INTRODUCTION TO

FINANCE
MEANING, NATURE AND
SCOPE OF FINANCE
Finance may be defined as the art and science of managing money. It includes
financial service and financial instruments. Finance also is referred as the provision
of money at the time when it is needed. Finance function is the procurement of funds
and their effective utilization in business concerns.

The concept of finance includes capital, funds, money, and amount. But each word is
having unique meaning. Studying and understanding the concept of finance become
an important part of the business concern.
DEFINITION
Howard and Upton: Financial management “as an application of general
managerial Principles to the area of financial decision-making.
Weston and Brigham: Financial management “is an area of financial decision-
making harmonizing individual motives and enterprise goals”.
Josheph and Massie: Financial management “is the operational activity of a
business that is responsible for obtaining and effectively utilizing the funds
necessary for efficient operations.
Thus, Financial Management is mainly concerned with the effective funds management
in the business. In simple words, Financial Management as practiced by business firms
can be called as Corporation Finance or Business Finance.
Definition: "Financial management involves planning, organizing, directing, and
controlling an organization's financial resources to achieve its goals efficiently and
effectively."
OBJECTIVES
Effective procurement and efficient use of finance lead to proper utilization of the
finance of the business concern. It is the essential part of the financial manager.
Hence, the financial manager must determine the basic objectives of the financial
management.
Objectives of Financial Management may be broadly divided into two parts such as:
 Profit maximization
 Wealth maximization
PROFIT MAXIMIZATION
Favourable Arguments for Profit Maximization
(i) Main aim is earning profit.
(ii) Profit is the parameter of the business operation.
(iii) Profit reduces risk of the business concern.
(iv) Profit is the main source of finance.
(v) Profitability meets the social needs also.
 Unfavourable Arguments for Profit Maximization

(i) Profit maximization leads to exploiting workers and consumers.

(ii) Profit maximization creates immoral practices such as corrupt practice, unfair
trade practice, etc.
(iii) Profit maximization objectives leads to inequalities among the sake holders such
as customers, suppliers, public shareholders, etc
DRAWBACKS OF PROFIT
MAXIMIZATION
1. It is vague

2. It ignores the time value of money

3. It ignores risk
WEALTH MAXIMIZATION
Favorable Arguments for Wealth Maximization
(i) Wealth maximization is superior to the profit maximization
(ii) Wealth maximization considers the comparison of the value to cost associated
with the business concern
(iii) Wealth maximization considers both time and risk of the business concern.
(iv) Wealth maximization provides efficient allocation of resources.
(v) It ensures the economic interest of the society.
Unfavorable Arguments for Wealth Maximization
(i) Wealth maximization leads to prescriptive idea of the business concern but it may
not be suitable to present day business activities.
(ii) Wealth maximization is nothing, it is also profit maximization, it is the indirect
name of the profit maximization.
(iii) Wealth maximization creates ownership-management controversy.
(iv) Management alone enjoy certain benefits.
(v) The ultimate aim of the wealth maximization objectives is to maximize the profit.
(vi) Wealth maximization can be activated only with the help of the profitable
position of the business concern
Finance function is one of the major parts of business organization, which involves
the permanent and continuous process of the business concern. Finance is one of the
interrelated functions which deal with personal function, marketing function,
production function and research and development activities of the business concern.

Deciding the proper financial function is the essential and ultimate goal of the
business organization. Finance manager is one of the important role players in the
field of finance function. He must have entire knowledge in the area of accounting,
finance, economics and management. His position is highly critical and analytical to
solve various problems related to finance. A person who deals finance related
activities may be called finance manager.
RELATIONSHIP OF FINANCE WITH OTHER
DEPARTMENTS

