INTRODUCTION

Finance is called “The science of money.” It studies the principles and the methods of obtaining, control
of money from those who have saved it, and of administering it by those into whose control it passes. It
is the process of conversion of accumulated funds to productive use. Financial management is the
science of money management. It is that managerial activity which is concerned with planning and
controlling of the firm's financial resources. In other words, it is concerned with acquiring, financing, and
managing assets to accomplish the overall goal of a business enterprise. Finance is the lifeblood of a
business firm. The health of every business concern mainly depends on the efficient handling of finance
functions. In simple term, Financial Management may be defined as the management of the finance or
funds of a business unit to realize the objective of the firm in an efficient manner. It is broadly concerned
with the mobilization and use of funds by a business firm.

MEANING
Financial Management means applying management principles to manage the financial resources of an
organization. It simply involves planning, organizing, directing, and controlling financial operations to
manage the finance of an organization efficiently. Financial Management is concerned with acquiring,
financing, and managing assets to accomplish the overall goal of a business enterprise (mainly to
maximize the shareholder’s wealth). It is the strategic planning and managing of an individual or
organization’s finances to better align their financial status to their goals and objectives. Depending on
the size of a company, finance management seeks to optimize shareholder value, generate profit,
mitigate risk, and safeguard the company's financial health in the short and long term. When working
with individuals, finance management may entail planning for retirement, college savings, and other
personal investments. At its core, financial management is the practice of making a business plan and
then ensuring all departments stay on track.

DEFINITION
1. “Financial management is the activity concerned with planning, raising, controlling and
administering of funds used in the business.” – Guthman and Dougal
2. “Financial management is that area of business management devoted to a judicious use of
capital and a careful selection of the source of capital in order to enable a spending unit to move
in the direction of reaching the goals.” – J.F. Brandley
3. “Financial management is the operational activity of a business that is responsible for obtaining
and effectively utilizing the funds necessary for efficient operations.”- Massie

Nature of financial management

 Estimates capital requirements: Financial management helps in anticipation of funds by
estimating working capital and fixed capital requirements for carrying business activities.
 Decides capital structure: Proper balance between debt and equity should be attained, which
minimizes the cost of capital. Financial management decides proper portion of different
securities (common equity, preferred equity, and debt).
  Select source of fund: Source of fund is one crucial decision in every organization. Every
organization should properly analyse various sources of funds (shares, bonds, debentures etc.)
and must select appropriate funds which involve minimal risk.
 Selects investment pattern: Before investing the amount, the investment proposal should be
analyzed and properly evaluate its risk and returns.
 Raises shareholders value: It aims to increase the amount of return to its shareholders by
decreasing its cost of operations and increase in profits. Finance manager should focus on
raising the funds from different sources and invest them in profitable avenues.
 Management of cash: Finance manager observes all cash movements (inflow and outflow) and
ensures they should face any deficiency or surplus of cash.
 Apply financial controls: Implying financial controls helps in keeping the company's actual cost
of operation within limits and earning the expected profits. There different approaches involved
like developing certain standards for business in advance, comparing the actual cost or
performances with pre-established standards and taking all require remedial measures.
Importance of Financial Management in Modern Business
 Forecasts Cash Flows: Financial management forecasts the fund required for carrying out the
activities by the business. Estimation of fund requirement is the foremost and primary function
played by financial management.
 Raises the Funds: Once the fund required by business are estimated, financial managers are
responsible for the acquisition of such funds. Financial managers choose among different
sources available for raising funds like shares, debentures, loans, etc. They choose the one
which provides funds at low cost and has fewer conditions attached to them.
 Determines Capital Structure: Financial management decides the optimum capital structure of
the organization. It decides the proportion of equity and debt to be included in the capital. The
proper balance between debt and equity should be attained which minimizes the cost of capital.
 Proper Use of Funds: Financial management ensures that all financial resources are properly
utilized in the organization. Financial managers supervise the use of all funds and checks
whether they are invested in better assets.
 Facilitates Cost Control: Financial managers focus on controlling all costs associated with the
business. They prepare a budget for all activities of the business and ensure that all expenses go
in accordance with the pre-determined budget.
 Better Disposal of Surplus: Decisions regarding using the surplus or profit earned by the
business are taken by financial managers. They decide whether it should be distributed as
dividends to shareholders or should be retained for plowing it back into the business .
 Manages Cash Movements: Financial management monitors and manages all cash movements
in business organizations. All cash inflows and outflows in an organization are properly recorded
by financial managers. They ensure that there is no deficiency or surplus of cash.

OBJECTIVES OF FINANCIAL MANAGEMENT

FINANCIAL OBJECTIVES

 Profit Maximization: Traditionally a business firm is a profit-seeking economic institution and

profit is used as a common and unique measurement of efficiency. Hence, profit maximization
 may be assumed to be a rational and appropriate financial objective for the following reasons: It
is rational measure. A business venture is an economic activity and it attempts to maximize the
utility value to the owners. Utility can be easily measured through profits. Hence, profit
maximization may be considered as a rational financial objective. Profit maximization enables
economic natural selection and only profit maxi- misers can survive at the end. It also maximizes
socio-economic welfare. It will act as an incentive to face competition and be a motive force to
attain growth.

