FINANCIAL

MANAGEMENT

INDEX
ABOUT US
INTRODUCTION
DEFINITIONS OF FINANCIAL MANAGEMENT
DEFINITION OF FINANCIAL PLANNING
OBJECTIVES OF FINANCIAL MANAGEMENT
SCOPE OF FINANCIAL MANAGEMENT
ONLINE FINANCIAL MANAGEMENT TOOLS
MEANING OF FINANCIAL MANAGEMENT
FINANCE FUNCTIONS
ADVERTISEMENTS:

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INTRODUCTION
FINANCIAL MANAGEMENT
Financial management refers to the efficient and effective management of
money (funds) in such a manner as to accomplish the objectives of the
organization. It is the specialized function directly associated with the top
management. The significance of this function is not seen in the 'Line' but
also in the capacity of 'Staff' in overall of a company. It has been defined
differently by different experts in the field.

The term typically applies to an organization or company's financial strategy,

while personal finance or financial life management refers to an individual's
management strategy. It includes how to raise the capital and how to allocate
capital, i.e. capital budgeting. Not only for long term budgeting, but also how

to allocate the short term resources like current liabilities. It also deals with
the dividend policies of the share holders.

DEFINITIONS OF FINANCIAL MANAGEMENT

"Planning is an inextricable dimension of financial management. The

term financial management connotes that funds flows are directed
according to some plan." By James Van Morne

"Financial management is that activity of management which is

concerned with the planning, procuring and controlling of the firm's
financial resources. " By Deepika &Maya Rani

Financial Management is the Operational Activity of a business that is

responsible for obtaining and effectively utilizing the funds necessary for
efficient operation. By Joseph Massie

Business finance deals primarily with rising administering and

disbursing funds by privately owned business units operating in nonfinancial fields of industry. By Kuldeep Roy

Financial Management is an area of financial decision making,

harmonizing individual motives and enterprise goals." -By Weston and
Brigham

Financial management is the area of business management devoted to

a judicious use of capital and a careful selection of sources of capital in
order to enable a business firm to move in the direction of reaching its
goals. by J.F.Bradlery

Financial management is the application of the planning and control

function to the finance function. by K.D. Willson

Financial management may be defined as that area or set of

administrative function in an organization which relate with arrangement
of cash and credit so that organization may have the means to carry out its
objective as satisfactorily as possible." - by Howard & Opton.

Business finance can be broadly defined as the activity concerned with

planning, raising, controlling and administering of funds and in the
business. by H.G Gathman & H.E Dougall

Financial management is a body of business concerned with the

efficient and effective use of either equity capital, borrowed cash or any
other business funds as well as taking the right decision for profit
maximization and value addition of an entity.- Kepher Petra;Kisii
University.

Finance management not only for the business, but also for every
expenses. Like its for the home base expenses or the government
expenses. The government also need to manage the finance for the
develop of the counter and the household also need to manage their
expenses properly - By Vinod Verma

"Financial management refers to proper and efficient use of money" and it

plays a significant role in analyzing to invest in profitable business
enterprise..Return on Investment must be greater than the invested
amount..By Ibrar Alam

DEFINITION OF FINANCIAL PLANNING

Financial Planning is the process of estimating the capital required and
determining its competition. It is the process of framing financial
policies in relation to procurement, investment and administration of
funds of an enterprise.
Objectives of Financial Planning
Financial Planning has got many objectives to look forward to:
a. Determining capital requirements- This will depend upon factors
like cost of current and fixed assets, promotional expenses and
long- range planning. Capital requirements have to be looked with
both aspects: short- term and long- term requirements.
b. Determining capital structure- The capital structure is the
composition of capital, i.e., the relative kind and proportion of
capital required in the business. This includes decisions of debtequity ratio- both short-term and long- term.
c. Framing financial policies with regards to cash control, lending,
borrowings, etc.
d. A finance manager ensures that the scarce financial resources
are maximally utilized in the best possible manner at least cost
in order to get maximum returns on investment.

