Concept, evolution, functions, objectives, scope

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1. FINANCIAL MANAGEMENT

2. Finance is provision of money at the time when it is required. Every enterprise requires finance. Indispensable Lifeblood of business Finance is the art and science of managing money. FINANCE

3. Financial management is an applied branch of management that looks after the finance function of a business. “Financial management is the operational activity of the business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations”. Financial management

4. Financial management deals with how the corporation obtains the funds and how it uses them”-- Hoagland Financial Management

5. Financial management emerged as a distinct field of study at the turn of 20 th century. Its evolution can be divided into three broad phases: Evolution

6. Traditional phase lasted for about four decades. Following were its important features: The focus of financial management was mainly on certain episodic events like formation, issuance of capital, major expansion, merger, reorganization and liquidation in the lifecycle of the firm. The approach placed great emphasis on long term problems. Financial management was not considered to be a managerial function. Traditional Phase

7. The Transitional Phase began around the early 1940 s and continued through the early 1950s . Nature of financial management during was similar to that of the traditional phase. Greater emphasis was placed on the day-to-day problems faced by financial managers in the areas of funds analysis, planning and control. Transitional Phase

8. The distinctive features of the modern phase are : The central concern is considered to be a rational matching of funds to their uses so as to maximize the wealth of the shareholders. 2) The approach is more logical. Modern Phase

9. Thus, the new approach is an analytical way of dealing with financial problems of a firm.

10. Role of financial manager

11. Functions of financial management

12. Investment decisions involve capital expenditure; known as capital budgeting decisions. Risk arises due to uncertain returns. So, evaluate proposals in terms of both expected returns and risks. Investment Decision

13. Decide from where, when and how to acquire funds to meet needs. Determine appropriate proportion of debt and equity. Financing decisions

14. Decide whether the firm should distribute all profits or retain them or distribute a portion and retain a balance. Dividend Decision

15. Investment in current assets affects the firm’s liquidity and profitability. Current assets to be managed effectively . Liquidity Decision

16. Basic Objectives Other Objectives Basic Objectives : Objectives

17. Profit maximization implies that a firm either produces maximum output for a given amount of input. U ses minimum input for producing a given output. Profit earning is the main aim of every business activity. Profit Maximization

18. Profit Maximization

19. Profit is a barometer through which the performance of a business unit can be determined. Profit ensures maximum welfare of all the stakeholders. Profit maximization increases the confidence of management for modernization, expansion and diversification. Profit maximization attracts the investors to invest. Profits indicate efficient utilization of funds. Profits ensure survival during adverse business conditions. Points in favor of Profit maximization

20. It may encourage corrupt and unethical practices. It ignores time value of money. It does not take into account the element of risk. It attracts cut throat competition. Huge amount of profit may attract Government intervention. Huge profits may invite problems from workers who may demand increased wages and salaries. Customers may feel exploited. The term profit is vague and it cannot be defined precisely. Points Against Profit maximization

21. The goal of the management should be such all the stakeholders are benefited. A financial action that has a positive NPV creates wealth for shareholders and, therefore, is desirable. The wealth will be maximized if NPV criteria is followed in making financial decisions. NPV is the difference between the present value of its benefits and present value of its costs. If Pv (benefits)> Pv (costs)=Positive Pv (benefits)< Pv (costs)=Negative Wealth Maximization

22. It considers the concept of time value of money. It takes care of the interests of all the stakeholders. It considers the impact of risk factor. It implies long run survival and growth of the firm. It leads to maximizing stockholders’ utility or value maximization of equity shareholders through increase in stock price per share. Points in Favor of Wealth Maximization

23. It may not be socially desirable . Because of divorce between ownership and management, the latter may be more interested in maximizing managerial utility than shareholders wealth. Point Against Wealth Maximization