Financial Decisions

• Investment Decisions
• Decision regarding application of funds
raised by the organisation
– Fixed Assets
– Current Assets
• Dividend Policy Decision
• Declaration of Dividend V/s Retention of
profit in Business
Meaning of financial management

Financial management is application of

principles of management to the subject
called finance , it involves planning,
controlling decision making with respect
to finance activity of the business.

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FINANCIAL MANAGEMENT

Definition :

According to Soloman ,“Financial management

is concerned with the efficient use of an
important economic resource, namely,
Capital Funds.”
 Definitions
Finance management
J.F. Bradlery :-“financial management is the
area of business management devoted to a
judicious use of capital and a careful selection
of sources of capital in order to enable a
business firm to move in the direction of
reaching its goals”

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 The Evolution of Financial Management
Early 1900 : instrument, institution, and procedures of
capital market and money market
Around 1920 : focus on security and banking sector,
and investment in common stock
Around 1930 : focus on liquidity, debt, regulation,
bankruptcy, reorganization
End of 1950 : capital budgeting, valuation, and
dividend policy
Around 1960 : development of portfolio theory
Around 1970 : CAPM model and APT model that can
be used to value the financial assets
Around 1990 : multinational financial management,
behavioral finance, enterprise risk management, good
corporate governance
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 Nature of financial management
• FM is an area of decision making in finance function
of the business.
• It is descriptive/ theoretical/ statistical/ historical
and analytical in nature.
• It involves application of management principles to
the finance function.
• It is applicable to every organization irrespective of
its size, nature, place.
• It deals with accumulation and utilization of financial
resources(business resources).
• It is directed towards achieving business objectives.
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 Nature of FM :

• The term nature as applied to financial

management refers to its relationship with
the closely-related fields of economics and
accounting, its functions ,scope and objectives
 FINANCIAL MANAGEMENT & OTHER DISCIPLINES
• FINANCIAL MANAGEMENT IS AN INTEGRAL PART OF
OVERALL MANAGEMENT, IS NOT A TOTALLY
INDEPENDENT AREA. IT DRAWS HEAVILY ON
RELATED DISCIPLINES AND FIELDS OF STUDY, SUCH
AS ECONOMICS, ACCOUNTING, MARKETING,
PRODUCTION AND QUANTATIVE METHODS.
 FINANCE AND ECONOMICS
• THE RELEVANCE OF ECONOMICS TO
FINANCIAL MANAGEMENT CAN BE DESCRIBED
IN THE LIGHT OF THE TWO BROAD AREAS OF
ECONOMICS:
MACRO ECONOMICS
MICROECONOMICS
 FINANCE AND ACCOUNTING
• THE RELATIONSHIP BETWEEN FINANCE AND
ACCOUNTING CONCEPTUALLY SPEAKING HAS TWO
DIMENSIONS:
• THEY ARE CLOSELY RELATED TO THE EXTENT THAT
ACCOUNTING IS AN IMPORTANT INPUT IN
FINANCIAL DECISION MAKING
• THERE ARE KEY DIFFERENCES IN VIEWPOINTS
BETWEEN THEM
• FINANCE AND ACCOUNTING ALSO DIFFER IN RESPECT
OF THEIR PURPOSES. THE ACCOUNTING IS
COLLECTION AND PRESENTATION OF FINANCIAL DATA.
IT PROVIDES CONSISTENTLY DEVELOPED AND EASILY
INTERPRETED DATA ON THE PAST, PRESENT AND
FUTURE OPERATIONS OF THE FIRM. THE FINANCIAL
MANAGER USES SUCH DATA FOR FINANCIAL DECISION
MAKING. IT DOESNOT MEAN THAT ACCOUNTANTS
NEVER MAKE DECISIONS OR FINANCIAL MANAGERS
NEVER COLLECT DATA. BUT THE PRIMARY FOCUS OF
THE FUNCTIONS OF ACCOUNTANTS IS ON COLLECTION
AND PRESENTATION OF DATA WHILE THE FINANCIAL
MANAGER’S MAJOR RESPONSIBILITY RELATES TO
FINANCIAL PLANNING, CONTROLLING AND DECISION
MAKING. THUS, IN A SENSE, FINANCE BEGINS WHERE
ACCOUNTING ENDS.
 Relationship between Finance, Economics
and Accounting
• Economics provides structure for decision
making in many important areas.
− Provides a broad picture of economic
environment.
• Accounting provides financial data in various
forms.
– Income statements, balance sheets, and
statement of cashflows.
• Finance links economic theory with the
numbers of accounting.

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 FINANCIAL DECISION PRIMARY DISCIPLINES
AREAS

• INVESTMENT ANALYSIS SUPPORT • ACCOUNTING

•WORKING CAPITAL •MACROECONOMICS
MANAGEMENT •MICROECONOMICS
•SOURCES & COST OF FUNDS
•DETERMINATION OF CAPITAL
OTHER RELATED
STRUCTURE DISCIPLINES
•DIVIDEND POLICY
SUPPORT • MARKETING
•ANALYSIS OF RISKS & RETURNS
• PRODUCTION
• QUANTATIVE METHODS

RESULTING IN

SHAREHOLDERS WEALTH MAXIMISATION

IMPACT OF OTHER RELATED DISCIPLINES ON FINANCIAL MANAGEMENT

 Objectives of financial management
The objective of financial management are
considered usually at two levels –at macro
level and micro level. three primary
objectives are commonly explained as the
Objective of financial management-
1. Maximization of profits
2. Maximization of return
3. Maximization of wealth
 Criticisms of wealth maximization
• It is prescriptive idea. It is not descriptive of
what firms actually do.
• Wealth maximization is not necessarily
socially desirable.
• There is some controversy as to whether the
objective is to maximize shareholders
wealth or firms wealth(since debenture
holders, preferential holders also happen to
be a part of the firm).
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