OBJECTIVES AND SCOPE OF FINANCIAL MANAGEMENT NOTES

OBJECTIVES OF FINANCIAL MANAGEMENT

1. DR KUMAR J ASSOCIATE PROFESSOR DEPARTMENT OF COMMERCE SRMIST RAMAPURAM CAMPUS FINANCIAL MANAGEMENT   OBJECTIVES OF FINANCIAL MANAGEMENT

2. Meaning of Finance According to Khan and Jain “Finance is the art and science managing money. It includes financial services and financial instruments”. The concept of finance includes capital , funds, money and amount. But each word having unique function Finance may be defined as the provision of adequate amount of money when it is required. ‘ ` Guthumann and Dougall “Business finance may be defined as the activity concerned with planning, raising, controlling and administering of the funds used in the business”.

3. Definitions of financial management According to Howard & Upton, “Financial management is the application of the planning and control functions to the finance function.” According to Solomon, “Financial management is concerned with the efficient use of an important economic resource, namely, capital funds.” According to J. L. Massie , “Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.

4. According to Weston & Brigham , “Financial management is an area of financial decision making harmonizing individual motives & enterprise goals.” According to J. F. Bradley , “Financial management is the area of business management devoted to the judicious use of capital & careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals.” “Financial Management is concerned with the managerial decisions that results in the acquisition and financing of short and long term credits for the organizations.”

5. Objectives of Financial Management There are two main objectives of Financial management. They are 1 .Profit Maximisation and 2. Wealth Maximisation I.. Profit Maximisation : Profit maximisation refers to the maximisation of income or earnings of the firm. The argument in favour of profit maximisation as the objectives of financial management are Favourable : 1. Natural goal : Profit is the aim of any business. Naturally, the goal of financial management should be profit maximisation .

6. 2 . Measure efficiency: Profit is a measure of efficiency. Higher profits imply greater efficiency. Hence the objective of profit maximisation is quite rational. 3. Internal generation of funds: Profit lead to internal generation of funds. It helps to finance the growth of the business. 4 . Protection Against risks : Profits provide protection against risks. When a company is faced with unfavourable conditions (such as fall in prices, increase in costs and severe competition) , accumulated profits serve as a cushion to absorb the stocks

7. 5. Fulfilment of social obligation: Profits are essential for fulfilling social obligation of the business. The goal of profit maximisation helps to maximise social welfare. Unfavourable The arguments against the objectives of profit maximisation are 1. Vague: The term profit is vague. It has different meanings. For instance, profit may refer to long term profits or short term profits. It may refer to profit before tax or profit after tax or even operating profit

8. 2. Neglects Time Value of Money: The objective of profit maximisation neglects time value of money. Profits or today are more valuable that profits to be earned after taxes five years. But profit maximisation objective treats all profits as equal, irrespective of the timing. 3. Ignores Risk Factor : Some projects are more risky than the others through the expected earnings may be equal but, the risk factor is not considered by the profit maximisation gaol .

9. 4. Trait of Immorality: Profit maximisation implies exploitation of consumers, workers and the society , Hence it is regarded as immoral. 5. Invalid: Profit maximisation may be a valid objective under conditions of perfect competition. As the markets are not perfect. It can not be a valid objective.

10. 6. Inadequate: In company formal of organisation , there is separation of ownership and control. Shareholders are the owners, but control is in the hands of professional managers. Creditors m financial institutions, workers , consumers and the society are concerned with the company’s operations. The management has to reconcile the conflicting interest of the these stakeholders. Profit maximisation goal is inadequate for the purpose

11. II. Wealth Maximisation : Wealth Maximisation refers to the maximation of the wealth of the shareholders. It involves maximisation of the present value of an investment. Net present value (NPV) of an investment is the difference between present value of its inflows (benefits) and outflows (costs

12. Favourable : The advantage of wealth maximisation objective are: Clarity: It takes into account the time value of money, by discounting the future cash inflows. Time value of Money: I takes into account the time value of money, by discounting the future cash inflows.

13. 3. Recognise Risk Factors : The risk factor is also recognised . For proposals with a greater degree of risk, a high discount rate (cost of capital) is used and vice versa 4. Universal Acceptance: The concept of wealth maximisation is universally accepted. It takes care of the interest of shareholders, financial institutions, employees and the society.

14. Approaches or scope of Financial management Approaches of financial management can be discussed under two major heads . 1.Traditional Approach 2. Modern Approach 1 .Traditional Approach: The traditional approach was popular during the early stages of evolution of financial management. It was introduced by Thomas Green Finance. Under the traditional approach , the scope of financial management was limited to the procurement of funds on the most suitable terms. The utilization of funds was not regarded as a function of financial management.

15. It broadly dcovered the following three aspects 1.Arrangement of funds from financial institutions 2. Arrangement of funds through financial instrument viz share ,bonds etc. 3.Relationship between a corporation and its sources of funds Limitations of Traditional Approach 1.One-sided approach- It is more considerate towards the fund procurement and the issues related to their administration, however, it pays no attention to the effective utilization of funds

16. 2.Gives importance to the Financial Problems of Corporations- It only focuses on the financial problems of corporate enterprises, so it narrows the opportunity of the finance function. 3.Attention to Irregular Events- It provides funds to irregular events like consolidation, incorporation, reorganization, and mergers, etc. and does not give attention to everyday business operations.

17. 4 .More Emphasis on Long Term Funds- It deals with the issues of longterm financing . 5. Fails to deal with financing mix : The traditional approach fail to deal with the financing mix. It gives no consideration to the relationship between financing mix and cost of capital

18. 2.Modern Approach Since the mid 1950,s business conditions have changed , factors like rapid industrialization ,technological improvements an severe competition arrangement of funds have made business more complex. They also necessitated the efficient utilization of financial resources. In response to the changes, the approache to financial management has also changed. The main contents of Mew approach 1.Total volume of funds 2.Specfic assets an enterprise acquire 3.Funds requires be financed

19. Features of Modern Approach The following are the main features of a modern approach. • More Emphasis on Financial Decisions- This approach is more analytic and less descriptive as the right decisions for a business can be taken only on the base of accounting and statistical data. • Continuous Function- The modern approach is a constant activity where the financial manager makes different financing decisions unlike the traditional method,

20. Broader View- It gives importance not only to optimum use of finance also abut the fund’s procurement. Similarly, it also incorporates features relating to the cost of capital, capital budgeting, and financial planning, etc. • The measure of Performance- Performance of a firm is also affected by the financial decision taken by the Management or finance manager. Therefore, to maximize revenue, the modern approach keeps a balance between liquidity and profitability