FM – Module 1

Part A
1. Define finance.
According to Paul. G. Hasings, 'Finance' is the management of the monetary affairs of a company.
It includes determining what has to be paid for raising the money on the best terms available and devoting
the available resources to best uses."
2. Define financial management.
According to Paul. G. Hasings, 'Finance' is the management of the monetary affairs of a company. It
includes determining what has to be paid for raising the money on the best terms available and devoting
the available resources to best uses."
3. Why it is considered important for a financial manager to understand the broad economic
environment?
Macro economics is concerned with the over all institutional environment in which the Company
operates. It looks at the Economy as a whole. It is concerned with the institutional structure of the banking
system, money and capital markets, financial intermediaries, monetary credit, and fiscal policies. Since
the business operates in the macro economic environment, it is important for financial managers to
understand the broad economic environment.
4. Why accounting is considered as a sub function of finance?
Accounting generates information about a firm. The end products of accounting constitute financial
statements such as Balance Sheet, P&L Account and the statement of changes in financial position. The
information contained in this reports and statements assist financial managers in assessing the past
performance and taking future decisions of the firm and in meeting the legal obligations such as payment
of Taxes and so on.
5. How financial management is related with marketing function?.
All functions in marketing like product development, advertising, selling etc require money. Financial
managers should consider the impact of new product development and promotion plans made in the
marketing area since their plans will require Capital or Fund out flows and have an impact on the projected
cash flows.
6. Show the relationship between financial management and Production.
Financial managers should consider the impact of new product development and promotion plans
made in the marketing area since their plans will require Capital or Fund out flows and have an impact on
the projected cash flows. Similarly changes in the production process may necessitate capital expenditure
which the financial managers must evaluate and finance.
7. What is traditional approach to financial management
The traditional approach refers to the subject in the initial stages of its development. At that time name
of name was 'Corporation Finance'. The objective of 'Corporation Finance' was with the financing of
Corporate enterprises ( ie companies). The subject included, 1. Arrangement of capital from various
financial institutions and study of Capital Market. 2. Financial instruments through which Funds are raised
from the capital market. & 3. The Legal and Accounting relationship between a firm and its sources of
funds.
8. What do you mean by modern approach to financial management.
The modern approach views the term 'Financial management' in a broad sense. According to it Finance
function covers both acquisitions of funds as well as their allocations. So Financial Management includes
1. The investment Decision, 2. The Financing Decision and 3. The Dividend Policy Decision.
9. What is the ' investment decision' function of financial management.
Investment decisions are the financial decisions taken by management to invest funds in different assets
with an aim to earn the highest possible returns for the investors. So it relates to the selection of Assets
in which funds will be invested by a firm. The Assets are of two types. A. Long Term or Fixed Assets -
which is used for a long period and . B. Short term or Current Assets which are convertible in to cash
usually within a year.
10. What is capital budgeting ?
Capital budgeting is the process of making investment decisions in long term assets. It is the process of
deciding whether or not to invest in a particular project or Fixed Assets.
11. What is the ' financing decision' function of financial management.
Financing decision is concerned with raising funds from which long-term sources, i.e., through
shareholders funds or borrowed funds. Shareholders funds include share capital, reserves and surplus and
retained earnings, whereas borrowed funds include debentures, long-term loans and public deposits.
12. What is the ' dividend policy decision' function of financial management.
Dividend policy decisions are concerned with decisions for deciding the amount of profits a business
would like to distribute among their owners and shareholders. These decisions also involve determining
how much amount can be retained within the business for further operations. The final decision will
depend upon the preference of the share holders and the investment opportunities available within the
firm.
13. What is profit maximisation approach?
