INTRODUCTION TO FINANCIAL MANAGEMENT
DEFINITION OF FINANCE
Webster’s Ninth New Collegiate Dictionary defines
finance as “the Science on study of the management of funds’ and the management
of fund as the system that includes the circulation of money, the granting of
credit, the making of investments, and the provision of banking facilities.
According
to Khan and Jain, “Finance is the art and science of managing
money”.
According
to Oxford dictionary, the word ‘finance’ connotes ‘management of
money’.
BUSINESS FINANCE
According
to the Wheeler, “Business finance is that business activity
which concerns with the acquisition and conversation of capital funds in
meeting financial needs and overall objectives of a business enterprise”.
According to
the Guthumann and Dougall, “Business finance can broadly be defined as
the activity concerned with planning, raising, controlling, administering of
the funds used in the business”.
Corporate
finance is concerned with budgeting, financial forecasting, cash management,
credit administration, investment analysis and fund procurement of the business
concern and the business concern needs to adopt modern technology and application
suitable to the global environment.
DEFINITION OF FINANCIAL MANAGEMENT
“Financial Management is an
area of financial decision making harmonizing individual motives and enterprise
goals.”
- Weston and Brigam.
“Financial Management is the application of the planning and control functions to the finance function.”
- Howard and Upton.
“Financial Management is the operational activity of a business that is responsible for obtaining and effectively, utilizing the funds necessary for efficient operations.”
- Joseph and Massie.
SCOPE OF FINANCIAL MANAGEMENT
Financial management is one of the important
parts of overall management, which is directly related with various functional
departments like personnel, marketing and production.
Financial management covers wide area with
multidimensional approaches. The following are the important scope of financial
management.
1. Financial Management and Economics
Economic concepts like micro and
macroeconomics are directly applied with the financial management approaches.
Investment decisions, micro and macro environmental factors are closely
associated with the functions of financial manager.
Financial management also uses the economic
equations like money value discount factor, economic order quantity etc.
Financial economics is one of the emerging area, which provides immense
opportunities to finance, and economical areas.
2. Financial Management and Accounting
Accounting records includes the financial
information of the business concern. Hence, we can easily understand the
relationship between the financial management and accounting. In the olden
periods, both financial management and accounting are treated as a same
discipline and then it has been merged as Management Accounting because this
part is very much helpful to finance manager to take decisions. But nowaday’s
financial management and accounting discipline are separate and interrelated.
3. Financial Management or Mathematics
Modern approaches of the financial management
applied large number of mathematical and statistical tools and techniques. They
are also called as econometrics. Economic order quantity, discount factor, time
value of money, present 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
Production management is the operational part
of the business concern, which helps to multiple the money into profit. Profit
of the concern depends upon the production performance. Production performance
needs finance, because production department requires raw material, machinery,
wages, operating expenses etc. These expenditures are decided and estimated by
the financial department and the finance manager allocates the appropriate
finance to production department.
The financial manager must be aware of the
operational process and finance required for each process of production
activities.
5. Financial Management and Marketing
Produced goods are sold in the market with
innovative and modern approaches. For this, the marketing department needs
finance to meet their requirements. The financial manager or finance department
is responsible to allocate the adequate finance to the marketing department.
Hence, marketing and financial management are interrelated and depends on each
other.
6. Financial Management and Human Resource
Financial management is also related with
human resource department, which provides manpower to all the functional areas
of the management. Financial manager should carefully evaluate the requirement
of manpower to each department and allocate the finance to the human resource
department as wages, salary, remuneration, commission, bonus, pension and other
monetary benefits to the human resource department. Hence, financial management
is directly related with human resource management.
OBJECTIVES
OF FINANCIAL MANAGEMENT
Effective
procurement and efficient use of finance lead to proper utilization of the
finance by 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:
1. Profit
maximization
2. Wealth maximization.
Profit Maximization
Main aim
of any kind of economic activity is earning profit. A business concern is also functioning
mainly for the purpose of earning profit. Profit is the measuring techniques to
understand the business efficiency of the concern. Profit maximization is also
the traditional and narrow approach, which aims at, maximizes the profit of the
concern. Profit
maximization
consists of the following important features.
1. Profit maximization is also called as
cashing per share maximization. It leads to maximize the business operation for
profit maximization.
2. Ultimate aim of the business concern is
earning profit, hence, it considers all the possible ways to increase the
profitability of the concern.
