Fundamental of Financial Management

MEANING AND DEFINITION OF FINANCE

Finance, according to Khan and Jain is the art and science of managing money.
Finance may be defined as the art and science of managing money. It includes financial
service and financial instruments. The word finance connotes “Management of Money”.
Finance is necessary in the modern world, especially in economic fields. For example,
business is individuals or organizations who try to earn a profit by providing products
that satisfy people needs. Increasing the profit is the main aim of any kind of economic
world. Thus, business needs finance to meet their goals.

DEFINITION OF BUSINESS FINANCE

Business finance according to the Wheeler, “Business finance is that business

activity which concerns with the acquisition and conversation of capital funds in
meeting financial needs and overall objectives of a business enterprise”. This finance is
concerned with budgeting, financial forecasting, cash management, credit
administration, investment analysis and fund procurement of the business concern and
the business concern needs to adopt modern technology and application suitable to the
global environment.

TYPES OF FINANCE

There are two major parts of finance :

1. Private finance
Refer to Non-government finance or private penance. Actually, without
government Institution and all others institution is known by the private finance or
non-government finance. Private finance is the financial management which an
individual or a family unit performs to budget, save, and spend monetary resources
over time, taking into account various financial risks and future life events. This type
of finance includes the individual, firms, business/corporate financial activities.
 2. Public Finance
Public finance is the finance sector that deals with the allocation of resources to
meet the set budgets for government entities. This branch of economics is responsible
for the scrutiny of the meaning and effects of financial policies implemented by the
government. This sector examines the effects and results of the application of taxation
and the expenditures of all economic agents and the overall economy.

FINANCIAL MANAGEMENT

Financial Management is a part of the overall management. It is concerned with

the effective funds management in the business. According to Joshep and Massie,
financial management is the operating activity of a business that is responsible for
obtaining and effectively utilizing the funds necessary for efficient operations. The most
popular and acceptable definition of financial management as given by S.C. Kuchal is
that “Financial Management deals with procurement of funds and their effective
utilization in the business”.
Financial management stated by Solomon, “It is concerned with the efficient use
of an important economic resource namely, capital funds”.
Howard and Upton : Financial management “as an application of general
managerial principles to the area of financial decision-making.
Weston and Brigham : Financial management “is an area of financial decision-
making, harmonizing individual motives and enterprise goals”.
Managing the finance is necessary because it enables your business to approach
financial decisions with sound information and sufficient resources.

THE SCOPE OF FINANCIAL MANAGEMENT

Financial Management related with various functional departments like personnel,

marketing and production. The scope of financial management covers wide area with
multidimensional approaches. Those are :
1) Financial Management and Economics
Investment decisions, micro and macro environmental factors are closely
associated with the functions of financial manager. Financial management also
uses the economic equations like money value discount factor, economic order
quantity etc.
2) Financial Management and Accounting
Accounting records includes the financial information of the business concern.
But, in the modern world accounting and financial management are two separate
functions where, accounting requires to report past financial transactions whereas
the other, financial management requires to plan about future transactions. Even
though, they are separated, both are still interrelated.
3) Financial Management or Mathematics
Modern approaches of the financial management applied large number of
mathematical and statistical tools and techniques. They are also called as
econometrics.
4) Financial Management and Production Management
Production management helps the business earn revenue or profit. Production
performance needs finance, because production department requires raw material,
machinery, wages, operating expenses etc. These expenditures are decided and
estimated by the financial department and the finance manager allocates the
appropriate finance to production department.
5) Financial Management and Marketing
Every produced goods in a company has a different target for customers. The
financial manager must be responsible to allocate the adequate finance to the
marketing department.
6) Financial Management and Human Resource
The human resource management provides manpower to all the functional areas
of management. This is where financial management is required, financial
manager should allocate the finance to the human resource department as wages,
salary, remuneration, commission, bonus, pension and other monetary benefits to
the human resource department.
OBJECTIVE OF FINANCIAL MANAGEMENT

Objective of the financial management is needed to obtain effective procurement and

efficient use of finance. Those objects are divided into two parts :
1. Profit maximization
A business main goal is to reach the maximization profit. Profit can be a measure
techniques to understand the effectiveness and efficient of a business. The important
features of profit maximization includes maximizing the quantity of production or the
business operation to reach the maximum profit. Profit maximization help reduces the
risk of a company or business. Hence it’s necessary to maximize profit as a measure to
shows the entire business position.
There are some affirmative arguments regarding the profit maximization. Those
arguments consist of : (i) Main aim is earning profit. (ii) Profit is the parameter of the
business operation. (iii) Profit reduces risk of the business concern. (iv) Profit is the
main source of finance. (v) Profitability meets the social needs also.
But for those who are unfavourable of profit maximization argue that : (i) Profit
maximization leads to exploiting workers and consumers. (ii) Profit maximization
creates immoral practices such as corrupt practice, unfair trade practice, etc. (iii) Profit
maximization objectives leads to inequalities among the sake holders such as customers,
suppliers, public shareholders, etc.
Profit maximization objective consists of certain drawback also: It is vague, It
ignores the time value of money, and it ignores risk.