In financial management terms, profit maximisation refers to the process or approach that will result in
increasing the profit of the business or more specifically increases the earnings per share (EPS) of the
business. According to it, all functions of financial management should be oriented towards maximisation
of profit.
14. Why the term profit is considered as a vague and ambiguous concept?
The term profit is vague and ambiguous because meaning of the term profit is not clear. E.g., profits can
be the net profit, gross profit, before tax profit, profit per share, the rate of profit, etc.
15. "Profit maximization ignores the time value of money" - explain
Time value of money means that the value of a unity of money is different in different time periods. The
sum of money received in future is less valuable than it is today. Profit maximization gives equal
importance to all earnings through the receivable in different periods.
16. "Profit maximization ignores the quality aspect of benefits associated with a financial course of
action". Explain
The term quality refers to the degree of certainty with which benefits can be expected. The more sure /
certain the expected return, the higher is the quality of the benefits. An uncertain and fluctuating return
implies risk to the investors. Profit maximization gives equal importance to all earnings at different
economic conditions.
17. What is wealth maximisation approach?
Wealth maximization is the concept of increasing the value of a business. This will leads to an
increase the value of the shares held by its stockholders.. It is achieved by maximizing the Net Present
Value (or wealth) of all activities / course of action of a business.
18. Write any two advantages of wealth maximisation objective.
1. It serves the interest of the owners as well as other stakeholders. Ie, suppliers of loan, employees,
creditors, society etc. 2. It is consistent with the objective of owners economic welfare. 3. It helps in the
long run survival and growth of the firm 4. It considers the time value of money and risk factor. 5. The
effect of dividend policy is also considered. 6. It helps to the increase market value of shares.
19. How wealth maximisation removes the technical limitations of profit maximization criterion ?
Wealth maximization means maximizing the Net Present Value (or wealth) of a course of action. It is
achieved by maximizing the Net Present Value (or wealth) of all activities / course of action of a business.
It considers the timing and risk of expected benefits. This is done by selecting appropriate rate for
discounting the expected flow of future benefits.
20. What are the merits of wealth maximisation approach?
1. It serves the interest of the owners as well as other stakeholders. Ie, suppliers of loan, employees,
creditors, society etc. 2. It is consistent with the objective of owners economic welfare. 3. It helps in the
long run survival and growth of the firm 4. It considers the time value of money and risk factor. 5. The
effect of dividend policy is also considered. 6. It helps to the increase market value of shares.
21. What is the role of a finance committee in a well organised business?
A finance committee is usually established between the Board of Directors and Managing Director. So Its
main function is to advise the Board of Directors on financial planning and financial control and co-
ordinate the activities of various departments.
22. What are the functions performed by a financial controller in a well organised modern business
enterprise?
According to Prof. I.M. Pandey, the controller’s functions concentrate the asset side of the balance sheet.
Financial controller is a person of executive rank and he monitors whether funds so augmented are
properly utilized. He is also responsible for providing accurate and timely company records by managing
the accounting function. The controller’s functions include providing information to formulate accounting
and costing policies, preparation of financial reports, direction of internal auditing, budgeting, inventory
control payment of taxes, etc.
23. What is the major function performed by a finance committee?
A finance committee is usually established between the Board of Directors and Managing Director. So Its
main function is to advise the Board of Directors on financial planning and financial control and co-
ordinate the activities of various departments.
24. What are the functions performed by a treasurer in a well organised modern business enterprise?
According to Prof. I.M. Pandey, the treasurer’s functions relate to the liability side. So The function of the
treasurer of an organization is to raise funds and manage funds. The treasures functions include
forecasting the financial requirements, administering the flow of cash, managing credit, flotation of
securities, maintaining relations with financial institutions and protecting funds and securities etc.