3. Profit is the parameter of measuring the
efficiency of the business concern. So it shows the entire position of the
business concern.
4. Profit
maximization objectives help to reduce the risk of the business.
Favourable Arguments for Profit Maximization
The following important points are in support
of the profit maximization objectives of the business concern:
(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
The following important points are against
the objectives of 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 stake holders such as customers, suppliers, public
shareholders, etc.
Drawbacks of Profit Maximization
Profit maximization objective consists of
certain drawback also:
(i) It is
vague: In this objective, profit is not defined
precisely or correctly. It creates some unnecessary opinion regarding earning
habits of the business concern.
(ii) It ignores
the time value of money: Profit maximization
does not consider the time value of money or the net present value of the cash
inflow. It leads certain differences between the actual cash inflow and net
present cash flow during a particular period.
(iii) It ignores
risk: Profit maximization does not consider risk of
the business concern. Risks may be internal or external which will affect the
overall operation of the business concern.
Wealth Maximization
Wealth maximization is one of the modern
approaches, which involves latest innovations and improvements in the field of
the business concern. The term wealth means shareholder wealth or the wealth of
the persons those who are involved in the business concern.
Wealth maximization is also known as value maximization
or net present worth maximization. This objective is an universally accepted
concept in the field of business.
Favourable Arguments for Wealth Maximization
(i) Wealth maximization is superior to the
profit maximization because the main aim of the business concern under this
concept is to improve the value or wealth of the shareholders.
(ii) Wealth maximization considers the
comparison of the value to cost associated with the business concern. Total
value detected from the total cost incurred for the business operation. It
provides extract value of 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.
Unfavourable 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
Finance function for
the sake of convenience may broadly be classified into groups i.e., executive
finance function and incidental finance function.
The
executive finance function is so termed because it requires some
administrative skill in planning, execution and control. On the other hand
incidental finance function is so called because it does not require any
specialized administrative skill and for the most part it covers routine work,
mainly clerical that is necessary to carry into effect the executive decisions.
We shall discuss hereunder both the finance functions of finical management in
detail.
Some of the executive functions
are given below:-
(i)
Financial Forecasting. The first and foremost functions of
financial management is to forecast the financial needs of the concern. In the
initial stage, it is done by promoters but in a going concern, it is generally
performed by the executive chief or by the officers of the finance-department
in a large scale enterprise. In estimating the financial requirements of the
concern, help of various budgets i.e., sales budget, production budget etc.,
profit and loss account and Balance Sheet is sought.
(ii) Establishing Asset-Management Policies. In order to estimate and arrange for cash requirements of an enterprise, it is very necessary to decide how much cash will be invested in non-cash assets, i.e., fixed assets, and also the kind and coverage of insurance that a company will carry. Establishing a sound asset management policy is a pre-requisite to successful financial Management. No doubt the financial manager in deciding about the asset-management policies seeks cooperation of marketing executive in making decisions involving the carrying of inventories of finished goods and credit policy etc. and that of the production manager in making decision concerned with the carrying of inventories of raw materials and factory supplies, purchases etc.
(iii) Allocation of Net Profit. How to allocate the net profits of the concern is the another problem before the financial manager. After paying all taxes, the available net profits of the concern can be allocated for three purposes- (a) For paying dividends to the shareholders of the comp nay as a return upon this investment. (b) for distributing bonus to the employees and company's contribution tooth profit sharing plans, and (c) retention of profits for the expansion of business. As far as, the second alternative is concerned, the amount to be paid to employees is generally fixed by statutes or on contractual basis and therefore, there is no problem in allocating profits for that purpose. But a considerably attention is to be paid in so far as first and third alternatives are concerned namely the dividends to be distributed to the shareholders and the amount to be retained for future expansion plans.
(iv) Cash Flows and Requirements. It is the prime responsibility of the financial manager to see that an adequate supply of cash is available at proper time for the smooth running of the business. A good financial executive should ensure that cash inflow and outflow must be continuous and uninterrupted. Inflow of cash originates in sales and cash outflows or cash requirements are closely related to volume of sales. Here the financial manger is to decided how much cash e must retain to meet the current obligations so that there would be no idle cash balance earning nothing for the company. But there is a dilemma because inflow of cash is not precisely predictable and seldom offset one another. Therefore, the financial manager must maintain a balance between inflow of cash and outflow of cash.
