2 Marks Questions

1. Define Financial Management?

 Financial management is the art of planning; organizing, directing and
controlling of the procurement and utilization of the funds and safe disposal
of profits to the end those individual, organizational and social objectives are
accomplished.

2. Which are the things required to be remember while financing decision?

a) Cost of capital – Choose sources with the lowest cost.

b) Risk and return – Balance financial risk with expected returns.

3. Enumerates the modern approach of financial management?

 It focuses on maximizing shareholder wealth by making optimal decisions
in investment, financing, and dividend policies, considering risk and time
value of money.

4. Process of Financial Management associated with?

 Planning, organizing, directing, and controlling financial activities such
as procurement and utilization of funds to achieve organizational goals.

5. Which objective of financial management is superior?

 FM has 2 main objectives; Profit maximization and Wealth Maximization.
 From these two Profit Maximization is superior as it is the main goal of any
organization in the market.

5 Marks Questions

1. Explain the functions of finance manager?

The functions of a Finance manager is as follows:-

I. Estimating the Amount of Capital Required:

 This is the foremost function of the financial manager. Business firms require
capital for:

a. purchase of fixed assets,

 b. meeting working capital requirements, and
c. Modernization and expansion of business.
 The financial manager makes estimates of funds required for both short-term
and long- term.
II. Determining Capital Structure:
 Once the requirement of capital funds has been determined, a decision
regarding the kind and proportion of various sources of funds has to be
taken.
 For this, financial manager has to determine the proper mix of equity and
debt and short-term and long-term debt ratio.
 This is done to achieve minimum cost of capital and maximise shareholders
wealth.
III. Choice of Sources of Funds:
 Before the actual procurement of funds, the finance manager has to decide
the sources from which the funds are to be raised.
 The management can raise finance from various sources like equity
shareholders, preference shareholders, debenture- holders, banks and other
financial institutions, public deposits, etc.
IV. Procurement of Funds:
 The financial manager takes steps to procure the funds required for the
business.
 It might require negotiation with creditors and financial institutions, issue of
prospectus, etc.
 The procurement of funds is dependent not only upon cost of raising funds
but also on other factors like general market conditions, choice of investors,
government policy, etc.
V. Utilization of Funds:
 The funds procured by the financial manager are to be prudently invested in
various assets so as to maximize the return on investment:
 While taking investment decisions, management should be guided by three
important principles, viz., safety, profitability, and liquidity.
VI. Disposal of Profits or Surplus:
 The financial manager has to decide how much to retain for ploughing back
and how much to distribute as dividend to shareholders out of the profits of
the company.
 he factors which influence these decisions include the trend of earnings of
the company, the trend of the market price of its shares, the requirements of
funds for self- financing the future programmes and so on.
VII. Management of Cash:
 Management of cash and other current assets is an important task of
financial manager.
 It involves forecasting the cash inflows and outflows to ensure that there is
neither shortage nor surplus of cash with the firm.
  Sufficient funds must be available for purchase of materials, payment of
wages and meeting day-to-day expenses.
VIII. Financial Control:
 Evaluation of financial performance is also an important function of financial
manager.
 The overall measure of evaluation is Return on Investment (ROI).
 The other techniques of financial control and evaluation include budgetary
control, cost control, internal audit, break-even analysis and ratio analysis.
 The financial manager must lay emphasis on financial planning as well.

2. Explain the objectives of financial management

1. Profit Maximization

Definition:
Profit maximization is the traditional objective of financial management.

It refers to the process of increasing a company’s earnings to the highest possible

level.
In simple terms:
Profit = Revenue – Cost

Limitations of Profit Maximization:

1. Ambiguity/Vague Concept:
Profit is not clearly defined. Are we talking about gross profit, operating
profit, or net profit? Different interpretations can lead to confusion in
decision-making.