Part B

1. Explain the relevance of economics to Financial Management.

The relevance of economics to Financial Management can be described based on two broad areas of
economics, -macro economics, and micro economics. Macro economics is the branch of economics that
deals with studying performance and behaviour of an economy as a whole. It is concerned with the
structure of the banking system, money and capital markets, financial intermediaries, monetary credit,
and fiscal policies. Since the business operates in the macro economic environment, it is important for
financial managers to understand the broad economic environment.
Micro economics deals with the economic decisions of individuals and organizations. It helps to develop
optimal operating strategies. A financial manger uses these to run the firm efficiently and effectively.
Investment decisions, micro and macro environmental factors are closely associated with the functions
of financial manager. Financial management also uses the economic equations like money value discount
factor, economic order quantity etc. Financial economics is one of the emerging area, which provides
immense opportunities to finance, and economical areas
2. How is finance related to other disciplines?
Financial management is related to Economics, Accounting, Marketing, Production, and Quantitative
Methods.
The relevance of economics to Financial Management can be described based on two broad areas of
economics, -macro economics, and micro economics. Macro economics is the branch of economics that
deals with studying performance and behaviour of an economy as a whole. It is concerned with the
structure of the banking system, money and capital markets, financial intermediaries, monetary credit,
and fiscal policies. Since the business operates in the macro economic environment, it is important for
financial managers to understand the broad economic environment.
Micro economics deals with the economic decisions of individuals and organizations. It helps to develop
optimal operating strategies. A financial manger uses these to run the firm efficiently and effectively.
Investment decisions, micro and macro environmental factors are closely associated with the functions of
financial manager. Financial management also uses the economic equations like money value discount
factor, economic order quantity etc. Financial economics is one of the emerging area, which provides
immense opportunities to finance, and economical areas
Financial Management and Accounting.
Accounting function is a necessary input in to the finance function. ie. accounting is a sub function of
finance. Accounting generates information about a firm. The end products of accounting constitute
financial statements such as Balance Sheet, P&L Account and the statement of changes in financial
position. The information contained in this reports and statements assist financial managers in assessing
the past performance and taking future decisions of the firm and in meeting the legal obligations such as
payment of Taxes and so on. Thus accounting and finance are functionally closely related.
Finance and Other Related Disciplines.
Apart from economics and accounting, finance is also related to Marketing, Production, and Quantitative
methods. For instance financial managers should consider the impact of new product development and
promotion plans made in the marketing area since their plans will require Capital or Fund out flows and
have an impact on the projected cash flows. Similarly changes in the production process may necessitate
capital expenditure which the financial managers must evaluate and finance. And finally the tools of
analysis developed in the quantitative techniques are helpful in analyzing complex financial management
problems.
Thus the marketing, production and quantitative techniques are only indirectly related to day to day
decision making by financial managers and are supportive in nature , while Economics and Accounting are
primary disciplines on which the financial managers draws substantially.
3. Why Finance is considered as the life-blood of modern business economy?
A business is an activity which is carried on with the intention of earning profits. Production, marketing
and business financing are the key operational areas in case of any business organization, out of which
finance is the most crucial one. Finance is considered as the life-blood of modern business economy. We
cannot imagine a business without finance in the modern world. It is the basis of all economic activities,
no matter; the business is big or small. The problem of finance and that of financial management is to be
dealt within every organisation. The problem of finance is equally important to government, semi-
governments and private bodies, and to profit and non-profit organisations.
4. What is business finance? Explain its significance or ( 5) Explain the Importance of Financial
Management.
Finance is that managerial activity which is concerned with planning and controlling of firms financial
resources. According to Paul. G. Hasings, 'Finance' is the management of the monetary affairs of a
company. It includes determining what has to be paid for raising the money on the best terms available
and devoting the available resources to best uses." Some of the importance of the financial management
is as follows:
1. Financial Planning - Financial management helps to determine the financial requirement of the business
concern and leads to take financial planning of the concern. Acquisition of Funds Financial management
involves the acquisition of required finance to the business concern. Acquiring needed funds play a major
part of the financial management, which involve possible source of finance at minimum cost.
2. Proper Use of Funds - Proper use and allocation of funds leads to improve the operational efficiency of
the business concern. When the finance manager uses the funds properly, they can reduce the cost of
capital and increase the value of the firm.
3. Financial Decision - Financial management helps to take sound financial decision in the business
concern. Financial decision will affect the entire business operation of the concern. Because there is a
direct relationship with various department functions such as marketing, production personnel, etc.
4. Improve Profitability - Profitability of the concern purely depends on proper utilization of funds by the
business concern. Financial management helps to improve the profitability position of the concern with
the help of strong financial control devices such as budgetary control, ratio analysis and cost volume profit
analysis.
5. Increase the Value of the Firm - Financial management is very important in the field of increasing the
wealth of the investors and the business concern. Ultimate aim of any business concern will achieve the
maximum profit and higher profitability leads to maximize the wealth of the investors as well as the
nation.
6. Market value of the business can be increased through efficient and effective financial management.
7. Efficient financial management is necessary for the survival, growth, expansion and diversification of a
business.
8. Financial Management significantly influences the business's credit rating, employee commitment,
suppliers' confidence, customers' patronage and the like.