(v) Deciding Upon Borrowing Policy. Every organisation plans for the expansion of the business for which he requires additional resources. Personal resources being limited the case must be arranged by borrowing money either from commercial bank, and other financial institutions or by floating new debentures or by issuing new shares. The financial manger, at this juncture, will take a decision about the time when the funds from outside sources are needed, the source from which they are to be received, how log they will be needed an from what source they will be repaid. Obviously, it is a very important function of financial manager.
(vi) Negotiations For New outside Financing. Finance function does not stop with the decision to undertake outside financing; it extends towards carrying on negotiations from the outside financing agencies to arrange for it. Finances are needed by an establishment to meet its short-term and long-term requirements. The financial manger must assess short and long term financial requirements of the organisation an start negotiations for raising these funds. It requires considerable planning because the sources are to be tackled in advance keeping in view the alternative sources and sounded in a manner that in case one fails, the other should be available. He must keep open the credit lines.
(vii) Checking upon Financial Performance. The Financial manager is under an obligation to check the financial performance of the funds invested in the business. It requires retrospective analysis of the operating period to evaluate the efficiency of financial planning. An unbiased assessment of financial performance shall be great value to the business in improving the standards, techniques, and procedures of financial control.
(ii) Establishing Asset-Management Policies. In order to estimate and arrange for cash requirements of an enterprise, it is very necessary to decide how much cash will be invested in non-cash assets, i.e., fixed assets, and also the kind and coverage of insurance that a company will carry. Establishing a sound asset management policy is a pre-requisite to successful financial Management. No doubt the financial manager in deciding about the asset-management policies seeks cooperation of marketing executive in making decisions involving the carrying of inventories of finished goods and credit policy etc. and that of the production manager in making decision concerned with the carrying of inventories of raw materials and factory supplies, purchases etc.
(iii) Allocation of Net Profit. How to allocate the net profits of the concern is the another problem before the financial manager. After paying all taxes, the available net profits of the concern can be allocated for three purposes- (a) For paying dividends to the shareholders of the comp nay as a return upon this investment. (b) for distributing bonus to the employees and company's contribution tooth profit sharing plans, and (c) retention of profits for the expansion of business. As far as, the second alternative is concerned, the amount to be paid to employees is generally fixed by statutes or on contractual basis and therefore, there is no problem in allocating profits for that purpose. But a considerably attention is to be paid in so far as first and third alternatives are concerned namely the dividends to be distributed to the shareholders and the amount to be retained for future expansion plans.
(iv) Cash Flows and Requirements. It is the prime responsibility of the financial manager to see that an adequate supply of cash is available at proper time for the smooth running of the business. A good financial executive should ensure that cash inflow and outflow must be continuous and uninterrupted. Inflow of cash originates in sales and cash outflows or cash requirements are closely related to volume of sales. Here the financial manger is to decided how much cash e must retain to meet the current obligations so that there would be no idle cash balance earning nothing for the company. But there is a dilemma because inflow of cash is not precisely predictable and seldom offset one another. Therefore, the financial manager must maintain a balance between inflow of cash and outflow of cash.
(v) Deciding Upon Borrowing Policy. Every organisation plans for the expansion of the business for which he requires additional resources. Personal resources being limited the case must be arranged by borrowing money either from commercial bank, and other financial institutions or by floating new debentures or by issuing new shares. The financial manger, at this juncture, will take a decision about the time when the funds from outside sources are needed, the source from which they are to be received, how log they will be needed an from what source they will be repaid. Obviously, it is a very important function of financial manager.
(vi) Negotiations For New outside Financing. Finance function does not stop with the decision to undertake outside financing; it extends towards carrying on negotiations from the outside financing agencies to arrange for it. Finances are needed by an establishment to meet its short-term and long-term requirements. The financial manger must assess short and long term financial requirements of the organisation an start negotiations for raising these funds. It requires considerable planning because the sources are to be tackled in advance keeping in view the alternative sources and sounded in a manner that in case one fails, the other should be available. He must keep open the credit lines.
(vii) Checking upon Financial Performance. The Financial manager is under an obligation to check the financial performance of the funds invested in the business. It requires retrospective analysis of the operating period to evaluate the efficiency of financial planning. An unbiased assessment of financial performance shall be great value to the business in improving the standards, techniques, and procedures of financial control.
Incidental
Finance functions
are those functions of clerical or routine nature which are necessary for the
execution of decisions taken by the executives. Some of the important
incidental finance functions are:-
(a) supervision of cash receipts an disbursements an safeguarding of cash balance.