Advantage
 The profit of the firm became the income of the owner. Maximization of profit then
ensured the self-interests of the owner/manager, who both decide the actions of the
firm and ensure that these are carried out.
 The force of competition-imposed profit maximization upon the firm to survive in
business. The behavioral assumption of profit maximization has served economic theory
well. Because profit is the difference between revenue and costs, once revenue and
costs are identified the assumption of profit maximization enables predictions to be
readily made about the consequence of any environmental change.

Disadvantage
a. The concept of profit maximization is vague and narrow.
b. It ignores the risk factor, as well as, timing of returns.
c. It may allow decisions to be taken at the cost of long-run stability and profitability of the
concern.
d. It emphasizes the short-run profitability and short-term projects.
e. It may cause to decrease in share price.
 Wealth Maximization: wealth may be defined as the net present worth or value of the stream
of net benefits obtained from a course of action. Prof. Ezra Solomon has suggested that
adoption of wealth maximization is the best criterion for the financial decisions-making. The
gross present value of a course of action is equal to capitalized value of the flow of future
benefits, discounted at a rate that reflects the certainty. Net present worth is the difference
between the gross present worth and the amount of investment required to achieve the flow of
benefits. Any financial decisions, which result in positive net worth are preferable and shall be
taken up. In other words, if the course of action results in negative net worth it shall be rejected.
In short maximization of wealth or net present worth may be taken as the operating objective
for financial management. The firm should adopt a course of action when it generates positive
wealth or which maximizes the wealth of the owners of the firm. The objective of wealth
maximization eliminates all the limitations of profit maximization objective.

Advantage
(a) It takes into consideration long-run survival and growth of the firm.
(b) It suggests the regular and consistent dividend payments to the
shareholders.
(c) The financial decisions are taken with a view to improve the capital
appreciation of the share price.
(d) It considers the risk and time value of money.
 (e) It considers all future cash-flows, dividends, and earnings per share.
Disadvantage
1) The basic assumption is that there an efficient capital market wherein the market
price of the share is truly reflected. This assumption seldom holds in real practice.
2) The market price is influenced by various economic and political factors which are
difficult to anticipate and judge.
3) The various parties having their stake in the company have conflicting interests and
therefore difficult to reconcile their divergent views.
 Market Value Maximization: The wealth maximization objective is consistent with the objective
of maximizing the owners’ economic welfare, which in turn maximizes the utility of their
consumption over time. It also enables the owners to adjust their flow of funds in such a way as
to optimize their consumption. The wealth of the owners of a company is reflected by the
market value of the company’s shares. Hence, it is implied that the financial objective of a firm
should be to maximize the market value of its shares. The market price of the shares reflects the
value of the shares and it, in turn depends on the quality of financial decisions taken by the
management. Hence, the market price of the share serves as an indicator of a firm’s
management efficiency and its progress. A firm’s market price is influenced by several internal
and external factors.
Advantage
o It is more related to cash flows than profits. Cash flows are more certain and regular,
and there is a lack of uncertainty that otherwise is associated with profit.
o Profits are more manipulative, but cash flows are not. Thus, wealth maximization is less
prone to manipulation than profit maximization, which relies on profit.
o It is more long-term-focused than profit maximization, which has a short-term focus.
Profit maximization is easy to attain because managers may adopt unethical ways to
bring short-term profits based on long-term sustainability.
o They consider risk and uncertainty factors while considering the discounting rate, which
reflects both the time and risk.
Disadvantage
o It is more based on an idea that is prospective and not descriptive.
o The objectives laid in such a technique are not clear.
o Wealth maximization is largely dependent on the business’s profitability as only after
the business is profitable can it think of enhancing the wealth of the shareholders.
o It is based on the generation of cash flows and not on the accounting profit.
NON-FINANCIAL OBJECTIVES
 Social objectives are linked to doing things in an ethical or environmentally friendly manner, or
having a business whose sole purpose is to meet a social need. For example, an entrepreneur
may aim to provide only products that are sustainably sourced or use only solar energy to power
their business.
 Personal satisfaction relates to an entrepreneur feeling satisfaction that they have created a
successful business. It may be that an entrepreneur is able to make a business out of a hobby or
personal interest.
  Challenge relates to an entrepreneur setting up a business with the intention that making it
successful will challenge them or take them out of their comfort zone.
 Control relates to an entrepreneur’s goal of being able to control the business and make
decisions about how it is run. These aims and objectives may relate to decisions around what
the business sells, where it buys raw materials from, and how much its product or service is sold
for.
 Independence relates to an entrepreneur working for themselves and running their own
business. It is also to do with them making their own key business decisions. A desire for
independence is a common reason for an entrepreneur to set up a business.

Conclusion
In conclusion, financial management practice is a field which deals with financial decisions including
short and long goals of the organization and ensures that there is a high return on the invested capital
without necessarily taking excess finance risk. Financial management is an essential discipline as it
guides the financial managers to make informed financial decisions in their companies. Financial
management is guided by several principles that the managers should adhere to in ensuring that the
finances of a company are appropriately invested. The investment comes with the analysis of the
outcome where different financial profitability and market ratios are used in establishing the stability of
a firm. From above mentioned points we can conclude that financial management works as the lifeline
for any organization and plays a very important role in growth and prosperity of all organizations.