New Generation University

College
Department of Management
Masters of Business Administration

Course Title: Financial Managerial

Submitted By
Robsan Kidane
ID: NGU/22/2830

Submitted To
Dasalegn M (Assist. Prof, PhD Cand)

Date of Submission:
INTRODUCTION

Finance is necessary for business concerns to meet their obligations in the economic environment.
The financial situation affects all business activities. It is therefore referred to as the lifeblood of a
business organization. Regardless of how big or small their business concerns are, they all require
financing to carry out their daily operations.

In the modern world, everything is focused on the economy and is very particular about turning a
profit on any project or activity. Making money directly affects every aspect of business
operations. (According to the economics concept of factors of production, rent paid to landlord,
wage paid to labor, interest paid to capital, and profit given to shareholders or proprietors), a
business concern needs finance to meet all the requirements. Finance may therefore be referred to
as capital, investments, funds, etc., but each term has a distinct meaning and character. Every type
of economic activity has as its primary goal raising the profit.

FINANCIAL SENSE

Finance is a broad term that describes activities associated with banking, leverage or debt, credit,
capital markets, money, and investments. Basically, finance represents money management and the
process of acquiring needed funds. Finance also encompasses the oversight, creation, and study of
money, banking, credit, investments, assets, and liabilities that make up financial systems.

Financial planning involves analyzing the current financial position of individuals to formulate
strategies for future needs within financial constraints. Personal finance is specific to every
individual's situation and activity; therefore, financial strategies depend largely on the
person's earnings, living requirements, goals, and desires.

Corporate finance refers to the financial activities related to running a corporation, usually with a
division or department set up to oversee the financial activities.

Corporate 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.
According to the Encyclopedia of Social Sciences, “Corporation finance deals with
the financial problems of corporate enterprises. These problems include the financial aspects
of the promotion of new enterprises and their administration during early development,
the accounting problems connected with the distinction between capital and income, the
administrative questions created by growth and expansion, and finally, the financial
adjustments required for the bolstering up or rehabilitation of a corporation which has
come into financial difficulties”

DEFINITION OF FINANCE

 According to Khan and Jain, “Finance is the art and science of managing money”.
 According to Oxford dictionary, the word ‘finance’ connotes ‘management of money’.
  Webster’s Ninth New Collegiate Dictionary defines finance as “the Science on study of
the management of funds’ and the management of fund as the system that includes the
circulation of money, the granting of credit, the making of investments, and the provision
of banking facilities.

Definition of Business Finance

According to the Wheeler, “Business
with the acquisition and conversation of
objectives of a business enterprise”.
In the words of Parhter and Wert,
administering and disbursing funds by
financial fields of industry”.
finance is that business activity which concerns
capital funds in meeting financial needs and overall
“Business finance deals primarily with raising,
privately owned business units operating in non-

TYPES OF FINANCE

Finance is one of the important and integral part of business concerns, hence, it plays a major role
in every part of the business activities. It is used in all the area of the activities under the different
names. Finance can be classified into two major parts:

Private Finance: This includes the Individual, Firms, Business or Corporate Financial activities to
meet the requirements.

Public Finance: this concern with revenue and disbursement of Government such as Central
Government, State Government and Semi-Government Financial matters.
Importance of finance

One of the very nuanced business areas that can make or break entrepreneurs is finance. The
concept of finance is crucial for all organizations to understand because, in theory, all businesses
require finances for daily operations.
 Profit creation: Money is for making money, as the adage goes, which is why finance
management in businesses calls for the utmost care. Profits must continue to rise in
order for a business to remain profitable. Due to the fine line between debt and equity
financing, the initial capital investment must be carefully managed. The finance
team's profit planning should closely resemble figuring out the profitability of each
unique good or service the company provides, eliminating the losers, and promoting
the winners.
 Operational expenses: A business exists to fulfill the operational requirements of an
organization. Most businesses, including those in Africa, require financing to cover some
operational expenses like paying employees' salaries, purchasing raw materials, keeping
inventory, and paying interest, to name a few. In relation to the ongoing operational costs
that must be covered, a sound financial plan offers some stability in managing the
organization's profits.
 Asset creation: The main long-term goal of business owners is to scale up production by
increasing the company's assets. Because of the financial industry, businesses can have
reliable savings plans that don't rely on quick cash to cover expenses. Increased production
scale will undoubtedly result from investments in things like land, machinery, and
equipment, but only under the guidance of astute financial management. The creation of
assets generally refers to staying abreast of technological developments that are beneficial
to the business's success.
 New products and markets: Every business is constantly searching for new markets and
products. For instance, mystery shopping is a good way to learn about the products that are
offered on the market and the interests of the consumers. Without a sound financial
foundation, you might not have the resources to enter new markets or offer newer products
or services there.

