Internal Assignment

Financial Management

T K Tushar
20191BBL0097
To: Prof. Leena George
1. What is the Nature and Scope of Financial Management?
Ans: Financial Management means applying management principles to manage the
financial resources of an organization. It involves Planning, Organizing, Directing and
Controlling financial operations to manage the finance of an organization efficiently.

According to Howard and Upton Financial Management is defined as the administrative

area or set of administrative functions in an organization which has to deal with the
management of the flow of cash so that the organization so they have the means to carry
out its objectives.

Bonneville and Dewey interpret that Financial Management is defined as the part of
management which is concerned mainly with raising funds in the most economic manner.
It consists in the raising, providing and managing all the money, capital or funds of any
kind to be used in connection with the business.

Considering all these views, Financial Management may be defined as the part of
management which is concerned mainly with raising funds in the most economic and
suitable manner, using these funds by a business.

Nature of Financial Management is concerned with its functions, its goals, trade-off
with conflicting goals, its relations with the other sub systems in the firm, its
environment, its equations with other divisions within the organization.

1. Financial Management is an integral part of overall management. Financial

considerations are involved in all business decisions. Its pervasive throughout the
organization.
2. The central focus of financial management is valuation of the firm.
3. Financial management essentially involves risk-return trade-off Decisions on
investment involve choosing of types of assets which generate returns accompanied
by risks. Generally higher the risk, returns might be higher and vice versa. So, the
financial manager has to decide the level of risk the firm can assume.
 4. Financial management affects the survival, growth and vitality of the firm. Finance is
said to be the life blood of business. The amount, type, sources, conditions and cost of
finance squarely influence the functioning of the unit.
5. Finance functions such as investment, rising of capital, distribution of profit are
performed in all firms and business or non-business, big or small, proprietary or
corporate undertakings.
6. Financial management is a sub-system of the business system which has other
subsystems like production, marketing, etc. In systems arrangement financial sub-
system is to be well-coordinated with others and other sub-systems well matched with
the financial subsystem.

Scope of Financial Management

Financial management helps an organization to utilize their finances most profitably. This is
achieved through the following conducts:
I. Investment Decision: The investment decision, also known as capital budgeting, is
concerned with the selection of an investment proposal/ proposals and the investment
of funds in the selected proposal. A capital budgeting decision involves the decision
of allocation of funds to long-term assets that would yield cash flows in the future
II. Financial Decision: Financing decision is the second important function to be
performed by the financial manager. Broadly, he or she must decide when, from
where and how to acquire funds to meet the firm’s investment needs.

III. Dividend Decision: Dividend decision is the third major financial decision. The
financial manager must decide whether the firm should distribute all profits, or retain
them, or distribute a portion and return the balance. The proportion of profits
distributed as dividends is called the dividend-payout ratio and the retained portion of
profits is known as the retention ratio. Like the debt policy, the dividend policy should
be determined in terms of its impact on the shareholders’ value.

IV. Liquidity Decision: Investment in current assets affects the firm’s profitability and
liquidity. Current assets should be managed efficiently for safeguarding the firm
against the risk of illiquidity. Lack of liquidity in extreme situations can lead to the
 firm’s insolvency. A conflict exists between profitability and liquidity while
managing current assets. If the firm does not invest sufficient funds in current assets,
it may become illiquid and therefore, risky. But if the firm invests heavily in the
current assets, then it would lose interest as idle current assets would not earn
anything. Thus, a proper trade-off must be achieved between profitability and
liquidity.

2. What are the types of capital required by the firm and What are the sources of
capital?

Ans: Firms usually focus on the Three types of Business Capital and that is:
i. Working Capital
ii. Equity Capital
iii. Debt Capital

Finance is the major part in running a firm. Distribution of finance to each and every
department is based upon the requirements of that department and the situation of the
business. Requirement of finance can be broadly classified into following:

1. Long term or fixed capital financial requirement.

2. Short-term or working capital requirement.

A firm can obtain its funds from variety of sources, which are as follows:

1 Long term sources: A firm needs funds to purchase fixed assets such as land, plant &
machinery, furniture, etc. These assets should be purchased from those funds which
have a longer maturity repayment period. The capital required for purchasing these
assets is known as fixed capital. So, funds required for fixed capital must be financed
using long-term sources of finance.

2 Mid-term sources: Funds required for say, a heavy advertisement campaign, the
benefit of which lasts for more than one accounting period, should be financed
 through medium-term sources of finance. In other words expenditure that results in
deferred revenue should be financed through mid-term sources.
3 Short term sources: Funds required for meeting day-to-day expenses. Eg: revenue
expenditure or working capital should be financed from short-term sources whose
maturity period is one year or less.
4 Owned Capital: Owned capital represents equity capital, retained earnings and
preference capital. Equity share has a perpetual life and are entitled to the residual
income of the firm but the equity shareholders have the right to control the affairs of
the business because they enjoy the voting rights.
5 Borrowed Capital: Borrowed capital represents debentures, term loans, public
deposits, borrowings from bank, etc. These are contractual in nature. They are entitled
to get a fixed rate of interest irrespective of profit and are to be repaid on a fixed date.

3. What are the different financial decisions taken by a finance manager?

Ans: The Main 3 types of decisions that a finance manager has to take is:

i. Investment Decisions: Investment Decision relates to the determination of total

amount of assets to hold in the firm, the composition of these assets and the
business risk complexions of the firm as perceived by its investors. It is the most
important financial decision. Since funds involve cost and are available in a
limited quantity, its proper utilization is very necessary to achieve the goal of
wealth maximization.
ii. Financing Decisions: Once the firm has taken the investment decision and
committed itself to new investment, it must decide the best means of financing
these commitments. Since firms regularly make new investments; the needs for
financing and financial decisions are ongoing. A finance manager has to select
such sources of funds which will make the optimum capital structure. The
important thing to decide here is the proportion of various sources in the overall
capital mix of the firm.
iii. Dividend Decisions: The third major financial decision relates to the disbursement
of profits back to investors who supplied capital to the firm. The term dividend
refers to that part of profits of a company which is distributing it among its
shareholders.