Class :- BBA4

Subject :- Financial Management

Unit -1

Introduction:-

Financial management:-

Finance is the life blood and nerve centre of a business, just as circulation of blood is essential in
the human body for maintaining life, finance is a very essential for the smooth running of the
business. Without finance neither any business can be started nor successfully run.

According to R. C. Osborn, “The finance function is the process of acquiring and utilising funds of a
business.”

APPROACHES TO FINANCE FUNCTION:-

1) Traditional Approach: The traditional approach, which was popular in the early part of
twentieth century, limited the role of financial management to raising and administering of funds
needed by the corporate enterprises to meet their financial needs. The traditional approach
continued till mid 1950’s.

(2) The Modern Approach: The modern approach views finance function in broader sense. It
includes both raising of funds as well as their effective utilisation under the purview of finance.
Finance has to be considered as an integral part of overall management. So finance function,
according to this approach, covers financial planning, raising of funds, allocation of funds,
financial control etc. The new approach is an analytical way of dealing with financial problems of a
firm.

OBJECTIVES OF FINANCIAL MANAGEMENT:-

From the discussion we have made so far, it becomes clear that a firm has to take the following
three major decisions:-

(i) Where to invest funds and what amount? i.e., the Investment decisions;

(ii) Where to raise funds and what amount? i.e., the Financing decisions;

(iii) How much to pay by way of dividends? i.e. the Dividend Policy decisions.

It is generally accepted that the financial objective of the firm is to maximise the owner’s
economic welfare. For this purpose, two well-established and widely-discussed criteria are
presented: -
(a) Profit Maximisation .
(b) Wealth Maximisation.

a) Goal of Profit Maximisation: It is universally recognised that the basic goal of business should be
to maximise owner’s economic welfare. In order to achieve this ultimate goal ‘ maximisation of
profit’ has been considered a basic objective of financial management. Various types of financial
decisions, to be taken with a view to maximise the profit of the firm.
(b) Goal of Wealth Maximisation: The proper goal of financial management is wealth maximisation
of equity shareholders as it is expressly concerned with the relationship of profitability and the
volume of capital being used in the enterprise.

SCOPE OF FINANCE OR FINANCIAL FUNCTIONS:-

The scope of the term finance function, as considered by the modern approach, can be said to be
concerned with the following three types of decisions:

(a) Financing Decisions: These decisions are basically concerned with the process of acquiring the
funds. Obtaining the funds for their deployment in the business is the starting point of any
business activity. Further, the funds required by the business may be raised either by own
sources (Equity Capital) or by outside sources (Debt Capital). The financing decisions are basically
concerned with the answers to the questions like.

(1) What should be the amount of the funds that should be raised?

(2) What should be the mix of equity and debt capital in which the required amount of
funds should be raised?

(b) Investment Decisions: The second area with which the finance function deals is the utilisation
of the funds raised and required by the business. The investment decisions relate to the selection
of the assets in which the funds should be invested.

(c) Dividend Decisions: Another major area of decision making by a finance manager is known
as the dividend decisions. The dividend decision is concerned with the quantum of profits to be
distributed among shareholders.

FUNCTIONS OR SCOPE OF FINANCIAL MANAGEMENT:-

John J. Hampton explained following four functions:-

(1) Managing Funds, (2) Managing Assets, (3) Liquidity Functions and (4) Profitability Functions.

At present the important functions of Financial Management may be put into two categories:

(A) Executive/Administrative or Decision Making Functions: (1) Financial Forecasting and Planning,
(2) Procurement of Funds, (3) Decision making regarding Investment in Assets, (4) Managing
Assets, (5) Management of Income, (6) Dividend Policy Decision. (7) Appraisal of Financial
Performance, (8) To make efforts for increasing the productivity of the capital, (9) To Advice the
top management, (10) Financing Decisions, (11) Financial Control.

(B) Routine/Incidental Functions: (1) Record keeping of financial transactions, (2) Preparation of
various financial statements, (3) Arranging the cash balance as per requirement, (4) Managing the
Credit, (5) Safeguarding of securities, insurance policies and other valuable documents.