CHAPTER 1 FINANCIAL

MANAGEMENT
the owners, the frequency of such payments and the
amounts to be retained by the firm.
The dividend distribution policies and retention of
relating to the firm’s activities in the books of accounts
and summarizing the same for presentation in the
financial statements.
FIRST SEMESTER profits will have ultimate effect on the firm’s wealth.
The finance manager will make use of the accounting
NATURE, PURPOSE AND SCOPE OF FINANCIAL MANAGEMENT SUMMARY information in the analysis and review of the firm’s
1. Procurement of short term as well as long term funds To summarize, the basic objective of the investment , business position in decision making.
from financial institutions. financing and dividend decisions is to maximize the •Financial management is the key function and many
NATURE OF FINANCIAL MANAGEMENT 2. Mobilization of funds through financial instruments firm’s wealth. If the firm enjoys the stability and firms prefer to centralize the function to keep constant
Financial management also referred to such as equity shares, debentures, bonds, notes and so growth, its share prices in the market will improve control on the finances of the firm.
managerial finance, corporate finance, and business forth. and will lead to capital appreciation of shareholders’
finance is a decision making process concerned with 3. Compliance with legal and regulatory provisions investment and ultimately maximize the
planning, acquiring, and utilizing funds in a manner relating to funds procurement, use and distribution as shareholders’ wealth. Financial Management and Economics
that achieves the firm’s desired goals. well as coordination of the finance function with the •Microeconomics deals with the economic decisions of
accounting function. individuals and firms. The concept of microeconomics
•It is also described as the process for and the analysis SIGNIFICANCE OF FINANCIAL MANAGEMENT helps the finance manager in decisions like pricing,
of making financial decisions in the business context. *In view of modern approach, the Finance Manager is taxation, determination of capacity and operating levels,
expected to analyze the business firm and determine the Broad Applicability-The principles of finance are break-even analysis, volume-cost profit analysis, capital
•It is a part of a larger discipline called FINANCE following: applicable wherever there is cash flow. The concept structure decisions, dividend distribution decisions,
which is a body of facts, principles, and theories a. The total funds requirements of the firm. of cash flow is one of the central elements of profitable product-mix decisions, fixation of levels of
relating to raising and using money by individuals, b. The assets or resources to be acquired and financial analysis, planning, control, and resource inventory, setting the optimum cash balance, pricing of
businesses, and governments. c. The best pattern of financing the assets. allocate decisions. Cash flow is important because warrants and options, interest rate structure, present
the financial health of the firm depends on its ability value of cash flows, and so forth.
to generate sufficient amounts of cash to pay its
THE GOAL OF FINANCIAL MANAGEMENT employees, suppliers, creditors, and owners. •Macroeconomics looks at the economy as a whole in
•GENERAL GOAL- The general goal of financial
TYPES OF FINANCIAL DECISIONS which a particular business concern is operating.
management is to make money and add value for the All these decisions aim to maximize the Reduction of Chances of Failure-A firm having Macroeconomics provides insight into policies by which
owners. shareholders’ wealth through maximization of the firm’s latest technology, sophisticated machinery, high economic activity is controlled. The success of the
wealth. caliber marketing and technical experts, and so forth business firm is influenced by the economy and is
•SPECIFIC GOAL-The financial manager in a may still fail unless its finances are managed on dependent upon the money and capital markets, since
business enterprise must make a decision for the 1. Investment Decisions sound principles of financial management. The the investible funds are to be procured from the financial
owners of the firm. He must act in the owners’ or strength of business lies in its financial discipline. markets
shareholders’ best interest by making decisions that •The investment decisions are those which determine Therefore, finance function is treated as primordial
increase the value of the firm or the value of the stock. how scarce or limited resources in terms of funds of the which enables the other functions like production,
business firms are committed to projects. marketing, purchase, and personnel to be effective in
 In conclusion, the main goal of financial •Generally, the firm should elect only those capital the achievement of organizational goal and
management is:“The goal of financial investment proposals whose net present value is positive objectives.
management is to maximize the current value and the rate of return exceeding the marginal cost of
per share of the existing stock or ownership in a capital. Measurement of Return on Investment-Anybody
business firm.” who invests his money will expect to earn a
*Because the goal of management is to maximize the *It should also consider the profitability of each reasonable return on his investment. The owners of
value of the share(s), there is a need to learn how to individual proposal that will contribute overall business try to maximize their wealth. Financial
identify investments, arrangements and distribute profitability of the firm and lead to the creation of management studies the risk-return perception of the
satisfactory amount of dividends or share in the profits wealth owners and the time value of money. It considers the
that favorably impact the value of share(s). amount of cash flows expected to be generated for
the benefit of owners, the timing of these cash flows.
The greater the time and risk associated with the
SCOPE OF FINANCIAL MANAGEMENT 2.Financing Decisions expected cash flow, the greater is the rate of return
•Traditionally, financial management is primarily required by the owners.
concerned with acquisition, financing and management •Financing decisions assert the mix of debt and equity
of assets of business concern in order to maximize the chosen to finance investments should maximize the
wealth of the firm for its owners. The basic value of investments made. RELATIONSHIP BETWEEN FINANCIAL
responsibility of the Finance Manager is to acquire The finance decisions should consider the cost of MANAGEMENT ACCOUNTING AND
finance available in different forms and the risks
funds needed by the firm and investing those funds in ECONOMICS
profitable ventures that will maximize the firms wealth, attached to it.
as well as, generating returns to the business concern. Financial Management and Accounting
•In many organizations accounting and finance
3.Dividend Decisions functions intertwined and the finance function is
Financial Management looks into the following
functions that a financial manager of a business firm •The dividend decision is concerned with the often considered as a part of the functions of the
will perform: determination of quantum of profits to be distributed to accountant. Accounting function discharges the
function of systematic recording of transactions