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures,
programmes and budgets regarding the financial activities of a concern.
This ensures effective and adequate financial and investment policies.
The importance can be outlined as1. Adequate funds have to be ensured.
2. Financial Planning helps in ensuring a reasonable balance between
outflow and inflow of funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily
investing in companies which exercise financial planning.
4. Financial Planning helps in making growth and expansion
programmes which helps in long-run survival of the company.
5. Financial Planning reduces uncertainties with regards to changing
market trends which can be faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can
be a hindrance to growth of the company. This helps in ensuring
stability an d profitability in concern.

OBJECTIVES OF FINANCIAL MANAGEMENT

Profit Maximization occurs when marginal cost is equal to marginal

revenue. This is the main objective of Financial Management.

Wealth maximization means maximization of shareholders' wealth. It is

an advanced goal compared to profit maximization.[4]

Survival of company is an important consideration when the financial

manager makes any financial decisions. One incorrect decision may lead
company to be bankrupt.

Maintaining proper cash flow is a short run objective of financial

management. It is necessary for operations to pay the day-to-day expenses
e.g. raw material, electricity bills, wages, rent etc. A good cash flow
ensures the survival of company.

Minimization on capital cost in financial management can help

operations gain more profit.

SCOPE OF FINANCIAL MANAGEMENT

Estimating the Requirement of Funds: Businesses make forecast on

funds needed in both short run and long run, hence, they can improve the
efficiency of funding. The estimation is based on the budget e.g. sales
budget, production budget.

Determining the Capital Structure: Capital structure is how a firm

finances its overall operations and growth by using different sources of
funds.[5] Once the requirement of funds has estimated, the financial
manager should decide the mix of debt and equity and also types of debt.

Investment Fund: A good investment plan can bring businesses huge

returns.

Financial Management for Start Up

For new enterprises, it is important to make a good estimation on costs, sales.

[6]

Consideration on appropriate length sources of finances can help businesses

avoid the cash flow problems even the failure of setting up. There are fixed
and current sides of assets balance sheet. Fixed assets refers to assets that
cannot be converted into cash easily, like plant, property, equipment etc. [7] A
current asset is an item on an entity's balance sheet that is either cash, a cash
equivalent, or which can be converted into cash within one year.[8] It is not
easy for start ups to forecast the current asset, because there are changes in
receivables and payables.

ONLINE FINANCIAL MANAGEMENT TOOLS

Salesforce Invoice and Payment Platform: It builds strong,

collaborative relationships with suppliers, and continuously looking for
new solutions that provides five better ways to partner with users. It also
has partnered with Taulia, a market-leading provider of invoice, payment,
and financial management solutions to provide you with our new Invoice
and Payment Portal. The Invoice and Payment Portal will provide users
with 24/7 visibility into invoice and payment status, and the ability to
accept early payment offers entirely free of charge.

BodeTree: It provides real-time access to all of users' financial accounts

in one place. Monitor cash flow, uncover trends, and plan for the future in
under five minutes.

Bench: It is an online bookkeeping service that provides users' business

with its own personal professional bookkeeper at bank level security of
users' financial information, and tax time support to help lower your
business-related stress levels

MEANING OF FINANCIAL MANAGEMENT

Financial Management means planning, organizing, directing and
controlling the financial activities such as procurement and utilization of
funds of the enterprise. It means applying general management principles
to financial resources of the enterprise.

Scope/Elements
1. Investment decisions includes investment in fixed assets (called as
capital budgeting). Investment in current assets are also a part of
investment decisions called as working capital decisions.
2. Financial decisions - They relate to the raising of finance from
various resources which will depend upon decision on type of source,
period of financing, cost of financing and the returns thereby.
3. Dividend decision - The finance manager has to take decision with
regards to the net profit distribution. Net profits are generally divided
into two:
a. Dividend for shareholders- Dividend and the rate of it has to be
decided.
b. Retained profits- Amount of retained profits has to be finalized
which will depend upon expansion and diversification plans of
the enterprise.

