Course : Financial Management.

Chapter.1

(Outcome 1 - Recognize the role of financial management within the organisation and with
regard to average stakeholders)

Financial Management - Meaning

Financial Management is that branch of management which deals with finance. Dictionary
meaning of finance is” the money resources of the State, business and individuals”. Therefore
the term finance can be classified into two viz;

1. Public fiancé deals with the requirements, receipts and disbursements of funds in the
government and government institutions.

2. Private finance is concerned with requirements receipts and disbursements of funds

of individuals, businesses and non profit organizations. Thus private finance can be
divided into
a. Personal finance
b. Business finance and
c. Finance of non profit organizations

Financial management –Defined

Financial Management deals with business finance. Business finance can be broadly defined
as the activity concerned with the planning, raising, controlling and administering the funds
used in the business.

Finance Function- Defined

Finance function is one of the most important functions in the business. The aim of this
function is to increase profitability and to maximise the value of the firm. There are two
concepts to define finance function.

1. Traditional concept

Traditional concept of finance function deals with acquiring sufficient funds both for
long term and short term period for the business.

1
Course : Financial Management.

2. Modern concept

Modern concept of finance function covers both acquisition of funds and proper
utilisation of funds in the business for long period and short period.
Finance functions / Responsibility of financial management
The main responsibilities of the financial officer are as follows:

1. Financial Planning
The financial Officer has to do the following for financial planning
a. he must decide the time when he needs money,
b. the sources of supply of money and
c. the investments patterns
So that the company may meet its obligations properly and maintain its goodwill in
the market
2. Raising of Necessary Funds
a. He has to see the nature of the need for funds, i.e., whether finances are required
for long-term or for short-term.
b. He must assess the alternative sources of supply of finance taking into view the
cost of raising funds,
c. He must assess the effect of raised funds on various concerned parties, i.e,
shareholders, creditors, employees etc.
3. Controlling the Use of Funds.
a. The financial manager is responsible for the proper utilization of funds.
b. He must ensure that the assets are used effectively so as to earn higher profits.
c. Inflow and outflow of cash must be controlled in a manner so as to meet the
current as well as future obligations
d. Unnecessary expenditure should be curtailed
e. There should be no possibility for misappropriation of money.
4. Disposition of Profits.
a. Appropriation of profits is one of the main responsibilities of the financial manger.
b. He is to advise to the top executive as how much of the profits should be retained
in the business for future expansion; how much to be used in repaying the debts;
and how much to be distributed to the shareholders as dividend.

2
Course : Financial Management.

Objectives of Financial management

The main objective of financial management is to maximize the value of the firm/shares or to
maximize the owner’s economic welfare of the shareholder. But there is difference of opinion
about how owners/shareholders welfare can be maximised. There are two approaches
suggested to maximize the owner’s economic welfare.
1. Profit maximization objective and
2. Wealth maximization objective
Profit maximization

Maximization of profits is generally regarded as the main objective of a business enterprise.

Share holder investing his money in the shares of company expecting some profits. It is
possible only when the company's goal is to maximize profits.

Profit maximisation means maximising the Oman Rial income of the business. Profit is the
difference between revenue and costs. Excess of income/revenue over expenditure/cost
result in profit.

According to this objective, all such actions which increase profits should be undertaken and
those that are likely to have adverse impact on profitability of the enterprise should be
avoided.

This objective is simple and has the advantage of judging the performance of an enterprise.
The objective of profit maximisation is not an adequate goal of the firm/business because

 It does not take into account the time value of receipt/income. Present income have
more value than future income because of time value
 It does not take into consideration the risk of the future income/profit.
Wealth maximization
 Maximization of wealth is regarded as the proper objective of the firm, which is
consistent with maximizing the economic welfare of the shareholders.
 Wealth maximisation objective looks into maximising the wealth of the firm or the
market value of the equity shares.

 Wealth is calculated from profit after adjusting the time value of money and risk factor

 Wealth = Present Value of benefits – Present Value of investment

3
Course : Financial Management.

 Present value of benefits is calculated by discounting the benefits at a rate which

reflects the time value and risk.
 Thus, wealth maximization objective suggests that any financial action which creates
wealth is desirable and accepted one.
Role of the Financial Management with regard to stakeholders
According to traditional approach, finance function is limited to raising funds only. But
according to modern approach, finance function covers both raising of funds as well as wise
utilisation of funds.
The role of the financial manager in such a situation is to plan and acquire funds in order to
maximize the value of the company /share holders.
When the financial manger tries to increase return, risk will also increase. When he tries to
reduce the risk return will also decrease
Therefore a financial manager has to maintain a proper balance between risks and return in
order to maximize the market value of the firm/ share. Such a balance is called risk return
trade off. At this stage, risk is minimum and return is maximum. Only at this stage value of the
firm or market value of equity share is maximum.