6. Write a note on scope of corporation finance. Or (7) Explain the Traditional Approach to financial
management
The traditional approach refers to the subject in the initial stages of its development. At that time name
of name was 'Corporation Finance'. The objective of 'Corporation Finance' was with the financing of
Corporate enterprises ( ie companies).
The scope of corporation finance included, 1. Arrangement of capital from various financial institutions
and study of Capital Market. 2. Financial instruments through which Funds are raised from the capital
market. & 3. The Legal and Accounting relationship between a firm and its sources of funds.

8. What are the criticism raised against Traditional Approach to Financial Management?
The traditional approach refers to the subject in the initial stages of its development. At that time name
of name was 'Corporation Finance'. The objective of 'Corporation Finance' was with the financing of
Corporate enterprises ( ie companies).
Following are the criticism against the traditional approach.
1. According to The traditional approach, finance function was raising and administering of funds only.
The limitation was that internal decision-making was completely ignored.
2. The focus was on financing problems of Corporate enterprises (i.e. Companies). Non corporate
organizations lay outside its scope.
3. The approach laid over emphasis on the problems of long term financing. Hence day to day financial
problems and working capital management of a business did not receive any attention.

9. "The modern approach views Financial management in a broad sense " - Explain.

The modern approach views the term 'Financial management' in a broad sense and provides a
conceptual and analytical frame work for financial decision making. According to it Finance function
covers both acquisitions of funds as well as their allocations. Thus the Financial Management, in the
modern sense of the term, can be broken down in to 3 major decisions as functions of Finance.
1. The investment Decision, 2. The Financing Decision, 3. The Dividend Policy Decision.

1. Investment Decision. The investment decision relates to the selection of Assets in which funds will be
invested by a firm. The Assets are of two broad categories. A. Long Term or Fixed Assets, and . B. Short
term or Current Assets. Financial decision making with reference to long term assets is called Capital
Budgeting and financial decision making with reference to current assets is known as Working Capital
Management.

2. Financing Decisions. This is the decision taken on the Financing Mix or Capital Structure or Leverage.
Capital structure refers to the proportion of debt (i.e., fixed interest source of financing) and equity capital
(or variable dividend security). The financing decision relates to the choice of the proportion of various
sources to collect capital.
3. Dividend Policy Decision. This is the decision taken on the profit of the firm. Two options are available
to manage the profits of the firm. They can be distributed to the share holders as dividends or they can
be retained in the business.

4. Liquidity Decision. By the term ‘liquidity’ it is meant the debt-repaying capacity. It refers to the firm’s ability to
make payment to creditors, Payables and other expenses in time. Currents assets can be used to maintain good
liquidity position.

In addition to the above functions, the Scope or Content of Finance function / Financial management also
include:- Estimating financial requirements:, Proper Utilisation of Funds, Proper cash management and
Financial controls:-
From the above, it is clear that The modern approach views the term 'Financial management' in a broad
sense and provides a conceptual and analytical frame work for financial decision making.
10. What do you mean by Investment Decision? What are the two important aspects of Investment
Decision?

