HANDOUT #1 Objectives of Financial Management

FINANCIAL MANAGEMENT
The financial management is generally concerned with
Meaning of Financial Management procurement, allocation and control of financial resources of a
concern. The objectives can be-
Financial Management means planning, organizing, directing
and controlling the financial activities such as procurement 1. To ensure regular and adequate supply of funds to the
and utilization of funds of the enterprise. It means applying concern.
general management principles to financial resources of the 2. To ensure adequate returns to the shareholders which
enterprise. will depend upon the earning capacity, market price of
the share, expectations of the shareholders.
Scope/Elements of Financial Management 3. To ensure optimum funds utilization. Once the funds
are procured, they should be utilized in maximum
1. Investment decisions includes investment in fixed possible way at least cost.
assets (called as capital budgeting). Investment in 4. To ensure safety on investment, i.e, funds should be
current assets are also a part of investment decisions invested in safe ventures so that adequate rate of
called as working capital decisions. return can be achieved.
2. Financial decisions- They relate to the raising of 5. To plan a sound capital structure - There should be
finance from various resources which will depend upon sound and fair composition of capital so that a balance
decision on type of source, period of financing, cost of is maintained between debt and equity capital.
financing and the returns thereby.
3. Dividend decision- The finance manager has to take
decision with regards to the net profit distribution. Net
profits are generally divided into two:
➢ Dividend for shareholders- Dividend and the
rate of it has to be decided.
➢ Retained profits- Amount of retained profits has
to be finalized which will depend upon
expansion and diversification plans of the
enterprise.
Functions of Financial Management Choice of factor will depend on relative merits and
demerits of each source and period of financing.
1. Estimation of capital requirements: A finance manager
has to make estimation with regards to capital 1. Investment of funds: The finance manager has to
requirements of the company. This will depend upon decide to allocate funds into profitable ventures so
expected costs and profits and future programmes and that there is safety on investment and regular returns
policies of a concern. is possible.
2. Disposal of surplus: The net profits decision have to be
Estimations have to be made in an adequate manner made by the finance manager. This can be done in two
which increases earning capacity of enterprise. ways:
a. Dividend declaration - It includes identifying the
2. Determination of capital composition: Once the rate of dividends and other benefits like bonus.
estimation have been made, the capital structure have b. Retained profits - The volume has to be decided
to be decided. which will depend upon expansional,
innovational, diversification plans of the
This involves short-term and long-term debt equity company.
analysis. This will depend upon the proportion of 3. Management of cash: Finance manager has to make
equity capital a company is possessing and additional decisions with regards to cash management.
funds which have to be raised from outside parties.
Cash is required for many purposes like payment of
3. Choice of sources of funds: For additional funds to be wages and salaries, payment of electricity and water
procured, a company has many choices like- bills, payment to creditors, meeting current liabilities,
a. Issue of shares and debentures maintainance of enough stock, purchase of raw
b. Loans to be taken from banks and financial materials, etc.
institutions
c. Public deposits to be drawn like in form of 4. Financial controls: The finance manager has not only
bonds. to plan, procure and utilize the funds but he also has to
exercise control over finances.

This can be done through many techniques like ratio

analysis, financial forecasting, cost and profit control,
etc.
Role of a Financial Manager the best possible manner the following point must be
considered
Financial activities of a firm is one of the most important and
complex activities of a firm. Therefore in order to take care of ▪ The size of the firm and its growth capability
these activities a financial manager performs all the requisite ▪ Status of assets whether they are long-term or
financial activities. short-term
▪ Mode by which the funds are raised
A financial manger is a person who takes care of all the
important financial functions of an organization. The person 3. These financial decisions directly and indirectly
in charge should maintain a far sightedness in order to ensure influence other managerial activities. Hence formation
that the funds are utilized in the most efficient manner. of a good asset mix and proper allocation of funds is
one of the most important activity
His/Her actions directly affect the Profitability, growth and
goodwill of the firm. 4. Profit Planning

Following are the main functions of a Financial Manager: Profit earning is one of the prime functions of any
business organization.
1. Raising of Funds
Profit earning is important for survival and sustenance
In order to meet the obligation of the business it is of any organization. Profit planning refers to proper
important to have enough cash and liquidity. A firm usage of the profit generated by the firm.
can raise funds by the way of equity and debt.
Profit arises due to many factors such as pricing,
It is the responsibility of a financial manager to decide industry competition, state of the economy,
the ratio between debt and equity. It is important to mechanism of demand and supply, cost and output.
maintain a good balance between equity and debt.
A healthy mix of variable and fixed factors of
2. Allocation of Funds production can lead to an increase in the profitability
of the firm.
Once the funds are raised through different channels
the next important function is to allocate the funds. Fixed costs are incurred by the use of fixed factors of
production such as land and machinery. In order to
The funds should be allocated in such a manner that maintain a tandem it is important to continuously
they are optimally used. In order to allocate funds in value the depreciation cost of fixed cost of production.
 An opportunity cost must be calculated in order to developed economy as individuals who retain private property
replace those factors of production which has gone have the ability to grow their capital. Firms are any business
thrown wear and tear. If this is not noted then these that offers goods or services to consumers. Investors are
fixed cost can cause huge fluctuations in profit. individuals or business that place capital into businesses for
financial returns. Markets represents the financial
5. Understanding Capital Markets environment that makes this all possible.

Shares of a company are traded on stock exchange and Historically, firms were very small or even nonexistent in
there is a continuous sale and purchase of securities. economies or financial markets. Though a few firms have
Hence a clear understanding of capital market is an always been in existence, the ability for a large number of
important function of a financial manager. firms was not possible until markets became more mature.
Mature markets allow for more access to resources necessary
When securities are traded on stock market there to produce goods and services. As firms begin to grom,
involves a huge amount of risk involved. Therefore a expand, and multiply, higher capital needs to persist in order
financial manger understands and calculates the risk for firms to succeed. Capital sources include money from
involved in this trading of shares and debentures. outside parties, such as investors.
Its on the discretion of a financial manager as to how Many times investors are individuals who have more capital
to distribute the profits. Many investors do not like than necessary to provide a sufficient living standard. Any
the firm to distribute the profits amongst share holders excess capital can actually make individuals more money if
as dividend instead invest in the business itself to thet invest the funds into a firm that offers a financial return.
enhance growth. This symbiotic relationship in the financial environment allows
both parties to increase their capital. Many different factors
The practices of a financial manager directly impact the
play a role for individuals making investments. A few of these
operation in capital market.
may include risk, current market conditions, and competition,
among others.

FINANCIAL ENVIRONMENT Financial environment of a company refers to all the financial

institutions and financial market around the company that
A financial environment is a part of an economy with the affects the working of the company as a whole.
major players being the firms, investors, and market.
Essentially, this sector can represent a large part of a well-