 Cash Flow Management: Large amounts of money are expected to flow in and out of any
business, regardless of how big or small it is. A business depends on these financial
transactions to function. They can, however, be a major source of issues without a proper
system in place, particularly with regard to legal matters. A company needs a solid
financial team to manage the company's cash flow, with historical records serving as proof
of the various transactions. This makes sure that all necessary costs, such as taxes to the
government, are covered. The goal of cash flow management is to maintain a level of
liquidity that will allow for the payment of the majority of operational costs.
 Financial goals: Each organization has a set of financial objectives in addition to other
vital ones for a business setup. Financial objectives can extend as far as meeting the overall
economic needs and requirements of the country, even though the majority focuses on
achieving a certain profit margin over a predetermined time.
  Management of unavoidable risks: Risk-taking is a key component of running any
business. Even so, it is insufficient to consider the way your company is set up as a risk.
The two main causes of significant loss in your business can by far be natural phenomena
and human error. Your financial management strategies will assist in creating a backup
plan before that time arrives, putting your business in a position to handle unforeseen risks.

The roles of the finance in organization

5 reasons why Finance is important aspect of every organization

1. Without financial management business cannot exists

Finance is the backbone of any business or organization without which it cannot function.
2. Adequate funds availability:
Sufficient funds are necessary to meet daily expenses to purchase long term assets for the
company's requirement accordingly; also funds should be there to deal with future unforeseen over
costs which may arise. 
3. Cash flow management system:
In an organization, excess cash flow can also become difficult to manage. Having excess amount
of funds and not using it in a genuine much useful way is a greater waste of resources.
4. Always keeping long term goals
Having long term goals in life or business is a very important aspect to keep, once it is done the
responsibility has to be fulfilled as per the plan made at any cost to get fulfil the targeted goals to
achieve success. 
5. Financial Planning value and importance in a business
Financial planning creates immense value to the company, without this any of the business entity
cannot function properly. It is a major vital venture for all kinds of businesses worldwide. It is
done for an entire year to have control over financial activities of the company. 

Discuss what financial management means and why it is required in the personal and business
arenas. What are major components of financial management and what decisions are made by
financial managers?

Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying general
management principles to financial resources of the enterprise.

Decisions that are made by financial managers

1. Investment decisions: includes investment in fixed assets (called as capital budgeting).

Investments in current assets are also a part of investment decisions called as working
capital decisions.
2. Financial decisions: They relate to the raising of finance from various resources which
will depend upon decision on type of source, period of financing, cost of financing and the
returns thereby.
 3. Dividend decision: The finance manager has to take decision with regards to the net profit
distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will depend
upon expansion and diversification plans of the enterprise.
4. Retained profits: Amount of retained profits has to be finalized which will depend upon
expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern. The objectives can be-

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders this will depend upon the earning capacity,
market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized
in maximum possible way at least cost.
4. To ensure safety on investment, i.e., funds should be invested in safe ventures so that
adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of capital so
that a balance is maintained between debt and equity capital.
6. Maintaining enough supply of funds for the organization.
7. Ensuring shareholders get good returns on their investment.
8. Optimum and efficient utilization of funds.
9. Creating real and safe investment opportunities.

1. Profit Maximization
One of the most critical objectives is to ensure maximum profits in both the short and long run. A
finance manager should consider this on top of his priority list and ensure that outcomes related to
business performance are profitable.

