Meaning of Financial Management Financial Management means planning, organizing, directing and controlling the financial activities such

as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. Scope/Elements 1. Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions. 2. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of 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: a. Dividend for shareholders- Dividend and the rate of it has to be decided. b. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise. Objectives of Financial Management The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be1. To ensure regular and adequate supply of funds to the concern. 2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders. 3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost. 4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved. 5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital. Functions of Financial Management 1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise. 2. Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This

will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties. 3. Choice of sources of funds: For additional funds to be procured, a company has many choices likea. Issue of shares and debentures b. Loans to be taken from banks and financial institutions c. Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing. 4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible. 5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways: a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. b. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company. 6. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc. 7. Financial controls: The finance manager has not only 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. What is financial management? Financial management is concern with the management of all matters associated with the cash flow of an organisation both shortterm and long term. How the company uses its funds typically by buying non current assets and funding its working capital and where the funds came from typically from the shareholders (equity) or by borrowing money from third parties (loans/debt). A decision to invest in capital assets should be considered against: Return Risk Shortterm profitability Liquidity

Return The return of an investment is the profit that is derived from the acquired asset. Profit may be calculated in several ways; financial accounting profit or net present value (which is a measure of the surplus cash received less the cash paid out over the life of the product, expressed in terms of the current value of the cash flow). Risk Risk is the probability that an event will occur. It is not based on a hunch that an event might occur it is a quantified assessment of what might occur. Shortterm profitability The shortterm profitability of an investment is important because if too little profit is made during the early stages of the project the organisation may struggle to keep financing the project for the longer term. Liquidity Liquidity has to do with the additional strain on cash that the new project requires. The investment in the project must include an amount for the increased working capital requirement that the organisation will need. The additional cost must be included in the decision criteria. What is working capital? Working capital is the cash resource available to the business on a daytoday basis and used to finance the current assets such as inventory and receivable. Without it the business would run out of cash and become insolvent. What are some disadvantages of working capital? Working capital does not directly provide any returns. Returns come from using the capital assets that depend on the working capital. The business therefore has to balance the amount of working capital it has. Too much and the cost of having money tied up in working capital increases and profitability decreases. When looking at the financing of a business there are four basic points to consider: Total funding required (difference between what it requires and what it has) Internally generated vs. externally generated Debt vs. equity Longterm vs. shortterm debt

Financial objectives in relationship with corporate strategy The aims of the financial management team should be aligned with those of the wider corporate strategy. Some objectives of commercial companies include: Maximising shareholders wealth Maximising profits Satisficing/satisfying Maximising shareholders wealth Shareholders wealth comes primarily from the value of the companys shares, therefore, if the directors manage the business in such a way that the share price is maximised then they have maximised shareholders wealth. Time period may differ between shareholders themselves and the management of the business some shareholders may be looking for a quick return (get in and get out fast), some may be looking to build the business for the longterm (in it for the long haul). A high share price may be quickly achieved if directors pursue risky strategy but this may be a strategy that will go badly wrong resulting in a collapse of the share price and the share market. In practice if shareholders are unhappy with the management of the business they can sell their shares but the point is that directors should be aware of these issues to ensure that their objectives really are those of the shareholders. Maximising profits Management is rewarded on some measure of profit and we expect some correlation between profit increasing and shareholders wealth increasing but there may be some conflicts: Shorttermism profit is calculated over one year, relatively easy to manipulate resulting in high returns for managers but affect longterm interest of shareholders Cash vs. Profit Wealth is calculated on a cash basis Risk managers may be incline to accept risky projects to achieve profit targets which may affect adversely the value of the business Satisfying Satifying is where an organisation is primarily concern about surviving rather than growing this mean that it attempts to generate an acceptable level of profit with minimal risk. Stakeholders and impact on corporate objectives Stakeholders are any party that has An interest in the company A relationship of some sort with the company Can exert influence over the company

The main stakeholders of a company can be listed as follows: Shareholders Employees and unions HM Revenue and Customs Local Council Local people living close to the business Customers Debt holders Organisations have a responsibility to balance the requirements of all stakeholder groups in relation to the relative economic power or influence of each stakeholder. Depending on the degree of influence which each stakeholder possesses, the company must deliver the various stakeholders the return that the stakeholder is seeking. The level of returns within an organisation is finite therefore there is a need to balance the needs of all groups in relation to their relative strength. Give example of conflicts between stakeholders? Employees and unions demand more pay or a shorter working week and this affects the level of profitability expected by shareholders. Neighbours may complain about the level of pollution the company produces. Customers may demand extra services from employees or complain that prices of products/services are too high. Debtholders want returns regardless of the business profitability. Shareholders may demand large dividends which can weaken the companys asset base. How can goal congruence be achieved? Goal congruence is defined as the state which leads individuals or groups to take actions which are in their self interest and also in the best interest of the entity. In order to achieve goal congruence there should be introduction of careful designed remuneration packages for managers and the workforce which would motivate them to take decisions which will be consistent with the objectives of the share holders. Including share options as part of a managers remuneration package incentivises the managers to try and maximise the share price as this will maximise the capital gains they will achieve. It will at the same time satisfy shareholders. Performance related pay incentivises both managers and the workforce to maximise shareholders wealth. Objectives and targets are set and if they are met then bonuses are paid in accordance with an agreed formula.

Financial and other objectives in notforprofit organisations Notforprofit organisations are established to pursue nonfinancial aims and exist to provide services to the community. Such organisations need fund to finance their operations. Their major constraint is the amount of funds that they would be able to raise. As a result notforprofit organisations should seek to use the limited funds so as to obtain value for money. Value for money simply means getting the best possible service at the least possible cost. Value for money involves providing a service which is economical, efficient and effective. Economy means resourcing and purchasing the inputs at minimum cost consistent with the required quality of the output. Effectiveness means doing the right thing. Efficiency means doing the right thing well