2. Timing of Benefits:
Profit maximization ignores when the profits are received. For example,
₹10,000 today is more valuable than ₹10,000 received after 2 years. This
approach doesn't consider the time value of money (TVM).

3. Quality of Benefits:
It doesn’t focus on the risk or sustainability of profits. A decision may yield
high profits today but could be risky or unsustainable in the long term (e.g.,
cutting costs by ignoring product quality).

2. Wealth Maximization

Definition:
Wealth maximization focuses on increasing the value of the shareholders'
investment in the company. This is often reflected in the market price of the
company's shares.

How it works:

It uses the Net Present Value (NPV) approach:

NPV = Present Value of Benefits (Cash Inflows) – Present Value of Costs

If NPV is positive, it means the action will increase the value of the business, and
hence, the shareholders’ wealth.

Why it’s better than profit maximization:

 Considers time value of money

 Focuses on long-term goals

 Takes risk into account

 Enhances market reputation and shareholder trust

3. Explain the scope of finance function.

Scope of Finance Function:

 The finance function includes all activities related to the planning, raising,
managing, and controlling of funds in an organization. Its main aim is to
ensure efficient use of financial resources.

Key areas under the scope:

1. Financial Planning:
Estimating short-term and long-term financial requirements of the business.

2. Raising of Funds:
Deciding the sources of finance (equity, debt, etc.) and arranging capital at
minimum cost.

3. Investment Decisions (Capital Budgeting):

Evaluating and selecting profitable investment opportunities.

4. Dividend Decisions:
Determining the portion of profits to be distributed to shareholders and
retained for growth.

5. Working Capital Management:

Managing day-to-day finances like cash, inventory, and receivables to ensure
liquidity.

6. Financial Control:
Monitoring and controlling financial activities using tools like budgets, ratios,
and audits.

4. How is finance related to other disciplines?

Finance and Its Relation to Other Disciplines:

Finance is closely connected with several other fields, as it draws concepts, tools,
and insights from them to make effective financial decisions.

Key Relations:

a. Economics:
Finance uses economic principles like demand & supply, interest rates,
inflation, and market efficiency.

b. Accounting:
Financial decisions are based on accounting data (like balance sheets,
income statements, cash flows).

c. Mathematics & Statistics:

Used in financial modeling, risk analysis, forecasting, and decision-making
under uncertainty.

d. Law:
Finance must follow corporate, tax, and securities laws while raising and
managing funds.

e. Management:
Finance is a core part of business strategy, operations, and resource
planning.

5. Describe the relationship of financial management with economics and

accounting?

Relationship of Financial Management with Economics:

Financial Management and Economics are deeply connected, as financial

decisions are heavily influenced by economic principles.

1. Economic Theories and Principles:

Economic theories, such as supply and demand, market structures, inflation,
and interest rates, directly affect financial decisions. For example, the cost of
capital is influenced by economic conditions like inflation and interest rates.

2. Resource Allocation:
Financial management helps in the efficient allocation of resources (capital),
which aligns with the economic goal of maximizing utility and productivity in
an economy.
 3. Macroeconomics and Microeconomics:
Financial management considers macroeconomic factors (e.g., national
income, GDP, inflation) when making decisions related to investments,
financing, and dividends. On a micro level, it involves analyzing the firm's
resources, market position, and competition—core aspects of
microeconomics.

4. Risk and Return:

The risk-return trade-off is a key principle in both economics and finance.
Economics helps to understand market risks and financial management
applies this in decisions about investment and financing.

Relationship of Financial Management with Accounting:

Accounting provides the financial data that is essential for financial

management decisions.

1. Financial Information:
Financial management relies heavily on accounting records (balance sheets,
income statements, and cash flow statements) to evaluate a company’s
financial health and make informed decisions about investments, financing,
and dividends.

2. Budgeting and Forecasting:

Accounting helps in preparing budgets and forecasts, which are crucial for
financial planning and controlling operations. Financial management uses
this data to allocate resources efficiently.

