Financial Management :Definition of Financial Management, Meaning , objective , Nature of Financial Management and Risk- Return Trade off

 

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