Investment decisions are the financial decisions taken by management to invest funds in different assets
with an aim to earn the highest possible returns for the investors. So it relates to the selection of Assets
in which funds will be invested by a firm. The Assets which can be acquired fall in to two broad categories.
A. Long Term or Fixed Assets, which yield a return over a period of time in future. B. Short term or Current
Assets which in the normal course of business are convertible in to cash usually within a year. The aspects
of financial decision making with reference to long term assets is popularly known as Capital Budgeting
and financial decision making with reference to current assets is popularly termed as Working Capital
Management.
A. Capital Budgeting. Capital Budgeting is the most important financial decisions for a firm. It is the
selection of Fixed asset or investment proposal , whose benefits are likely to be available in future.
Whether an asset will be purchased or not will depend upon the benefits / returns associated with it.
Capital Budgeting also consider risk and uncertainty. Since the benefits from Fixed Assets or the
investments are in the future, there happening / accrual is uncertain. Therefore there is a risk of
'uncertainty of future benefits' is involved in the capital budgeting.
B. Working Capital Management. Working capital management is concerned with the management of
current asset. In Working capital management manager should consider profitability and risk. If a firm
does not have adequate working capital, it may become illiquid , but If current assets are too large,
profitability is adversely affected. Therefore The investment decision relates to the management of both
fixed assets and current assets.
11. What is Profit Maximisation Objectives? What are its demerits?
In financial management terms, profit maximisation refers to the process or approach that will result in
increasing the profit of the business or more specifically increases the Earnings Per Share (EPS) of the
business. According to it, all functions of financial management should be oriented towards maximisation
of profit. According to this approach, actions that increase profits should be undertaken and that decrease
profits should be avoided. Profits maximization approach implies that the functions of financial
management/ Decisions taken by financial mangers (i.e. the investment, financing, and dividend policy
decisions) should be oriented towards maximization of profits or Rupee income of the firm.

The main criticism against profit maximization approach are ambiguity, timing of benefits and quality of
benefits.
1. Ambiguity. The term profit is vague and ambiguous because meaning of the term profit is not clear. It
is amenable to different interpretations by different people. It is not clear in what sense the term profit
has been used.E.g., profits can be the net profit, gross profit, before tax profit, profit per share, the rate
of profit, etc.
2. Timing Of Benefit. A more important technical objection to profit maximization is that it ignores the
differences in the time value of the benefits received. Time value of money means that the value of a
unity of money is different in different time periods. The sum of money received in future is less valuable
than it is today. Profit maximization gives equal importance to all earnings through the receivable in
different periods.
3. Quality of Benefits. Profit maximization ignores the quality aspect of benefits. The term quality refers
to the degree of certainty with which benefits can be expected. The more sure / certain the expected
return, the higher is the quality of the benefits. An uncertain and fluctuating return implies risk to the
investors. Profit maximization gives equal importance to all earnings at different economic conditions.

12. What are the two different approaches to Financial Management?

There are two approaches to financial management. They are traditional approach and modern approach.

1. Traditional Approach refers to the subject in the initial stages of its development. At that time name
of name was 'Corporation Finance'. The objective of 'Corporation Finance' was with the financing of
Corporate enterprises ( ie companies). The subject included, 1. Arrangement of capital from various
financial institutions and study of Capital Market. 2. Financial instruments through which Funds are raised
from the capital market. & 3. The Legal and Accounting relationship between a firm and its sources of
funds. Following are the criticism against the traditional approach.
1. According to The traditional approach, finance function was raising and administering of funds only.
The limitation was that internal decision-making was completely ignored.
2. The focus was on financing problems of Corporate enterprises (i.e. Companies). Non corporate
organizations lay outside its scope.
3. The approach laid over emphasis on the problems of long term financing. Hence day to day financial
problems and working capital management of a business did not receive any attention.