(b) Proper custody and safeguarding of the important and valuable papers, securities and insurance policies.
(c) Taking care of all mechanical details of financing.
(d) Record-keeping and reporting.
(a) supervision of cash receipts an disbursements an safeguarding of cash balance.
(b) Proper custody and safeguarding of the important and valuable papers, securities and insurance policies.
(c) Taking care of all mechanical details of financing.
(d) Record-keeping and reporting.
(e)
Cash
planning an credit management.
OBJECTIVES OF FINANCE FUNCTION
The objectives or goals or financial
management are- (a) Profit maximization, (b) Return maximization, and (c)
Wealth maximization. We shall explain these three goals of financial management
as under:
(1) Goal of Profit maximization:
(1) Goal of Profit maximization:
Maximization of profits is generally
regarded as the main objective of a business enterprise. Each company collects
its finance by way of issue of shares to the public. Investors in shares
purchase these shares in the hope of getting medium profits from the company as
dividend It is possible only when the company's goal is to earn maximum profits
out of its available resources. If company fails to distribute higher dividend,
the people will not be keen to invest their money in such firm and persons who
have already invested will like to sell their stocks. On the other hand, higher
profits are the barometer of its efficiency on all fronts, i.e., production,
sales an management. A few replace the goal of 'maximization of profits' to
'fair profits'. 'Fair Profits' means general rate of profit earned by similar
organisation in a particular area.
(2) Goal of Return Maximization:
(2) Goal of Return Maximization:
The second goal of financial management is
to safeguard the economic interest of the persons who are directly or
indirectly connected with the company, i.e.,shareholders, creditors and
employees. The all such interested parties must get the maximum return for
their contributions. But this is possible only when the company earns higher
profits or sufficient profits to discharge its obligations to them. Therefore,
the goal of maximization of returns are inter-related.
3. Goal of Wealth Maximization:
3. Goal of Wealth Maximization:
Frequently, Maximization of profits is
regarded a the proper objective of the firm but it is not as inclusive a goal
as that of maximising it value to its shareholders. Value is represented by the
market price of the ordinary share of the company over the long run which is
certainly a reflection of company's investment and financing decisions. The log
run means a considerably long period in order to work out a normalized market
price. The management ca make decision to maximize the value of its shares on
the basis of day-today fluctuations in the market price in order t raise the
market price of shares over the short run at the expense of the long fun by temporarily
diverting some of its funds to some other accounts or by cutting some of its
expenditure to the minimum at the cost of future profits. This does not reflect
the true wort of the share because it will result in the fall of the share
price in the market in the long run. It is, therefore, the goal of the
financial management to ensure its shareholders that the value of their shares
will be maximized in the long-run. In fact, the performances of the company can
well be evaluated by the value of its share.
Profit-Maximization Vs. Wealth
Maximizations
The question arises of the choice, i.e.,
which should be the goal of decision making be profit maximization or which
strengthen the case for wealth Maximization as the goal of business enterprise.
The
objections are:
(i)
Profit
cannot be ascertained well in advance to express the probability of return as
future is uncertain. It is not at possible to maximize what cannot be known.
(ii)
The
executive or the decision maker may not have enough confidence in the estimates
of future returns so that he does not attempt future to maximize. It is argued
that firm's goal cannot be to maximize profits but to attain a certain level or
rate of profit holding certain share of the market or certain level of sales.
Firms should try to 'satisfy' rather than to 'maximize'
(iii) There must be a balance between
expected return and risk. The possibility of higher expected yields are
associated with greater risk to recognise such a balance and wealth
Maximization is brought in to the analysis. In such cases, higher
capitalisation rate involves. Such combination of expected returns with risk
variations and related capitalisation rate cannot be considered in the concept
of profit maximization.
(iv) The goal of Maximization of profits is considered to be a narrow outlook. Evidently when profit maximization becomes the basis of financial decisions of the concern, it ignores the interests of the community on the one hand and that of the government, workers and other concerned persons in the enterprise on the other hand.
(iv) The goal of Maximization of profits is considered to be a narrow outlook. Evidently when profit maximization becomes the basis of financial decisions of the concern, it ignores the interests of the community on the one hand and that of the government, workers and other concerned persons in the enterprise on the other hand.
