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FINANCIAL MANAGEMENT

Rajinder Kaur(MIMIT)

Scope of Financial ManagementThe term "financial management" refers to management of money, the life-blood of business

Financial Management involves the application of general management principles to particular financial operation

Objectives of Financial ManagementMaximization of shareholders wealth

Maximization of Profitability

Evolution of Financial managementTransitional phaseTraditional PhaseModern Phase

Traditional Phase

The focus of financial management was mainly on certain episodic events like formation, issuance of capital, major expansion, merger, reorganization and liquidation in the life cycle of firm. The approach was mainly descriptive and institutional. The instruments of financing, the institutions and procedures used capital markets, and the legal aspects of financial events formed the core of financial management. Financial management was viewed mainly from the point of view of the investment bankers, lenders, and other outside interests.


It began around the early 1940s and continued through the early 1950s. The nature of financial management during this phase was similar to that of traditional phase, greater emphasis was placed on the day-to-day problems faced by financial managers in the areas of fund analysis, planning, and control. In this phase the main focus shifted to working capital managementTransitional Phase

Modern Phase: The modern phase began in the mid 1950s and has witnessed an accelerated pace of development with the infusion of ideas from economic theory and application of quantitative methods of analysis. The central concern of financial management is considered to be a rational matching of funds to their uses so as to maximize the wealth of current shareholders. The approach of financial management has become more analytical and quantitative


Role of Finance ManagersEstimating the requirement of funds Decision regarding the capital structure Investment decisions Dividend decisions cash management Evaluating financial performance with respect to return on investment Financial negotiations with banks, financial institutions and public depositorsKeeping touch with stock exchange quotations and behaviour of share prices, etc.


Financial Management DecisionsFinancingInvestmentDividendWorking capital management

Financing

Procurement of funds, inter alia, includes: Identification of finance sources Cultivating sources of funds and raising funds Determination of finance mix Allocation of profits between dividends and retention of profits i.e. internal Fund generation

Investment

The investment of long term funds is made after a careful assessment of various projects through capital budgeting and uncertainty analysis

Only those investment proposals must be accepted which are expected to yield at least so much return as is adequate to meet cost of financing

Investment proposals should, therefore, be evaluated in terms of both expected return and risk


Dividend policyImportant factors that generally determine the dividend policy of a firm are: Dividend payout ratioStability of dividendsTax consideration, Legal, contractual, internal constraints and restrictionsCapital market considerationsInflation, etc

Working Capital Management

Management will use a combination of policies and techniquesfor the management of working capitalCash management Inventory management Debtors managementShort term financing

Capital Budgeting Capital budgeting is the planning process used to determine a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research and development projects


Capital StructureCapital structure of a business enterprise has to be viewed with respect to the risk, cost and capital aspectRisk is one of the major considerations which help the finance manager in determining the capital structureA firm has an option to go for either equity or debt as a source of funds, each of them having its own merits and demerits


To sum up

THE TERM PROFIT IS VAGUE AND IT CANNOT BE PRECISELY DEFINED. IT MEANS DIFFERENT THINGS FOR DIFFERENT PEOPLE. SHOULD WE CONSIDER SHORT-TERM PROFITS OR LONG-TERM PROFITS? DOES IT MEAN TOTAL PROFITS OR EARNING PER SHARE? SHOULD WE TAKE PROFITS BEFORE TAX OR AFTER TAX? IGNORES TIME VALUE OF MONEYObjections to Profit Maximization


Wealth-maximization wealth maximizations is the single substitute for a stockholders utility. When the firm maximizes the stockholders wealth, the individual stockholder can use this wealth to maximize his individual utility. It means that maximizing stockholders wealth the firm is operating consistently towards maximizing stockholders utility. Stockholders current wealth=(No. of shares owned)*(Current stock price per share)



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