2. Modern approach to financial management.

The modern approach views the term 'Financial management' in a broad sense. According to it Finance
function covers both acquisitions of funds as well as their allocations. So Financial Management includes
1. The investment Decision, 2. The Financing Decision and 3. The Dividend Policy Decision.
1. Investment Decision. The investment decision relates to the selection of Assets in which funds will be
invested by a firm. The Assets are of two broad categories. A. Long Term or Fixed Assets, and . B. Short
term or Current Assets. Financial decision making with reference to long term assets is called Capital
Budgeting and financial decision making with reference to current assets is known as Working Capital
Management.

2. Financing Decisions. This is the decision taken on the Financing Mix or Capital Structure or Leverage.
Capital structure refers to the proportion of debt (i.e., fixed interest source of financing) and equity capital
(or variable dividend security). The financing decision relates to the choice of the proportion of various
sources to collect capital.
3. Dividend Policy Decision. This is the decision taken on the profit of the firm. Two options are available
to manage the profits of the firm. They can be distributed to the share holders as dividends or they can
be retained in the business.
4. Liquidity Decision. By the term ‘liquidity’ it is meant the debt-repaying capacity. It refers to the firm’s ability to
make payment to creditors, Payables and other expenses in time. Currents assets can be used to maintain good
liquidity position.

In addition to the above functions, the Scope or Content of Finance function / Financial management also
include:- Estimating financial requirements:, Proper Utilisation of Funds, Proper cash management and
Financial controls:-

13. Explain Wealth maximisation approach. / What is Wealth Maximization Approach? What are its
merits? / Why Wealth maximisation approach is considered as superior to profit maximisation approach?

Wealth Maximization Approach is also known as value maximization or Net Present Worth maximization.
It removes the technical limitations of profit maximization criterion.(i.e. ambiguity, timing of benefit and
quality of benefit.). Wealth maximization is the concept of increasing the value of a business. This will
leads to an increase the value of the shares held by its stockholders.. It is achieved by maximizing the
Net Present Value (or wealth) of all activities / course of action of a business.
The objective of wealth maximisation takes care of the questions of the timing and risk of expected
benefits. These problems are handled by selecting an appropriate rate for discounting the expected flow
of future benefits. The following arguments are advanced in favour of wealth maximization. ( Advantage
/ merits)
1. It serves the interest of the owners as well as other stakeholders. Ie, suppliers of loan, employees,
creditors, society etc.
2. It is consistent with the objective of owners economic welfare.
3. It helps in the long run survival and growth of the firm
4. It considers the time value of money and risk factor.
5. The effect of dividend policy is also considered.
6. It helps to the increase in the stock price.
The Wealth created by a Company through its actions is reflected in the market value of companies'
shares. The value of the companies share is represented by the market price, which in turn, is a reflection
of the firm's financial decisions. The market price of the share serves as the performance indicator.
14. Explain the organisation of Finance function. / How the Finance Function is organised in a modern
business organisation? / Write a note on organisation of finance function.
The organisation of finance function implies the division and classification of functions relating to finance
because financial decisions are of utmost significance to firms. Therefore, to perform the functions of
finance, we need a sound and efficient organization.
The ultimate responsibility of carrying out the finance function lies with the top management. However,
organization of finance function differs from company to company depending on their respective
requirements.
Financial planning and financial control are quite significant for a large sized organisation. Therefore, a
finance committee is established between the Board of Directors and Managing Director. Its main function
is to advise the Board of Directors on financial planning and financial control and co- ordinate the activities
of various departments. The following chart explains the organisation of finance function.