OBJECTIVES OF FINANCIAL MANAGEMENT

The financial management is generally concerned with procurement,
allocation and control of financial resources of a concern. The objectives
can be1. To ensure regular and adequate supply of funds to the concern.
2. To ensure adequate returns to the shareholders which will depend
upon the earning capacity, market price of the share, expectations of
the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured,
they should be utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe
ventures so that adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair
composition of capital so that a balance is maintained between debt
and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to
make estimation with regards to capital requirements of the
company. This will depend upon expected costs and profits and
future programmes and policies of a concern. Estimations have to be

made in an adequate manner which increases earning capacity of

enterprise.
2. Determination of capital composition: Once the estimation have
been made, the capital structure have to be decided. This involves
short- term and long- term debt equity analysis. This will depend
upon the proportion of equity capital a company is possessing and
additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a
company has many choices likea. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each
source and period of financing.
4. Investment of funds: The finance manager has to decide to allocate
funds into profitable ventures so that there is safety on investment
and regular returns is possible.
5. Disposal of surplus: The net profits decision have to be made by the
finance manager. This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of
dividends and other benefits like bonus.

b. Retained profits - The volume has to be decided which will

depend upon expansional, innovational, diversification plans of
the company.
6. Management of cash: Finance manager has to make decisions with
regards to cash management. Cash is required for many purposes like
payment of wages and salaries, payment of electricity and water
bills, payment to creditors, meeting current liabilities, maintenance of
enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan,
procure and utilize the funds but he also has to exercise control over
finances. This can be done through many techniques like ratio
analysis, financial forecasting, cost and profit control, etc.

FINANCE FUNCTIONS
Investment Decision
One of the most important finance functions is to intelligently allocate
capital to long term assets. This activity is also known as capital
budgeting. It is important to allocate capital in those long term assets so
as to get maximum yield in future. Following are the two aspects of
investment decision
a. Evaluation of new investment in terms of profitability
b. Comparison of cut off rate against new investment and prevailing
investment.
Since the future is uncertain therefore there are difficulties in calculation
of expected return. Along with uncertainty comes the risk factor which
has to be taken into consideration. This risk factor plays a very
significant role in calculating the expected return of the prospective
investment. Therefore while considering investment proposal it is
important to take into consideration both expected return and the risk
involved.
Investment decision not only involves allocating capital to long term
assets but also involves decisions of using funds which are obtained by
selling those assets which become less profitable and less productive. It
wise decisions to decompose depreciated assets which are not adding

value and utilize those funds in securing other beneficial assets. An

opportunity cost of capital needs to be calculating while dissolving such
assets. The correct cut off rate is calculated by using this opportunity
cost of the required rate of return (RRR)
Financial Decision
Financial decision is yet another important function which a financial
manger must perform. It is important to make wise decisions about
when, where and how should a business acquire funds. Funds can be
acquired through many ways and channels. Broadly speaking a correct
ratio of an equity and debt has to be maintained. This mix of equity
capital and debt is known as a firms capital structure.
A firm tends to benefit most when the market value of a companys
share maximizes this not only is a sign of growth for the firm but also
maximizes shareholders wealth. On the other hand the use of debt affects
the risk and return of a shareholder. It is more risky though it may
increase the return on equity funds.
A sound financial structure is said to be one which aims at maximizing
shareholders return with minimum risk. In such a scenario the market
value of the firm will maximize and hence an optimum capital structure
would be achieved. Other than equity and debt there are several other
tools which are used in deciding a firm capital structure.

Dividend Decision
Earning profit or a positive return is a common aim of all the businesses.
But the key function a financial manger performs in case of profitability
is to decide whether to distribute all the profits to the shareholder or
retain all the profits or distribute part of the profits to the shareholder
and retain the other half in the business.
Its the financial managers responsibility to decide a optimum dividend
policy which maximizes the market value of the firm. Hence an
optimum dividend payout ratio is calculated. It is a common practice to
pay regular dividends in case of profitability Another way is to issue
bonus shares to existing shareholders.
Liquidity Decision
It is very important to maintain a liquidity position of a firm to avoid
insolvency. Firms profitability, liquidity and risk all are associated with
the investment in current assets. In order to maintain a tradeoff between
profitability and liquidity it is important to invest sufficient funds in
current assets. But since current assets do not earn anything for business
therefore a proper calculation must be done before investing in current
assets.
Current assets should properly be valued and disposed of from time to
time once they become non profitable. Currents assets must be used in
times of liquidity problems and times of insolvency.