2. Proper Mobilization
Just like you do not waste your savings all in one go to buy something and have nothing in hand,
managing funds is crucial for any business. Financial managers need to evaluate and make vital
decisions on the allocation and utilization of various funds. Whether it is shares, products, or
investing in small companies, all the critical factors must be considered before investing.
3. High Efficiency
Financial Management tries to increase the efficiency of all the departments of the company.
Proper distribution of finances or funds to all the departments considering the resources and work
involved increases the organization’s efficiency as a whole.
4. Reduce Risks
There are always risks involved in running a business, especially with the uncertainties that come
along. Financial managers need to avoid high-risk situations/opportunities and take calculated risks
under the consultation of experienced leaders and subject matter experts.
5. Business Survival
Amidst the competitive world, the survival of the business is a primary goal. Darwin said,
“Survival of the fittest” in Biology, which is applicable for companies. Companies need to make
decisions intuitively. They can always take the help of expert consultants if needed.
6. Balanced Structure
Like they say – Balance is key to everything. This applies not just in life but to businesses too.
Financial managers need to prepare a robust capital structure considering all capital sources. This
balance is vital for liquidity, flexibility, economy, and stability.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the company. This will depend upon expected costs and
profits and future programmed and policies of a concern. Estimations have to be made in
an adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the capital
structure have to be decided. This involves short- term and long- term debt equity analysis.
This will depend upon the proportion of equity capital a company is possessing and
additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has many
choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.
Choice of factor will depend on relative merits and demerits of each source and period of
financing.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is possible.
5. Disposal of surplus: The net profits decisions have to be made by the finance manager.
This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other
benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon expansion,
innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries,
 payment of electricity and water bills, payment to creditors, meeting current liabilities,
maintenance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances. This can be done through many
techniques like ratio analysis, financial forecasting, cost and profit control, etc.

The role of the financial manager

The financial management department of any company is handled by a financial manager. 
 This department has numerous functions, such as:

 Calculating the capital required. The amount of capital needed by an organization must
be determined by the financial manager. This is dependent on the company's policies
regarding anticipated costs and profits. The necessary sum must be calculated so that the
company's earnings increase.
 Formation of capital structure. A capital structure must be created after the amount of
capital has been estimated. This entails a short- and long-term debt-equity analysis. The
amount of capital that the company already has on hand as well as the amount that needs to
be raised from outside sources determines the structure's outlook.
 Investing the capital: To raise additional funding and generate consistent returns, every
organization or business must make financial investments. This means that the financial
manager must put money into profitable and secure ventures.
 Allocation of profits. It is the financial manager's responsibility to distribute the
company's net profit effectively once it is healthy. This might entail setting aside a portion
of the net profit for expansion, innovation, or contingency plans while using another
portion to pay dividends to shareholders.
 Effective management of money. Effective money management of the business is another
duty of the financial manager. The company needs money for a number of things, including
paying employees' salaries and bills, keeping stock, covering liabilities, and buying any
necessary materials or equipment..
 Financial control: The financial manager's responsibilities also include controlling and
analyzing the company's finances in addition to planning, organizing, and obtaining
funding. Tools like financial forecasting, ratio analysis, risk management, and profit and
cost control can be used for this. 

IMPORTANCE OF FINANCIAL MANAGEMENT

Finance is the lifeblood of business organization. It needs to meet the requirement of the business
concern. Each and every business concern must maintain adequate amount of finance for their
smooth running of the business concern and also maintain the business carefully to achieve the
goal of the business concern. The business goal can be achieved only with the help of effective
management of finance. We can’t neglect the importance of finance at any time at and at any
situation. Some of the importance of the financial management is as follows:

Financial Planning: Financial management helps to determine the financial requirement of the
business concern and leads to take financial planning of the concern. Financial planning is an
important part of the business concern, which helps to promotion of an enterprise.
Acquisition of Funds: Financial management involves the acquisition of required finance to the
business concern. Acquiring needed funds play a major part of the financial management, which
involve possible source of finance at minimum cost.

Proper Use of Funds: Proper use and allocation of funds leads to improve the operational
efficiency of the business concern. When the finance manager uses the funds properly, they can
reduce the cost of capital and increase the value of the firm.

Financial Decision: Financial management helps to take sound financial decision in the business
concern. Financial decision will affect the entire business operation of the concern. Because there
is a direct relationship with various department functions such as marketing, production personnel,
etc.

Improve Profitability: Profitability of the concern purely depends on the effectiveness and proper
utilization of funds by the business concern. Financial management helps to improve the
profitability position of the concern with the help of strong financial control devices such as
budgetary control, ratio analysis and cost volume profit analysis.

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. Ultimate aim of any business
concern will achieve the maximum profit and higher profitability leads to maximize the wealth of
the investors as well as the nation.

Promoting Savings: Savings are possible only when the business concern earns higher
profitability and maximizing wealth. Effective financial management helps to promoting and
mobilizing individual and corporate savings.

Nowadays financial management is also popularly known as business finance or corporate

finances. The business concern or corporate sectors cannot function without the importance of the
financial management.