Keeping the above objections in view, most
of the thinkers on the subject have come to the conclusion that the aim of an
enterprise should be wealth Maximization and not the profit Maximization. Prof.
Soloman of Stanford University has handled the issued very logically. He argues
that it is useful to make a distinction between profit and 'profitability'.
Maximization of profits with a vie to maximising the wealth of shareholders is
clearly an unreal motive. On the other hand, profitability Maximization with a
view to using resources to yield economic values higher than the joint values
of inputs required is a useful goal. Thus the proper goal of financial
management is wealth maximization.
FINANCIAL PLANNING
Planning
is very necessary for the smooth running of the business. A business cannot be
carried on without planning. Planning means deciding in advance what is to be
done.
It
is primary functions and achieves primacy over other functions. It is a
continuous and never ending process. Planning is a preparatory step for action
to be followed. According to Kontz O'Donnel planning is “an intellectual
process, the conscious determination of courses of action, the basis of
decisions on purpose, facts and considered estimates.”
Planning is done for each functional area of management. Each functional manger plans for his area of management and acts accordingly. The planning of each area should be linked to the objectives of the organisation.
Financial management, being one of the branches of the management also needs planning. Financial planning is necessary for the control of inflow and outflow of cash so that necessary funds may be made available as and when they are required. The highest earnings can be assured only through sound financial plans. A faulty financial plan may ruin the business completely. So, sound financial planning is necessary to achieve the long term and the short-term objectives of the firm and to protect the interest of all parties concerned, i.e., firm, creditors, shareholders and public.
Planning is done for each functional area of management. Each functional manger plans for his area of management and acts accordingly. The planning of each area should be linked to the objectives of the organisation.
Financial management, being one of the branches of the management also needs planning. Financial planning is necessary for the control of inflow and outflow of cash so that necessary funds may be made available as and when they are required. The highest earnings can be assured only through sound financial plans. A faulty financial plan may ruin the business completely. So, sound financial planning is necessary to achieve the long term and the short-term objectives of the firm and to protect the interest of all parties concerned, i.e., firm, creditors, shareholders and public.
Main Aspects of Financial Planning
There
are mainly three aspects:
(1) Determining Financial Objectives. The main aspect of
financial planning is to determine the long-term ad the short-term financial
objectives. Determining of financial objectives is necessary to achieve the
basic objectives of the firm. Financial objectives guide the financial
authorities in performing their duties well. Financial objectives may be
long-term and short-term. The long-term financial objective of the firm should
be to utilise the productive resources of the firm effectively and
economically. The effective utilisation of all other productive factors is
possible only if there is a regular supply of funds at minimum cost. Thus long therm
financial objectives include (a) proper capitalisation, i.e., to estimate the
amount of capital to be raised and (b) determining the capital structure, i.e,
the form, relationship and proportionate amount of securities to be issued.
(2) Formulating Financial Policies. The second aspect of financial planning is to formulate certain policies to be followed by the financial authorities with regard to the administration of capital to achieve the long-term and the short-term financial objectives of the firm. The following financial policies maybe important in regard to-
(2) Formulating Financial Policies. The second aspect of financial planning is to formulate certain policies to be followed by the financial authorities with regard to the administration of capital to achieve the long-term and the short-term financial objectives of the firm. The following financial policies maybe important in regard to-
- Policies
regarding estimation of capital requirements.
- Policies
regarding relationship between the company and creditors.
- Policies
regarding the form and proportionate amount of securities to be issued.
- Policies and
guidelines regarding sources of raising capital.
- Policies
regarding distribution of earnings.
(3) Developing Financial Procedures. The third aspect of
financial planning is to develop the procedure for performing the financial
activities. For this purpose, financial activities should be sub-divided into
smaller activities and powers, duties and responsibilities be delegated to the
sub-ordinate officers. Proper control on financial performance should also be
administered. Financial control is possible by establishing standards for
evaluating the performance and comparing the actual performance with the
standard so established. Stern steps should be taken to control any deviations
from or inconsistencies in predetermined objectives, policies and programmes.
Various methods are used for this purpose such as budgetary control,
cost-control, analysis and interpretation of financial accounts etc.
The success of a business very much depends
upon a financial plan (capital plan) based upon certain basic principles of
corporation finance. racteristics of a sound
financial plan
The essential characteristics of an ideal
capital plan may briefly be summarised as follows:-
(1) Simplicity. The capital plan of a company should be as simple as possible. By 'simplicity' we mean that the plan should be easily understandable to all and it should be free from complications, and/or suspicion-arising statements. At the time of formulating capital structure of a company or issuing various securities to the public, it should be borne in mind that there would be no confusion in the mind of investors about their nature and profitability.