3. Cost Control:
Accounting helps track and control costs, which is a major aspect of financial
management. Effective cost analysis enables financial managers to improve
profitability by reducing unnecessary expenses.

4. Profitability and Performance Analysis:

Accounting measures a company’s profitability, while financial management
uses this information to analyze performance and make strategic decisions
like investment opportunities or funding strategies.

10 Marks Questions

1. Describe financial management – is it a science or an art?

1. Financial Management as a Science:

  A science is characterized by systematic knowledge, principles, and theories
that are based on facts and empirical data.
 It involves precision, predictability, and cause-effect relationships.

Key Characteristics of Financial Management as a Science:

1. Use of Principles and Theories:

Financial management is grounded in various scientific principles such as
time value of money, risk-return trade-off, cost of capital, and capital
budgeting techniques (NPV, IRR). These are well-established frameworks
that guide decision-making.

2. Quantitative Analysis:
Like any science, financial management involves quantitative tools and
models. Financial managers use mathematical formulas, statistical
models, and data analysis to forecast, plan, and control financial
performance. For example, the use of financial ratios, financial modeling,
and budgeting is based on empirical data and is consistent.

3. Predictability and Repeatability:

Financial management follows certain rules that can be consistently applied
across different organizations and scenarios. For instance, the concept of
discounted cash flows and NPV is universally applicable, regardless of the
organization or industry, making it scientific in nature.

4. Data-Driven Decisions:
Decisions in financial management, such as investment choices, capital
budgeting, and financial planning, are often based on hard data. Financial
managers rely on financial statements, market data, and historical trends to
make informed decisions, which are scientific and measurable.

2. Financial Management as an Art:

 An art involves creativity, intuition, experience, and subjective judgment.

 It is based on individual perception and often requires personal skills and
judgment in decision-making.

Key Characteristics of Financial Management as an Art:

1. Judgment and Experience:

Financial management often requires judgment based on the experience
and intuition of the financial manager.
 Decisions such as when to raise capital, which investment opportunities to
pursue or determining dividend policies involve subjective reasoning and a
deep understanding of market trends, which is not always quantifiable.

2. Customization to Specific Situations:

While there are general principles, each financial decision may need to be
tailored to the specific circumstances of the business.

For example, in deciding how to finance a project, a financial manager must

take into account not just the cost of capital but also market conditions, the
company's growth prospects, and future trends.

This requires creative thinking and personal insight, characteristic of an art.

3. Human Factor and Negotiations:

Many aspects of financial management involve human interaction, whether
it's in negotiating with investors, lenders, or other stakeholders.

Financial managers must possess interpersonal skills and an

understanding of human behavior, which is an art.

For example, obtaining financing may require convincing stakeholders

through a well-structured narrative of the company's financial health and
potential.

4. Adaptation to Change:
The financial landscape is dynamic, with markets and economic conditions
constantly evolving.

Financial managers must be adaptable and innovative, often making

decisions in the face of uncertainty.

Such adaptability is an artistic skill, as it requires flexibility and creativity

in managing funds under varying conditions.

3. Integration of Science and Art:

 While financial management incorporates both scientific and artistic

elements, it is most effectively understood as a blend of science and art.
 The science of financial management provides a framework, tools, and
methods for decision-making, ensuring objectivity and reliability.
 Meanwhile, the art of financial management involves the application of
judgment, experience, and intuition, allowing financial managers to adapt
and personalize decisions based on unique circumstances.

For example:
  Capital Budgeting Decisions: The process of evaluating projects using
scientific tools like NPV or IRR is a scientific approach. However, the decision
on which project to undertake might involve subjective judgment, especially
when the projects have different strategic implications, risks, or timeframes,
making it an art.

Conclusion:

 Financial management is both a science and an art.

