MODULE OF INSTRUCTION

Module 1
Introduction to Financial Management

Welcome to Financial Management!

I believe that you already have mastered the management of financial

resources for your personal living. Now, let’s talk about bigger things.
Let’s talk about business financial management.

After going over this chapter, you should be able to:

1. Define Financial Management

2. Know the objectives of Financial Management
3. Discover the functions of a finance manager
4. Tell the importance of Financial Management

Financial Management 1
 Financial Management

1.1 Definition of Financial Management

Financial management is concerned with the acquisition, financing,
and management of assets with some overall goal in mind. Its decision
function includes areas such as investment, financing, and asset
management decisions (Van Horne and Wachowicz, 2008).

1.2 Objectives of Financial Management

Objectives of Financial Management may be broadly divided into two
parts which includes profit maximization and wealth maximization:

Profit Maximization

This is a process that companies undergo to determine the

best output and price levels in order to maximize its return. The
company will usually adjust influential factors such as
production costs, sale prices, and output levels as a way of reaching
its profit goal.

Wealth Maximization

Wealth maximization is the concept of increasing the value of a

business in order to increase the value of the shares held by
stockholders. The concept requires a company's management team to
continually search for the highest possible returns on funds invested in
the business, while mitigating any associated risk of loss. This calls for
a detailed analysis of the cash flows associated with each prospective
investment, as well as constant attention to the strategic direction of
the organization.

1.3 Functions of Finance Manager

The finance manager plays a very big role in the finance function
which requires him to have possessed knowledge in the area of
accounting, finance, economics and management. His position is
highly critical and analytical to solve various problems related to
finance. He performs the following major functions:

2
MODULE OF INSTRUCTION

 Forecasting Financial Requirements

 Acquiring Necessary Capital
 Investment Decision
 Cash Management
 Interrelation with Other Departments

1.4 Importance of Financial Management

Proper financial management must be done for business to operate
smoothly. Effective financial management leads to the achievement of
the goals of the business. That’s why there must have good
management when it comes to financial planning, acquisition of funds,
usage of funds, financial decision, profitability improvement, firm
value maximization, and savings promotion. The following are their
importance as described by Paramasivan and T. Subramanian:

Financial Planning

This is considered an important part of the business because almost

everything starts with planning. Financial management helps you
determine the financial requirement of a certain business and help you
make a good financial plan.

Acquisition of Funds

Financial management involves the acquisition of required resources

for the business. Acquiring needed funds play a major role in financial
management and this involves finding possible source of finance
having a minimal cost.

Proper Use of Funds

Proper use and allocation of funds leads to the improvement of the

operational efficiency of the business. When the funds are utilized
properly, this can reduce the cost of capital and increase the value of
the firm.

Financial Management 3
 Financial Management

Financial Decision

Financial management helps you make sound financial decision.

Financial decision will affect the entire business operation because
decisions have direct relationships with various department functions.

Improvement of Profitability

Profitability of the business depends on the effectiveness and proper

utilization of funds. With the help of strong financial control devices
such as budgetary control, ratio analysis and cost volume profit
analysis, financial management can improve the profitability position
of the business.

Increasing the Value of the Firm

Financial management is very important in the field of increasing the

wealth of the investors and the business. The ultimate aim of most
businesses is to achieve the maximum amount of profit leading to the
maximization of the wealth of the investors.

Savings Promotion

Savings are possible only when the business earns higher profit and
thus maximizing wealth. Effective financial management helps you
promote and mobilize individual and corporate savings. Nowadays,
financial management is also popularly known as business finance or
corporate finances. Financial management is essential in the business
especially in the corporate sectors.

4
MODULE OF INSTRUCTION

Glossary

Financial Management - concerned with the acquisition, financing,

and management of assets with some overall goal in mind

Profit – the difference between income and expenses

Wealth – the true value or net worth of business

References
C. Paramasivan and T. Subramanian. (2005). “Financial
Management”, New Age International Ltd., Publishers.
Investopedia.com

J. Van Horne and J. Wachowics (2008). “Fundamentals of Financial

Management”, Pearson Education Limited.

Financial Management 5