It is evident from the above that Board of Directors is the supreme body under whose supervision and
control Managing Director, Production Director, Personnel Director, Financial Director, Marketing
Director perform their respective duties and functions. Further while auditing credit management,
retirement benefits and cost control banking, insurance, investment function under treasurer, planning
and budgeting, inventory management, tax administration, performance evaluation and accounting
functions are under the supervision of controller.
The terms ‘controller’ and ‘treasurer’ are in fact used in USA. Financial controller who has been a person
of executive rank does not control the finance, but monitors whether funds so augmented are properly
utilized. The function of the treasurer of an organization is to raise funds and manage funds. The treasures
functions include forecasting the financial requirements, administering the flow of cash, managing credit,
flotation of securities, maintaining relations with financial institutions and protecting funds and securities.
The controller’s functions include providing information to formulate accounting and costing policies,
preparation of financial reports, direction of internal auditing, budgeting, inventory control payment of
taxes, etc.
According to Prof. I.M. Pandey, while the controller’s functions concentrate the asset side of the balance
sheet, the treasurer’s functions relate to the liability side.
Part C
1. Why Financial management is Considered as an important management function? Give a
specimen organisation chart for the finance function in a large corporate enterprise.

Financial management – An important management function.

Introduction.
A business is an activity which is carried on with the intention of earning profits. Production,
marketing and business financing are the key operational areas in case of any business organization, out
of which finance is the most crucial one. Finance is considered as the life-blood of modern business
economy. We cannot imagine a business without finance in the modern world. It is the basis of all
economic activities, no matter; the business is big or small. The problem of finance and that of financial
management is to be dealt within every organisation. The problem of finance is equally important to
government, semi-governments and private bodies, and to profit and non-profit organisations.
Finance is that managerial activity which is concerned with planning and controlling of firms financial
resources. According to Paul. G. Hasings, 'Finance' is the management of the monetary affairs of a
company. It includes determining what has to be paid for raising the money on the best terms available
and devoting the available resources to best uses." .
The modern approach views the term 'Financial management' in a broad sense and provides a
conceptual and analytical frame work for financial decision making. According to it Finance function
covers both acquisitions of funds as well as their allocations. Thus the Financial Management, in the
modern sense of the term, can be broken down in to 3 major decisions as functions of Finance.
1. The investment Decision, 2. The Financing Decision, 3. The Dividend Policy Decision.

1. Investment Decision. The investment decision relates to the selection of Assets in which funds will be
invested by a firm. The Assets are of two broad categories. A. Long Term or Fixed Assets, and . B. Short
term or Current Assets. Financial decision making with reference to long term assets is called Capital
Budgeting and financial decision making with reference to current assets is known as Working Capital
Management.
2. Financing Decisions. This is the decision taken on the Financing Mix or Capital Structure or Leverage.
Capital structure refers to the proportion of debt (i.e., fixed interest source of financing) and equity capital
(or variable dividend security). The financing decision relates to the choice of the proportion of various
sources to collect capital.
3. Dividend Policy Decision. This is the decision taken on the profit of the firm. Two options are available
to manage the profits of the firm. They can be distributed to the share holders as dividends or they can
be retained in the business.
4. Liquidity Decision. By the term ‘liquidity’ it is meant the debt-repaying capacity. It refers to the firm’s ability to
make payment to creditors, Payables and other expenses in time. Currents assets can be used to maintain good
liquidity position.
In addition to the above functions, the Scope or Content of Finance function / Financial management also
include:- Estimating financial requirements:, Proper Utilisation of Funds, Proper cash management and
Financial controls:-
“Financial management is Considered as an important management function” Some of the importance of
the financial management is as follows:
1. Financial Planning - Financial management helps to determine the financial requirement of the business
concern and leads to take financial planning of the concern. Acquisition of Funds Financial management
involves the acquisition of required finance to the business concern. Acquiring needed funds play a major
part of the financial management, which involve possible source of finance at minimum cost.
2. Proper Use of Funds - Proper use and allocation of funds leads to improve the operational efficiency of
the business concern. When the finance manager uses the funds properly, they can reduce the cost of
capital and increase the value of the firm.
3. Financial Decision - Financial management helps to take sound financial decision in the business
concern. Financial decision will affect the entire business operation of the concern. Because there is a
direct relationship with various department functions such as marketing, production personnel, etc.
4. Improve Profitability - Profitability of the concern purely depends on proper utilization of funds by the
business concern. Financial management helps to improve the profitability position of the concern with
the help of strong financial control devices such as budgetary control, ratio analysis and cost volume profit
analysis.
5. Increase the Value of the Firm - Financial management is very important in the field of increasing the
wealth of the investors and the business concern. Ultimate aim of any business concern will achieve the
maximum profit and higher profitability leads to maximize the wealth of the investors as well as the
nation.
6. Market value of the business can be increased through efficient and effective financial management.
7. Efficient financial management is necessary for the survival, growth, expansion and diversification of a
business.
8. Financial Management significantly influences the business's credit rating, employee commitment,
suppliers' confidence, customers' patronage and the like.

