Definition of Financial Management
• Definition by Solomon: “It is concerned with the efficient use of an important economic resource namely, capital funds”.
• Definition by S.C. Kuchal: “Financial Management deals with procurement of funds and their effective utilization in the business”.
• Howard and Upton: Financial management “as an application of general managerial principles to the area of financial decision-making.
Financial Decisions in Firm
• Basic questions that needs to be addressed before starting a new business(Page 3, TB)
Financial Management-Core areas of Decision Making 6 TB
• Meaning: It is a term which denotes the maximum profits to be earned by an organisation in a given period of a time.
It also implies that the investment, financing and dividend decisions of the enterprise should be oriented to profit maximisation.
Profit Maximisation-Merits and demerits
Merits:
✓Best Criterion for decision making
✓Efficient allocation of resources ✓Optimum Utilisation of resources Demerits:
✓Ignores time value of money
✓A vague concept
✓It ignores risk factor
✓It may tempt to make such decisions which may prove disastrous in long term
✓Emphasis on short term projects
✓Unrealistic, difficult, inappropriate and Immoral
•Objective: To Maximise the market value of firm’s shares
• Considers the timing and risk of expected benefits
Wealth Maximisation-Merits and demerits
Merits:
✓ It takes care of:
Shareholder’s Interests, Lender or Creditor’s Interests, Employee’s Interests etc
✓ It also ensures fair return to the shareholders, building up reserves for growth and expansion and ensuring financial discipline in organisation.
✓ Focus on long term
✓ Takes into account time value of money
✓ It considers risk
✓ It maintains market value of shares
✓ It recognizes the value of regular dividend payment
Treasurer and Controller
Treasurer
• Obtaining Finance
• Banking Relationship
• Cash Management
• Credit Administration
• Capital Budgeting Controller
• Financial Accounting
• Internal Auditing
• Taxation
• Cost & Management Accounting
• Data Processing
Nature of Financial Management
• It is a continuous activity
• It is related to all the departments of organisation
(ex. Marketing, HR, accounting etc.)
• There are three core areas of FM
Capital structure decision making, capital budgeting and working capital management
• Primary two objectives: Profit Maximisation and Wealth Maximisation
Risk- Return Trade off
Risk- Return Trade off- Continued
• The Risk can further be measured by Beta (Sensitivity) and Standard deviation (Volatility) of Shares.
• Higher the SD and Beta, Higher are the chances of return from the security
Emerging Role of Financial Manager in India
• Due to various changes being undertaken in financial environment of the country, the keys challenge areas of financial manager are increasing as below:
1) Merger, Acquisition and Restructuring
2) Performance Management
3) Risk Management
4) Investors Relations
5) Portfolio Management
Tags
Definition of Financial Management
Meaning of financial management
Nature of Financial Management