Main Features of Financial Management
Financial Management and Accounting
1. Analytical Thinking- Under financial management,
financial problems are analyzed and considered. A study
of the trend of actual figures is made and ratio analysis
is done
2. Continuous Process- previously financial
management was required rarely but now the financial
manager remains busy throughout the year.
3. Basis of Managerial Decisions- All managerial
decisions relating to finance are taken after considering
the report prepared by the finance manager. Financial
management is the base managerial decisions
4. Maintaining Balance between Risk and Profitability-
The larger the risk in the business the larger the
expectation of profits. Financial management maintains
a balance between risk and profitability.
5. Coordination between Processes- There is always
coordination between various business processes.
6. Centralized Nature- Financial management is of a
centralized nature. Other activities can be decentralized
but there is only one department for financial
management.
Relationship with other business functions
Other organizational functions are closely tied to
Financial Management and in one way or another, are
affected by the decisions made by financial managers.
The following are some of the notes about other
business functions.
1. Financial Management and Economics
Economics provides a structure for decision-making in
such areas as risk analysis, pricing theory through supply
and demand relationships, comparative return analysis,
and many other important areas. Economics also
provides a broad picture of the economic environment
in which corporations must continually make decisions.
In this regard, Financial Management is related to
economics in the sense that the decision of a financial
manager must also take into consideration the
economic environment in which the business exists.
2.
Financial Management, as discussed earlier is the
interpretation of the data presented in accounting.
Interpretation gives color to the somewhat vague
numbers presented in financial reports. The firm’s
finance and accounting activities are closely related and
generally overlap. Accounting is sometimes said to be
the language of finance because it provides financial
data through income statements, balance sheets, and
statements of cash flows. The financial manager must
know how to interpret and use these statements in
allocating the firm's financial resources to generate the
best return possible in the long run.
3. Financial Management and Mathematics
Modern approaches to financial management apply a
large number of mathematical and statistical tools and
techniques. They are also called econometrics.
Economic order quantity, time value of money, cost of
capital, capital structure theories, dividend theories,
ratio analysis, and working capital analysis are used as
mathematical and statistical tools and techniques in the
field of financial management.
4. Financial Management and Production Management
The profit of the concern depends upon the production
performance. Production performance finance, because
the production department requires raw materials,
machinery, wages, operating expenses, etc. Important
production decisions like make or buy can be taken only
after financial implications have been considered.
5. Financial Management and Marketing
Marketing is another vital part of a firm’s profitability
that is linked with financial management. Marketing
strategies such as holding inventories to provide
uninterrupted service to customers to increase sales are
a cost of a firm that needs the area of financial
management. Managers need to know whether to
spend much on these marketing strategies since they
bring about large chunks of their sales or just to forfeit
these marketing strategies. Spending on advertisement
is also what financial managers keep an eye on
depending on its relationship with the company’s sales
data.
6. Financial Management and Personnel
The provision of wages, salary, remuneration,
commission, bonuses, pensions, and other monetary
benefits has become a major financial decision in the
area of human resource management. Should the firm
give out a bonus to its employees? Or how much should
a firm give as a bonus to its top-performing manager?
These are some questions that might be answered by
financial management.
7. Financial management and Top Management
Strategic planning and management control are two
important functions of top management. The finance
function provides the basic inputs needed for
undertaking these activities.
8. Financial Management and Quantitative Methods
Quantitative methods such as linear programming,
probability, discounting techniques, present value
techniques, etc. are useful in analyzing complex financial
management problems.
9. Financial Management and Costing
Cost efficiency is a major strategic advantage to a firm,
and will greatly contribute to its competitiveness,
sustainability, and profitability. A finance manager has to
understand, plan, and manage costs, through
appropriate tools and techniques including Budgeting
and Activity-based Costing.
10. Financial Management and Law
Sound knowledge of the legal environment, corporate
laws, business laws, Import Export guidelines,
international laws, trade and patent laws, commercial
contracts, etc. are again finance executives in a
globalized business scenario.