2. Wealth maximization
The term wealth means shareholder wealth or the wealth of the persons those
who are involved in the business concern. Unlike profit maximization that concern on
earning a larger amount of profit, wealth maximization ultimate goal is to improve the
market value of its shares. Wealth maximization is also known as value maximization or
net present worth maximization. This objective is an universally accepted concept in the
field of business.
 There are some favourable arguments for wealth maximization : (i) Wealth
maximization is superior to the profit maximization because the main aim of the
business concern under this concept is to improve the value or wealth of the
shareholders. (ii) Wealth maximization considers the comparison of the value to cost
associated with the business concern. Total value detected from the total cost incurred
for the business operation. It provides extract value of the business concern. (iii) Wealth
maximization considers both time and risk of the business concern. (iv) Wealth
maximization provides efficient allocation of resources. (v) It ensures the economic
interest of the society.
For the unfavourable arguments for wealth maximization, there are : (i) Wealth
maximization leads to prescriptive idea of the business concern but it may not be
suitable to present day business activities. (ii) Wealth maximization is nothing, it is also
profit maximization, it is the indirect name of the profit maximization. (iii) Wealth
maximization creates ownership-management controversy. (iv) Management alone
enjoy certain benefits. (v) The ultimate aim of the wealth maximization objectives is to
maximize the profit. (vi) Wealth maximization can be activated only with the help of
the profitable position of the business concern.

APPROACHES TO FINANCIAL MANAGEMENT

Financial management approaches measures the scope of the financial

management in various fields, which include the essential part of the finance. These
approaches are categorized into two parts :
1) Traditional Approach

Traditional approach was used during the year 1920-1950. The main aim of the
traditional approach is only for rising funds for business cocern. The utilisation of
funds was considered beyond the purview of finance function. It was felt that
decisions regarding the application of funds are taken somewhere else in the
organisation. However, institutions and instruments for raising funds were
considered to be a part of finance function. The traditional approach to the scope
and functions of finance has now been discarded as it suffers from many serious
limitations:
 (i) It is outsider-looking in approach that completely ignores internal decision
making as to the proper utilisation of funds.

(ii) The focus of traditional approach was on procurement of long-term funds.

Thus, it ignored the important issue of working capital finance and management.

(iii) The issue of allocation of funds, which is so important today, is completely

ignored.

(iv) It does not lay focus on day to day financial problems of an organization.

2) Modern approach

The modern approach views finance function in broader sense. It includes both
rising of funds as well as their effective utilisation under the field of finance. The
finance function does not stop only by finding out sources of raising enough funds;
their proper utilisation is also to be considered. The cost of raising funds and the
returns from their use should be compared.

The funds raised should be able to give more returns than the costs involved in
procuring them. The utilisation of funds requires decision making. Finance has to
be considered as an integral part of overall management. So finance functions,
according to this approach, covers financial planning, rising of funds, allocation of
funds, financial control etc. this new modern approach seems way more proper in
this era, because it considers the three basic management decisions, i.e., investment
decisions, financing decisions and dividend decisions within the scope of finance
function.

FUNCTIONS OF FINANCE MANAGER

Finance function is one of the major parts of business organization, which

involves the permanent, and continuous process of the business concern. Finance is one
of the interrelated functions which deal with personal function, marketing function,
production function and research and development activities of the business concern.
Finance Manager has a lot responsibilities to perform their function. Their function
consist of :

1. Forecasting Financial Requirements

It is the primary function of the Finance Manager. Responsible to estimate the financial
requirement of the business concern.

2. Acquiring Necessary Capital

After deciding the financial requirement, the finance manager should concentrate how
the finance is mobilized and where it will be available.

3. Investment Decision
The finance manager must carefully select best investment alternatives and consider the
reasonable and stable return from the investment.

4. Cash Management
Present days cash management plays a major role in the area of finance because proper
cash management is not only essential for effective utilization of cash but it also helps
to meet the short-term liquidity position of the concern.

5. Interrelation with Other Departments

Finance manager deals with various functional departments such as marketing,
production, personel, system, research, development, etc.

IMPORTANCE OF FINANCIAL MANAGEMENT

Finance is the lifeblood of business organization. It needs to meet the requirement of the
business concern.The business goal can be achieved only with the help of effective
management of finance.

1. Financial Planning
Financial management helps to determine the financial requirement of the business
concern and leads to take financial planning of the concern.
2. Acquisition of Funds
Financial management involves the acquisition of required finance to the business
concern.

3. Proper Use of Funds

Proper use and allocation of funds leads to improve the operational efficiency of the
business concern.
4. Financial Decision
Financial management helps to take sound financial decision in the business concern.
5. Improve Profitability
Profitability of the concern purely depends on the effectiveness and proper utilization of
funds by the business concern.
6. Increase the Value of the Firm
Financial management is very important in the field of increasing the wealth of the
investors and the business concern.
7. Promoting Savings
Savings are possible only when the business concern earns higher profitability and
maximizing wealth.