Financial Management : Introduction and Overview

This presentation provides a comprehensive introduction to Financial Management, covering the meaning, objectives, importance, and scope of finance in business organizations. Key concepts such as profit maximization vs. wealth maximization, functions of financial managers, and the relevance of agency theory are explained in detail. Designed for PG Commerce students, this resource will help learners understand the fundamental principles of financial decision-making and their role in business growth and sustainability.

1. INTRODUCTION TO FINANCIAL MANAGEMENT:- Mr. MUSTAQ MULLA UGC-NET,K-SET, (Ph.D.) Teaching Assistant, Department of studies and Research in Commerce, Sangolli Rayanna First Grade Constituent College, Rani Channamma University, Belagavi

2. INTRODUCTION:- Business concern needs finance to meet their requirements in the economic world. Any kind of business activity depends on the finance. Hence, it is called as lifeblood of business organization. Whether the business concerns are big or small, they need finance to fulfill their business activities. MEANING OF FINANCE:- Finance may be defined as the art and science of managing money. It includes financial service and financial instruments. Finance also is referred as the provision of money at the time when it is needed. Finance function is the procurement of funds and their effective utilization in business concerns.

3. According to the Wheeler, “Business finance is that business activity which concerns with the acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise”. According to the 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”. Financial management is an integral part of overall management. It is concerned with the duties of the financial managers in the business firm. The term financial management has been defined by Solomon, “It is concerned with the efficient use of an important economic resource namely, capital funds”. BUSINESS FINANCE:- Financial Management:-

4. Howard and Upton : Financial management “as an application of general managerial principles to the area of financial decision-making. S.C. Kuchal defined “Financial Management deals with procurement of funds and their effective utilization in the business”. Joseph and Massie : Financial management “is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations. In simple words, Financial Management as practiced by business firms can be called as Corporation Finance or Business Finance.

5. The objectives of Financial Management can be broadly classified into two categories, viz , 1) Basic or important Objectives:- a) Profit Maximization b) Wealth Maximization 2) Other or General Objectives:- To protect liquidity & solvency of the firm To utilize the available financial resources effectively To provide social welfare To build-up adequate reserves for financing, growth & expansion To ensure fair rate of return on investment of equity shareholders Objectives of Financial Management:-

6. A business firm is a profit seeking organization i.e every business of manufacturing organization has a profit motive. Profit is the measuring techniques to understand the business efficiency of the concern. Profit maximization is also the traditional and narrow approach, which aims at, maximizes the profit of the concern. Profit also serves as a protection against risks which can not be ensured. Advantages / Arguments in favor of Profit maximization:- 1. It is rational as well as natural objective. 2. It helps for service. 3. It helps for proper utilization of resources. 4. It helps for growth and development of organisation . 5. It helps for contributing for social welfare. 6. It helps for taking financial decisions a) Profit Maximization:-

7. 1. It is vague (not clear). 2. It ignores time value of money 3. It ignores risk & uncertainty. 4.It neglects social responsibilities. b) Wealth Maximisation :- Wealth maximization is one of the modern approaches, which involves latest innovations and improvements in the field of the business concern. The term wealth means shareholder wealth or the wealth of the persons those who are involved in the business concern. Wealth maximization is also known as value maximization or net present worth maximization. This objective is an universally accepted concept in the field of business. Dis -advantages / criticism of Profit Maximisation objectives:-

8. Advantages / Arguments in favor of Wealth maximization:- 1) It is clear or exactness 2) Time value of Money 3) Promotes the economic welfare of the shareholders 4) Helps to achieve the other objectives 5) Payment of regular dividends Dis -advantages / criticism of Wealth Maximisation objective:- 1) Unequal distribution of wealth 2) Firms wealth is not considered 3) Benefit to the society is not considered 4) Government restrictions 5) Reduce the profitability 6) It is an prescriptive idea

9. IMPORTANCE OF FINANCIAL MANAGEMENT:- Financial Planning Acquisition of Funds Proper Use of Funds Financial Decision Improve Profitability Increase the Value of the Firm Promoting Savings

10. Functions of Financial Manager:- Forecasting Financial Requirements Acquiring Necessary Capital Investment Decision Cash Management Interrelation with Other Department

11. SCOPE OF FINANCIAL MANAGEMENT :- Financial Management and Economics Financial Management and Accounting Financial Management or Mathematics Financial Management and Production Management Financial Management and Marketing Financial Management and Human Resource

12. Agency Theory :- The agency problem is a  conflict of interest  inherent in any relationship where one party is expected to act in another's best interests. In  corporate finance , the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or  principals , is supposed to make decisions that will maximize  shareholder  wealth even though it is in the manager’s best interest to maximize his own wealth.

13. How to avoid agency problems:- While it is not possible to eliminate the agency problem completely, the manager can be motivated to act in the shareholders' best interests through incentives such as  Performance-based compensation , Direct influence by shareholders, Threat of firing and Threat of  takeovers .