1. Financial Management and Production department

2. Financial Management and Material Department
3. Financial Management and Personnel Department
4. Financial Management and Marketing Department
FUNCTIONS OF FINANCE
MANAGER
1. Forecasting Financial Requirements
2. Acquiring necessary capital
3. Investment Decision
4. Cash Management
5. Interrelation with Other Departments
IMPORTANCE OF THE
FINANCIAL MANAGEMENT
1. Financial Planning
2. Acquisition of Funds
3. Proper Use of Funds
4. Financial Decision
5. Improve Profitability
6. Increase the Value of the Firm
7. Promoting Savings
SCOPE OF FINANCIAL
MANAGEMENT
1. Estimating Financial requirements
2. Deciding Capital structure
3. Selecting a source of finance
4. Selecting a pattern of investment
5. Proper Cash Management
6. Proper use of Surpluses
7. Implementing Financial Control
FUNCTIONAL AREAS OF
FINANCIAL MANAGEMENT
1. Determining financial needs
2. Selecting Sources of funds
3. Financial analysis and interpretation
4. Cost-Volume-Profit analysis
5. Capital Budgeting
6. Working Capital Management
7. Profit Planning and Control
8. Dividend Policy
DECISIONS IN FINANCIAL
MANAGEMENT
Investment Decisions- Capital Budgeting
Finance Decisions- Owned and Borrowed Funds
Dividend Decisions-Distribution or Reinvestment
Liquidity Decisions- Working Capital Management (Inventory+Cash+Receivables)
Background: XYZ Corporation, a medium-sized manufacturing company, has been facing financial
challenges due to a combination of market dynamics, internal operational issues, and economic uncertainties.
The management team recognizes the need for effective financial management to steer the company back to
profitability.
Key Issues:
1.Cash Flow Constraints:
1. The company is experiencing cash flow difficulties, affecting its ability to meet short-term obligations
and invest in necessary operational upgrades.
2.Cost Overruns:
1. There have been significant cost overruns in recent projects, leading to a decline in overall
profitability. The management needs to identify the root causes and implement cost-cutting measures.
3.Market Volatility:
1. The industry is facing increased volatility, impacting sales and pricing strategies. The finance team
needs to develop strategies to navigate market fluctuations effectively.
4.Debt Management:
1. The company has incurred substantial debt to fund expansion projects. There is a need for a
comprehensive debt management strategy to ensure the sustainability of the business.
Financial Management Strategies:
1.Cash Flow Forecasting:
1. Implement a robust cash flow forecasting system to anticipate and manage
liquidity challenges. This involves monitoring accounts receivable, accounts
payable, and inventory turnover.
2.Cost Analysis and Optimization:
1. Conduct a detailed cost analysis to identify areas of inefficiency and implement
cost optimization measures. This may involve renegotiating supplier contracts,
streamlining processes, and implementing technology solutions.
3.Market Diversification:
1. Develop a market diversification strategy to reduce dependence on a single
market or product. This could involve exploring new markets, introducing new
product lines, or strengthening relationships with existing clients.
4.Debt Restructuring:
1. Engage with financial institutions to restructure existing debt, negotiate
favorable terms, and explore debt consolidation options. This will provide the
company with greater flexibility in managing its financial obligations.
Implementation Plan:
1.Short-Term Measures (0-6 months):
1. Focus on immediate cash flow improvements through efficient receivables and payables management.
2. Identify and implement quick-win cost-cutting measures.
3. Initiate negotiations with key suppliers for favorable terms.
2.Medium-Term Measures (6-12 months):
1. Implement a cash flow forecasting system to enhance liquidity management.
2. Conduct a comprehensive cost analysis and optimization program.
3. Explore new markets or customer segments for revenue diversification.
3.Long-Term Measures (12+ months):
1. Develop and execute a market diversification strategy.
2. Engage in debt restructuring discussions with financial institutions.
3. Invest in employee training to enhance financial literacy across the organization.
Monitoring and Evaluation: Regularly review financial performance against key indicators, adjust strategies as
needed, and maintain open communication within the organization to ensure alignment with financial goals.