- 1 Financial Management An Introduction Bcom Notes
Financial Management An Introduction Bcom Notes
Financial Management An Introduction Bcom Notes:- In this post, you will get the notes of B.com 3rd year Financial Management, by reading this post you can score well in the exam, hope that this post has helped you with this post to all your friends and all groups right now I must share it so that every student can read this post and it can also be helped in this post.
Financial Management: An Introduction
Finance is the life blood and nerve centre of a business, just as circulation of blood is essential in the human body for maintaining life, finance is a very essential for the smooth running of the business. Without finance neither any business can be started nor successfully run.
According to R. C. Osborn, “The finance function is the process of acquiring and utilising funds of a business.
APPROACHES TO FINANCE FUNCTION
(1) Traditional Approach: The traditional approach, which was popular in the early part of twentieth century, limited the role of financial management to raising and administering of funds needed by the corporate enterprises to meet their financial needs. The traditional approach continued till mid 1950’s.
(2) The Modern Approach: The modern approach views finance function in broader sense. It includes both raising of funds as well as their effective utilisation under the purview of finance. Finance has to be considered as an integral part of overall management. So finance function, according to this approach, covers financial planning, raising of funds, allocation of funds, financial control etc. The new approach is an analytical way of dealing with financial problems of a firm.
MEANING AND DEFINITION OF FINANCIAL MANAGEMENT
Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. It encompasses the procurement of the funds in the most economic and prudent manner and employment of these funds in the most optimum way to maximise the return for the owner.
Howard and Upton, “Financial Management is the application of the planning and control function to the finance function.”
J.L. Massie, “Financial Management is the operational activity of a business that is responsible for obtaining and effectively utilising the funds necessary for efficient operations.”
J.E. Weston & E.F. Brigham, “Financial Management is an act of financial decision making, harmonising individual motives and enterprise goals.”
Nature or Characteristics of Financial Management: (1) Financial Management is an essential part of Top Management, (2) Modern financial management is less descriptive and more analytical, (3) Financing is a continuous function, (4) Different from Accounting Function. (5) It is concerned not only with the raising of finance but also with the allocation and efficient use of such finance, (6) Financial Management is centralised in nature, (7) It is concerned with the achievement of broad financial goals which an enterprise sets for itself, (8) It is applicable to all forms of organisations, (9) Financial management is both a science as well as an art.
OBJECTIVES OF FINANCIAL MANAGEMENT
From the discussion we have made so far, it becomes clear that a firm has to take the following three major decisions:
(i) Where to invest funds and what amount? i.e., the Investment decisions;
(ii) Where to raise funds and what amount? i.e., the Financing decisions;
(iii) How much to pay by way of dividends? i.e. the Dividend Policy decisions.
It is generally accepted that the financial objective of the firm is to maxmise the owner’s economic welfare. For this purpose, two well-established and widely-discussed criteria are presented: (a) Profit Maximisation ad (b) Wealth Maximisation.
(a) Goal of Profit Maximisation: It is universally recognised that the basic goal of business should be to maximise owner’s economic welfare. In order to achieve this ultimate goal ‘ maximisation of profit’ has been considered a basic objective of financial management. Various types of financial decisions, to be taken with a view to maximize the profit of the firm.
(b) Goal of Wealth Maximisation: The proper goal of financial management is wealth maximisation of equity shareholders as it is expressly concerned with the relationship of profitability and the volume of capital being used in the enterprise.
Thus, wealth maximization goal as decision criteria suggests that any financial action which creates wealth or which has discounted stream of future benefits exceeding its cost, is desirable and should be accepted and that which does not satisfy this test should be rejected.
The goal of wealth maximization is supposed to be superior to the goal of profit maximization due to following reasons:
(1) It uses the concept of future expected cash flows rather than the ambiguous term of profits.
(2) It considers time value of money.
Due to the above reasons, the wealth maximization is considered to be superior to profit maximization as an objective or goal of financial management.
SCOPE OF FINANCE OR FINANCIAL FUNCTIONS
The scope of the term finance function, as considered by the modern approach, can be said to be concerned with the following three types of decisions:
(a) Financing Decisions: These decisions are basically concerned with the process of acquiring the funds. Obtaining the funds for their deployment in the business is the starting point of any business activity. Further, the funds required by the business may be raised either by own sources (Equity Capital) or by outside sources (Debt Capital). The financing decisions are basically concerned with the answers to the questions like.
(1) What should be the amount of the funds that should be raised?
(2) What should be the mix of equity and debt capital in which the required amount of funds should be raised?
(b) Investment Decisions: The second area with which the finance function deals is the utilisation of the funds raised and required by the business. The investment decisions relate to the selection of the assets in which the funds should be invested.
(c) Dividend Decisions: Another major area of decision making by a finance manager is known as the dividend decisions. The dividend decision is concerned with the quantum of profits to be distributed among shareholders.
FUNCTIONS OR SCOPE OF FINANCIAL MANAGEMENT
John J. Hampton explained following four functions (1) Managing Funds, (2) Managing Assets, (3) Liquidity Functions and (4) Profitability Functions.
At present the important functions of Financial Management may be put into two categories:
(A) Executive/Administrative or Decision Making Functions: (1) Financial Forecasting and Planning, (2) Procurement of Funds, (3) Decision making regarding Investment in Assets, (4) Managing Assets, (5) Management of Income, (6) Dividend Policy Decision. (7) Appraisal of Financial Performance, (8) To make efforts for increasing the productivity of the capital, (9) To Advice the top management, (10) Financing Decisions, (11) Financial Control.
(B) Routine/Incidental Functions: (1) Record keeping of financial transactions, (2) Preparation of various financial statements, (3) Arranging the cash balance as per requirement, (4) Managing the Credit, (5) Safeguarding of securities, insurance policies and other valuable documents.