(2) Foresight. The planner should always keep in mind not only the needs of 'today' but also the needs of 'tomorrow' so that a sound capital structure (financial plan) may be formed. Capital requirements of a company can be estimated by the scope of operations and it must be planned in such a way that needs for capital may be predicted as accurately as possible. Although, it is difficult to predict the demand of the product yet it cannot b an excuse for the promoters to use foresight to the best advantage in building the capital structure of the company.
(3) Flexibility. The capital structure of a company must be flexible enough to meet the capital retirements of the company. The financial plan should be chalked out in such a way that both increase and decrease in capital may be feasible. The company may require additional capital for financing scheme of modernisation, automation, betterment of employees etc. It is not difficult to increase the capital. It may be done by issuing fresh shares or debentures to the public or raising loans from special financial institutions, but reduction of capital is really a ticklish problem and needs statesman like dexterity.
(4) Intensive use. Effective us of capital is as much necessary as its procurement. Every 'paisa' should be used properly for the prosperity of the enterprise. Wasteful use of capital is as bad as inadequate capital. There must be 'fair capitalisation' i.e., company must procure as much capital as requires nothing more and nothing less. Over-capitalisation and under capitalisation are both danger signals. Hence, there should neither be surplus nor deficit capital but procurement of adequate capital should be aimed at and every effort be made to make best use of it.
(1) Simplicity. The capital plan of a company should be as simple as possible. By 'simplicity' we mean that the plan should be easily understandable to all and it should be free from complications, and/or suspicion-arising statements. At the time of formulating capital structure of a company or issuing various securities to the public, it should be borne in mind that there would be no confusion in the mind of investors about their nature and profitability.
(2) Foresight. The planner should always keep in mind not only the needs of 'today' but also the needs of 'tomorrow' so that a sound capital structure (financial plan) may be formed. Capital requirements of a company can be estimated by the scope of operations and it must be planned in such a way that needs for capital may be predicted as accurately as possible. Although, it is difficult to predict the demand of the product yet it cannot b an excuse for the promoters to use foresight to the best advantage in building the capital structure of the company.
(3) Flexibility. The capital structure of a company must be flexible enough to meet the capital retirements of the company. The financial plan should be chalked out in such a way that both increase and decrease in capital may be feasible. The company may require additional capital for financing scheme of modernisation, automation, betterment of employees etc. It is not difficult to increase the capital. It may be done by issuing fresh shares or debentures to the public or raising loans from special financial institutions, but reduction of capital is really a ticklish problem and needs statesman like dexterity.
(4) Intensive use. Effective us of capital is as much necessary as its procurement. Every 'paisa' should be used properly for the prosperity of the enterprise. Wasteful use of capital is as bad as inadequate capital. There must be 'fair capitalisation' i.e., company must procure as much capital as requires nothing more and nothing less. Over-capitalisation and under capitalisation are both danger signals. Hence, there should neither be surplus nor deficit capital but procurement of adequate capital should be aimed at and every effort be made to make best use of it.
(5) Liquidity. Liquidity means
that a reasonable amount of current assets must be kept in the form of liquid
cash so that business operations may be carried on smoothly without any shock
to therm due to shortage of funds. This cash ratio to current ratio to current
assets depends upon a number of factors, e.g., the nature and size of the
business, credit standing, goodwill and money market conditions etc.
(6) Economy. The cost of capital procurement should always be kept in mind while formulating the financial plan. It should be the minimum possible. Dividend or interests to be paid to share holder (ordinary and preference) should not be a burden to the company in any way. But the cost of capital is not the only criterion, other factors should also be given due importance.
(6) Economy. The cost of capital procurement should always be kept in mind while formulating the financial plan. It should be the minimum possible. Dividend or interests to be paid to share holder (ordinary and preference) should not be a burden to the company in any way. But the cost of capital is not the only criterion, other factors should also be given due importance.
IMPORTNACE OF FINANCIAL MANAGEMENT
In a big organisation, the general manger or the managing director
is the overall incharge of the organisation but he gets all the activities done
by delegating all or some of his powers to men in the middle or lower
management, who are supposed to be specialists in the field so that better
results may be obtained.
