Financial Management

The major goal of any business concern is to make profit for its owner by selling their goods and services. To achieve this objective finance plays an important role. Finance is required for in a business firm for following activities:

      • To establish a business .

      •  To run the business.

      • To expand (Enlarge) the business and many more.

In every business,three  main questions arise regarding finance are:

1. How much finance will be required for different business  activities?

2. How much of it will be obtained from different sources?

3. How will the profit earned  from different  business  activities be distributed?

Answers to all these questions is inherent in financial management . In layman's language,under financial management first of all need of finance is estimated and then different sources of obtaining finance and finally arrangements are made for the distribution of profit.

Role of Financial Management:

• Determination of Fixed Assets: Under this the total Investment on assets are determined i.e. how much should be invested in fixed asset. This done through Capital Budgeting .  For example, if it  has been decided in the capital budgeting to invest rupees 20 crore in fixed asset (land or machines) ,then there will be an increase of rupees 500 crore in fixed assets(land or machines).

• Determination of current Assets : Under this the total Investment in current assets are determined. For example,if the investment in current assets is rupees 10 crore, it will then be determined how much should be invested in cash ,stock etc.

• Determination of amount of long-term and short-term Finance: All the financial needs of business are fulfilled through these two sources. Under financial management,a proportion of both the finance sources is determined. Long-term sources provide capital for business for a long time . The cost of long-term Finance is higher than the cost of short-term Finance. Therefore,if there is more liquidity (liquidity means  capacity to make quick payment in respect of daily payment) is required in the business,more cost shall have to be borne,and vice-versa. Under financial management,the proportion of both these sources is determined on the basis of liquidity and cost analysis.

• Determination of Proportion of various sources of long-term Finance:  Long-term financial source include primarily Equity share capital, preference shares capital , debentures etc. Under financial management ,the proportion of various long-term financial sources is determined, after comparing all the merits and demerits of the various sources and then a balanced decision is made.

• Determination of various Items of profit and loss Account:  Various items included in the profit and loss get influenced or affected by different financial decisions. Fir example- interest on debt , depreciation is related to the amount of long-term assets.

Objectives of Financial Management:

Objectives of Financial Management are directly related to the fact that what decision should be taken by financial manager for the wealth maximisation or maximum extent of the business. The main three decision are  investment decision, financial decisions and dividend decision. 

Wealth maximisation means to increase the capital invested in the business by the shareholders.  If the market price of the shares increases,it can be said that capital invested by the shareholders has been appreciating and vice-versa.

for example , a  person let be call him Joe buys 200 shares of tmt Ltd. @₹ 100 per share. It means that his wealth in the company is worth ₹ 20,000 (200×100). After 2 months the price of the shares rises to ₹120 per share. It means the Joe's wealth in the company has rises to ₹24,000 ,which means his shares values has been increased . Similarly if the price of the shares falls to ₹80 per share then Joe's worth in the country falls to ₹ 16,000 .

 Hence it is clear that wealth maximisation is possible only when market price of the shares rises.

so, what steps should be taken by financial manager to raise the market price of his company's shares?

Answer to this question is that he should take all the three main finance decisions i.e.

 • Optimum Investment Decision: It means he should take such decision regarding as are relatively more profitable.

• Optimum Financing Decision: It means that he should make such a mix of debt capital and share capital as has the minimum cost of capital.

• Optimum Dividend Decision: It means that total profit of the company should be distributed among the share holder so that they feel satisfied and company can also retain some reserve to meet its future requirements.

Therefore,it can be said that wealth maximisation is the main objective of the financial management. This objective also serves the interest of the company in the best manner.

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