11. Financial Management and Taxation
Sound knowledge of taxation, both direct and indirect, is
expected of a finance manager, as all financial decisions
are likely to have tax implications. Tax planning is an
important function of a finance manager. Some of the
major business decisions are based on the economics of
taxation. A finance manager should be able to assess
the tax benefits before committing funds.
12. Financial Management and Treasury Management
Every finance manager should be well grounded in
treasury operations, which is considered a profit center.
It deals with optimal management of cash flows,
judiciously investing surplus cash in the most
appropriate investment avenues, anticipating and
meeting emerging cash requirements, and maximizing
the overall returns. In banks, it includes the design of
new financial products from existing products.
13. Financial Management and Banking
Every finance manager must be up to date on the
changes in services & products offered by the banking
sector including several foreign players in the field.
Thanks to the Government's liberalized investment
norms in this sector, the banking system has essentially
been an important consideration in financing decisions.
14. Financial Management and Insurance
Evaluating and determining the commercial insurance
requirements, choice of products, and insurers.
analyzing their applicability to the needs and cost-
effectiveness, techniques, ensuring appropriate and
optimum coverage, claims to handle, etc. fall within the
ambit of a finance manager's scope of work &
responsibilities.
15. Financial Management and Information Technology
A finance manager needs to know how to integrate
finance and costing with operations through software
packages. Now more than ever, the difficult job of
valuation of financial instruments in the past is made
easier with the aid of better information technology.
Scope of Financial Management
The scope of financial management includes the
following 5 A’s.
1. Anticipation
- In financial management, estimation of a firm’s needs
is important as well as estimating the amount of income
that may enter the company or the amount of expense
that a company has to incur. Anticipation involves
finding out how much finance is required by a company.
2. Acquisition
- Once the required capital or finance is determined by
the company, then the company must find out how
these finances will be procured from different sources.

3. Allocation
- The collection of a firm’s finances will now be
determined by where it will be spent. Will it be spent to
purchase a fixed asset? Or will it be used to purchase
inventories to increase sellable products?
4. Appropriation
- Upon earning profits, appropriation means the
decision of the firm to determine the division of profits
among shareholders, credit holders, or whether it will
be part of a firm’s reserved capital.
5. Assessment
- This controls the financial activities of a company.
TEN AXIOMS THAT FORM THE BASICS OF
FINANCIAL MANAGEMENT
1. The Risk-Return Trade-off
- We won’t take on additional risk unless we expect to
be compensated with an additional return
2. The Time Value of Money
- A dollar received today is worth more than a dollar
received in the future. (This is further discussed in a
separate module)
3. Cash Flows is King
- This states that Cash flow and not profit is king in
terms of financial management 4. Incremental Cash
Flows
- Only the cash flows that change are the ones that
count
5. The Curse of Competitive Markets
- Why it’s hard to find exceptionally profitable projects
6. Efficient Capital Markets
- The markets are quick and the prices are right
7. The Agency Problem
- Managers will not work for the owners unless it is in
their best interests
8. Taxes Bias Business Decisions
- In evaluating projects, income taxes play a significant
role in the decision-making
9. All Risks are Not Equal
- Some risks can be diversified away and some cannot
10. Ethical Behavior is Doing the Right Thing
- Ethical dilemmas are everywhere in finance
GOAL AND OBJECTIVE OF THE FIRM
Objectives of Financial Management may be broadly
divided into:
1. Profit Maximization
2. Wealth Maximization
Profit maximization is a single-period or, at most, a
short-term goal, to be achieved within one year; it is
usually interpreted to mean the maximization of profits
within a given period. A corporation may maximize its
short-term profits at the expense of its long-term
profitability. In contrast, stockholder wealth
maximization is a long-term goal, since stockholders are
interested in future as well as present profits.
Wealth maximization is generally preferred because it
considers (1) wealth for the long term, (2) risk or
uncertainty, (3) the timing of returns, and (4) the
stockholders' return. Timing of returns is important; the
earlier the return is received; the better, since a quick
return, reduces the uncertainty about receiving the
return, and the money received can be reinvested
sooner.
Generally speaking, a firm must set its goals to maximize
its wealth rather than its profits for it to have
sustainability in the long run.