Overview

Financial Management
What is financial management?
Financial management deals with procurement of
funds and their effective utilization in the business.
S.C. Kushan

Financial management "is an area of Financial

decision making, harmonizing individual motives
and enterprise goals".
Weston and Bringham

Financial management"is the operational activity of

a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient Financial Management
operations".
Joseph and Massie
Is critical to any company, whether small or big.

Is like the lifeline of the business;a vital activity

that must be performed in any organization

Entails the process of planning, organizing,

monitoring and also controlling the financial
resources of an organization...

An integral part of the company because, A regular practice in business environment

without proper use of funds, the business can Involves managing a company’s financial
go down. resources to ensure there is little or no wastage
Controls every single thing regarding the
Is like the engine room of the company and can
company's financial activities which includes
effect every other department if not handled
the procurement of funds use of funds,
properly.
payments, accounting, risk assessment and
In order to eliminate any form of barrier that other things that are related to finances.
may hinder the growth of the business, firms
must ensure that the right financial
management mechanism is put in place. Objectives of Financial Management
1.Profit Maximization 2. Proper Mobilization of Finance
The gain can be in the short or long-term. The collection of funds to run a business is
One of the reasons a company employs a also an integral part of financial management
financial manager is to maximize profit while that the manager needs to handle
managing the finance of the company. appropriately

But the main focus is that the individual or Once the manager concludes the estimation of
department handling the financial issues of the the amount needed for a business process the
company must ensure that the company in required, Amount can then be requested from
question is making sufficient profit. any legal sources such as debenture, shares or
even request for a bank loan.
There should be a proper balance between
the money the firm has and the amount
borrowed.
 3. The Company's Survival 5. Lower Cost of Capital

The survival of the company is essential Financial management also try their very best to
That is one of the reasons the management reduce the cost o capital, which is something that is
considers hiring financial managers in the first vital to the business.
place They ensure money borrowed attracts little interest
The manager has to make adequate financial rates so the company can maximize profit
decisions to ensure the company is successful

4. Proper Coordination
There must be a proper understanding
and cooperation among the various
departments.
The finance department must understand
and agree with other departments within
the company for a business to function
smoothly

Financial Management Functions

1. Financial planning and forecasting 3. Fund investment

It is financial manager's responsibility to plan The financial manager has to ensure that funds made
and estimate the business's financial needs. available to the business are used adequately to grow
the business.
He needs to provide details regarding the
The lost of acquiring the said fund and value of
amount of money that would he required to
the returns need tour compared and balanced
purchase different assets for the company.
The management through the financial The financial manager also needs to look into the
manager needs to know what thy need send channels of the business that is yielding higher returns
on working capital and fixed assets for the and improve them.
business too.
4. Maintain proper liquidity
Another vital duty of the financial manager is to
make future plans for funds that the company Cash is the best source for maintaining liquidity.
would need, and the manner in which the funds
will be realized and used, is also of utmost The business requires it to buy raw material, salaries
importance to the financial manager. pay and tackle other financial needs for the company.

However, the financial manager has to determined if

2. Determination of capital composition there is demand for liquid assets.

Once the planning and forecasting have been He also has to arrange these assets in a manner
made, the capital structure has to be decided. that the business won't experience scarcity of
funds.
The mix of debt and equity used to finance the
company's future profitable investment 5. Disposal of surplus
opportunities is referred to as capital structure.
Selling surplus as sets and investing in more and
productive ways will increase profitability and therefore
increases the ROSE return and common equity

6. Financial controls
Th is can be construed as the analysis as a company's
actual results, approved from different perspectives
different times, and compared to its short, medium and
long-term objectives and business plans.
 Types of financial decision
There are four main financial decisions in order to
accomplish goal of the firm to maximize
shareholder's wealth

1. Capital budgeting decision

This is also known as "long term investment" - or
(application of funds)
The process as planning and managing a firm's long- Proportion of profits distributed as dividends is called
term investment is called capital budgeting. dividend ratio pay-out and the proportion of profits
retained in the business is retention ratio
I In capital budgeting, the financial manager tries to
identify profitable investment opportunities example: Finance manager here is concerned with determining
assets for which value up the cash flow generated by the optimal dividend pay-out ratio which maximizes
asset exceed the lost of the asset share holder's health

Evaluating the size, timing, and risk of films cash flows However, the actual decision is affected by availability
(both cause inflows and cashflows) is the essence of of profitable investment opportunities, firm's financial
capital budgeting needs, shareholder's exception, contrants, liquidity
position of the firm and other factors.
2. Capital structure decision
4. Working capital management decision
A firm's capital structure or financing decision ' is
concerned with obtaining funds to meet firm's long
term investment requirements Working capital management is concerned with
manage rent of firm's short term or current assets, such
It refers to the specific mixture of long-term debt as inventory, cash, receivables and short-term or
and equity which the firm uses to finance its asset. current liabilities, such as creditors, bills payable.
The finance manager has to decide exactly how
much fund to raise, from which sources to raise Assets and liabilities which mature within the operating
and when to raise. cycle of business or within one year ave termed as
current assets and current liabilities, respectively.
Different feasible combinations of raising required
funds must be carefully evaluated and an This involves the following issues:
optimal combination of different sources of
ounces should be selected. What are the possible sources of raising short term
funds?
The optimal capital structure is one which maximizes
overall cost of capital and maximizes firm's value In what proportion should the funds be raised from
different short term sources?
Capital satructure decision gives rise to
financial risk of a firm. What should be the optimum levels of cash and
inventory?
3. Dividend decision
What should be the firm's credit policy while selling to
costumers.
Dividend decision involves two issues whether to
distribute dividends and how much of profits to
distribute as dividends.
A finance manager has to decide what
percentage of after-tax-profit is to be retained
in the business to meet future investment
requirements and what proportion has to be
distributed as dividends among shareholders
Should the firm retain all the profits or
distribute all profits or retain a portion and
distribute the balance?