ADVERTISEMENTS:

Financial Management: Definition, Aims, Scope and Functions!

Financial Management is a related aspect of finance function. In the
present business administration financial management is an important
branch. Nobody will think over about-business activity without finance
implication.
Financial management includes adoption of general management
principles for financial implementation. The following may be said as
the related aspects of financial management raising of funds, using of
these funds profitably, planning of future activities, controlling of
present implementations and future developments with the help of
financial accounting, cost accounting, budgeting and statistics.
It acts as guidance where more opportunities for investment is available.
Financial management is useful as a tool for allotment of resources to
various projects depending on their importance and repayment capacity.
Definition:
James Van Morne defines Financial Management as follows:
Planning is an inextricable dimension of financial management. The
term financial management connotes that funds flows are directed

according to some plan. Financial managements can be said a good

guide for allotment of future resources of an organization.
Preparing and implementation of some plans can be said as financial
management. In other words, collection of funds and their effective
utilisation for efficient running of and organization is called financial
management. Financial management has influence on all activities of an
organisation. Hence it can be said as an important one.
Its main responsibility is to complete the finance function successfully. It
also has relations with other business functions. All business decisions
also have financial implications. According to Raymond Chambers,
Management of finance function is the financial management.
However, financial management shall not be considered as the profit
extracting device. If finance is properly utilised through plans, they lead
to profits. Besides, without profits there wont be finance generation. All
these are facts. But this is not complete.
The implication of financial management is not only attaining efficiency
and getting profits but also maximising the value of the firm. It
facilitates to protect the interests of various classes of people related to
the firm.
Hence, managing a firm for profit maximization is not the meaning for
financial management. Financial management is applicable to all kinds
of organizations. According to Raymond Chambers, the word financial

management is applicable to all kinds of firms irrespective of their

objectives.
Aims of Financial Management:
The aims of financial management should be useful to the firms
proprietors, managers, employees and consumers. For this purpose the
only way is maximisation of firms value.
The following aspects have place in maximising firms value:
1. Rice in profits:
If the firm wants to maximise its value, it should increase its profits and
revenues. For this purpose increase of sales volume or other activities
can be taken up. It is the general feature of any firm to increase profits
by proper utilisation of all opportunities and plans.
Theoretically, firm gets maximum profits if it is under equilibrium. At
that stage the average cost is minimal and the marginal cost and the
marginal revenues are equal. Here, we cant say the sales because there
must be suitable market for the increased sales. Further, the above costs
must also be controlled.
2. Reduction in cost:
Capital and equity funds are utilised for production. So all types of steps
should be taken to reduce firms cost of capital.

3. Sources of funds:
It should be decided by keeping in view the value of the firm to collect
funds through issue of shares or debentures.
4. Reduce risks:
There wont be profits without risk. But for this reason if more risk is
taken, it may become danger to the existence of the firm. Hence risk
should be reduced to minimum level.
5. Long run value:
It should be the feature of financial management to increase the long-run
value of the firm. To earn more profits in short time, some firms may do
the activities like releasing of low quality goods, neglecting the interests
of consumers and employees.
These trials may give good results in the short run. But for increasing the
value of the firm in the long run, avoiding; such activities are more
essential.
Scope and functions of financial management:
The scope of financial management includes three groups. First
relating to finance and cash, second rising of fund and their
administration, third along with the activities of rising funds, these are
part and parcel of total management, Isra Salomon felt that in view of
funds utilisation third group has wider scope.

It can be said that all activities done by a finance officer are under the
purview of financial management. But the activities of these officers
change from firm to firm, it become difficult to say the scope of finance.
Financial management plays two main roles, one participating in funds
utilisation and controlling productivity, two Identifying the
requirements of funds and selecting the sources for those funds.
Liquidity, profitability and management are the functions of financial
management. Let us know very briefly about them.

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