 As a science, it relies on systematic principles, quantitative analysis, and
empirical data to ensure rational and predictable outcomes.
 As an art, it requires creativity, judgment, and experience, allowing managers
to adapt to changing circumstances and make decisions in uncertain
environments.
 Ultimately, the synergy between science and art enables effective financial
management, guiding organizations toward financial success and
sustainability.

2. Explain the role of finance manager in current scenario?

 Refer to q1 of 5 m
3. Explain the key areas of Financial Management?

Key Areas of Financial Management

Financial management is a crucial function of any organization, aiming to ensure

the efficient use of financial resources to meet organizational objectives. It involves
various key areas that are interconnected and collectively contribute to the overall
financial health of the organization.

1. Financial Planning:

Definition:
Financial planning is the process of estimating the financial requirements of the
organization, ensuring that sufficient funds are available for future activities and
growth.

Key Points:

 Involves forecasting both short-term and long-term financial needs.

 Ensures that adequate funding is available for operations, investments, and

future expansions.

 Helps set financial goals and ensures that resources are allocated effectively
to achieve those goals.
2. Investment Decisions (Capital Budgeting):

Definition:
Investment decisions involve the process of planning and managing long-term
investments in assets, projects, or ventures. These decisions are crucial because
they determine the company's growth potential.

Key Points:

 Involves evaluating potential investments in fixed assets, research and

development, and new projects.

 Uses techniques like Net Present Value (NPV), Internal Rate of Return
(IRR), and Payback Period to evaluate the profitability of investments.

 Decisions aim to maximize the company’s wealth by choosing investments

that offer the best return for the least risk.

3. Financing Decisions (Capital Structure):

Definition:
Financing decisions determine the optimal mix of debt and equity used to
finance the organization's operations and growth.

Key Points:

 Involves deciding how to raise funds (through debt, equity, or a combination

of both).

 The goal is to structure the capital in a way that minimizes the overall cost of
capital while maintaining an optimal level of financial risk.

 Balancing debt (loans, bonds) and equity (shares) influences the company’s
control, risk, and cost of financing.

4. Dividend Decisions:

Definition:
Dividend decisions are about determining the portion of the company’s earnings to
be distributed to shareholders as dividends versus being retained for reinvestment.

Key Points:

 Dividend policy affects both the company's financial stability and shareholder
satisfaction.

 A company must decide how much of its profits to distribute as dividends and
how much to reinvest in the business for growth.
  The decision is influenced by factors like profitability, cash flow, tax
considerations, and future investment needs.

5. Working Capital Management:

Definition:
Working capital management focuses on managing short-term assets and liabilities
to ensure that the company has sufficient liquidity to meet its day-to-day
operational expenses.

Key Points:

 It involves managing current assets (cash, inventory, receivables) and

current liabilities (payables) efficiently.

 The objective is to ensure smooth operations without unnecessary cash

shortages or excessive idle funds.

 Techniques like cash management, inventory control, and receivables

management are used to optimize working capital.

Example:
A company managing its inventory levels to avoid overstocking (which ties up
capital) while ensuring enough stock is available to meet customer demand.

6. Financial Control:

Definition:
Financial control involves monitoring and controlling financial resources to ensure
that the company’s financial goals are being met and that resources are being used
efficiently.

Key Points:

 It includes setting budgets, monitoring actual performance against these

budgets, and analyzing variances.

 Financial control is also concerned with financial audits, internal controls, and
risk management to ensure the organization stays within its financial limits.

 Involves the use of tools like budgeting, financial reporting, variance

analysis, and internal controls.

7. Risk Management:

Definition:
Risk management involves identifying, analyzing, and mitigating financial risks that
may adversely affect the organization’s financial health.
Key Points:

 Financial risks include market risk, credit risk, liquidity risk, operational risk,
and others.

 Financial managers use strategies like hedging, insurance, and

diversification to manage these risks.

 Risk management ensures the company can withstand unexpected events

and continue its operations smoothly.

Example:
A company might use hedging strategies to mitigate the risk of fluctuating currency
exchange rates when doing business internationally.