareholder
basically a single period or wealth maximization is a
a short-term goal. It is long-term goal. shareholders
usually interpreted to are interested in future as
mean the maximization of well as present profits.
Wealth maximization is
profits within a given
generally preferred because it
period of time. A firm may considers (1) wealth for the
maximize its short-term long term, (2) risk or
profits at the expense of uncertainty. (3) the timing of
its long-term profitability returns, and (4) the
and still realize this goal. shareholders’ return.
Principles of Financial Management
•The risk return trade off- investors wont take additional risk unless they expect to
be compensated with additional return.
•Time Value of Money - a dollar received today is worth more than a dollar received a
year from now.
•CASH, not profits is KING - it is cash flows not profits that are actually received by
the firm and can be reinvested.
•Incremental Cash Flows- It's only what changes that counts.
•The Curse of Competitive Markets-Why it's hard to find exceptionally profitable
projects.
•Efficient Capital Markets-the markets are quick and the prices are right
•The Agency Problem-a problem resulting from conflicts of interest between the
manager/agent and the stockholder.
•Taxes bias Business Decisions
•All Risks are not Equal-some risk can be diversified away, and some cannot.
•Ethical Behavior is doing the right thing, and ethical dilemmas are everywhere in
finance.
FUNCTIONS OF FINANCE MANAGER
1. Forecastingthe financial requirement
2. Financial Planning
3. Procurement of funds
4. Allocation of Funds
5. Maintaining proper Liquidity
6. Dividend decision
7. Evaluation of Financial performance
8. Financial Negotiations
9. To ensure proper use of surplus