From the above discussion, it is clear that Financial management is Considered as an important
management function.
Organisation Chart for The Finance Function in A Large Corporate Enterprise
The organisation of finance function implies the division and classification of functions relating to finance
because financial decisions are of utmost significance to firms. Therefore, to perform the functions of
finance, we need a sound and efficient organization. The ultimate responsibility of carrying out the finance
function lies with the top management. However, organization of finance function differs from company
to company depending on their respective requirements.
Financial planning and financial control are quite significant for a large sized organisation. Therefore, a
finance committee is established between the Board of Directors and Managing Director. Its main function
is to advise the Board of Directors on financial planning and financial control and co- ordinate the activities
of various departments. The following chart explains the organisation of finance function.

It is evident from the above that Board of Directors is the supreme body under whose supervision and
control Managing Director, Production Director, Personnel Director, Financial Director, Marketing
Director perform their respective duties and functions. Further while auditing credit management,
retirement benefits and cost control banking, insurance, investment function under treasurer, planning
and budgeting, inventory management, tax administration, performance evaluation and accounting
functions are under the supervision of controller.
The terms ‘controller’ and ‘treasurer’ are in fact used in USA. Financial controller who has been a person
of executive rank does not control the finance, but monitors whether funds so augmented are properly
utilized. The function of the treasurer of an organization is to raise funds and manage funds. The treasures
functions include forecasting the financial requirements, administering the flow of cash, managing credit,
flotation of securities, maintaining relations with financial institutions and protecting funds and securities.
The controller’s functions include providing information to formulate accounting and costing policies,
preparation of financial reports, direction of internal auditing, budgeting, inventory control payment of
taxes, etc.
According to Prof. I.M. Pandey, while the controller’s functions concentrate the asset side of the balance
sheet, the treasurer’s functions relate to the liability side.

Conclusion
The organisation of finance function implies the division and classification of functions relating to finance
because financial decisions are of utmost significance to firms. Therefore, to perform the functions of
finance, we need a sound and efficient organization. However, organization of finance function differs
from company to company depending on their respective requirements.
2. Explain the scope and functions of Financial Management. / What are the important functions
performed by a Financial manager?
Important points -
Traditional Approach - The subject included, 1. Arrangement of capital from various financial institutions
and study of Capital Market. 2. Financial instruments through which Funds are raised from the capital
market. & 3. The Legal and Accounting relationship between a firm and its sources of funds.
Modem Approach. - 1. The investment Decision, 2. The Financing Decision and 3. The Dividend Policy
Decision
Other functions. - 1. Financial Planning , 2. Proper Use of Funds , 3. Financial Decision , 4. Improve
Profitability , 5. Increase the Value of the Firm etc ( Refer question no 4 .- Part B )

3. Explain the objectives of Financial management.

4. What is profit maximisation approach? What are its demerits? How the wealth maximisation
approach overcomes the drawbacks of profit maximisation?
6. What is Financial management and what are its objectives? Also explain how the financial
management is related with other disciplines?
7. What is Finance Function? Explain its scope. What major decisions are required to be taken in
Finance?