For
example, management and control of production may be delegated to a man who is
specialist in the techniques, procedures, and methods of production. We ma
designate him “Production Manager'. So is the case with other branches of
management, i.e., personnel, finance, sales etc.
The incharge of the finance department may be called financial manger, finance controller, or director of finance who is responsible for the procurement and proper utilisation of finance in the business and for maintaining co-ordination between all other branches of management.
Importance of finance cannot be over-emphasised. It is, indeed, the key to successful business operations. Without proper administration of finance, no business enterprise can reach its full potentials for growth and success. Money is a universal lubricant which keeps the enterprise dynamic-develops product, keeps men and machines at work, encourages management to make progress and creates values. The importance of financial administration can be discussed under the following heads:-
(i) success of Promotion Depends on Financial Administration. One of the most important reasons of failures of business promotions is a defective financial plan. If the plan adopted fails to provide sufficient capital to meet the requirement of fixed and fluctuating capital an particularly, the latter, or it fails to assume the obligations by the corporations without establishing earning power, the business cannot be carried on successfully. Hence sound financial plan is very necessary for the success of business enterprise.
(ii) Smooth Running of an Enterprise. Sound Financial planning is necessary for the smooth running of an enterprise. Money is to an enterprise, what oil is to an engine. As, Finance is required at each stage f an enterprise, i.e., promotion, incorporation, development, expansion and administration of day-to-day working etc., proper administration of finance is very necessary. Proper financial administration means the study, analysis and evaluation of all financial problems to be faced by the management and to take proper decision with reference to the present circumstances in regard to the procurement and utilisation of funds.
(iii) Financial Administration Co-ordinates Various Functional Activities. Financial administration provides complete co-ordination between various functional areas such as marketing, production etc. to achieve the organisational goals. If financial management is defective, the efficiency of all other departments can, in no way, be maintained. For example, it is very necessary for the finance-department to provide finance for the purchase of raw materials and meting the other day-to-day expenses for the smooth running of the production unit. If financial department fails in its obligations, the Production and the sales will suffer and consequently, the income of the concern and the rate of profit on investment will also suffer. Thus Financial administration occupies a central place in the business organisation which controls and co-ordinates all other activities in the concern.
The incharge of the finance department may be called financial manger, finance controller, or director of finance who is responsible for the procurement and proper utilisation of finance in the business and for maintaining co-ordination between all other branches of management.
Importance of finance cannot be over-emphasised. It is, indeed, the key to successful business operations. Without proper administration of finance, no business enterprise can reach its full potentials for growth and success. Money is a universal lubricant which keeps the enterprise dynamic-develops product, keeps men and machines at work, encourages management to make progress and creates values. The importance of financial administration can be discussed under the following heads:-
(i) success of Promotion Depends on Financial Administration. One of the most important reasons of failures of business promotions is a defective financial plan. If the plan adopted fails to provide sufficient capital to meet the requirement of fixed and fluctuating capital an particularly, the latter, or it fails to assume the obligations by the corporations without establishing earning power, the business cannot be carried on successfully. Hence sound financial plan is very necessary for the success of business enterprise.
(ii) Smooth Running of an Enterprise. Sound Financial planning is necessary for the smooth running of an enterprise. Money is to an enterprise, what oil is to an engine. As, Finance is required at each stage f an enterprise, i.e., promotion, incorporation, development, expansion and administration of day-to-day working etc., proper administration of finance is very necessary. Proper financial administration means the study, analysis and evaluation of all financial problems to be faced by the management and to take proper decision with reference to the present circumstances in regard to the procurement and utilisation of funds.
(iii) Financial Administration Co-ordinates Various Functional Activities. Financial administration provides complete co-ordination between various functional areas such as marketing, production etc. to achieve the organisational goals. If financial management is defective, the efficiency of all other departments can, in no way, be maintained. For example, it is very necessary for the finance-department to provide finance for the purchase of raw materials and meting the other day-to-day expenses for the smooth running of the production unit. If financial department fails in its obligations, the Production and the sales will suffer and consequently, the income of the concern and the rate of profit on investment will also suffer. Thus Financial administration occupies a central place in the business organisation which controls and co-ordinates all other activities in the concern.
(iv)
Focal Point of Decision Making. Almost, every decision in the
business is take in the light of its profitability. Financial administration
provides scientific analysis of all facts and figures through various financial
tools, such as different financial statements, budgets etc., which help in
evaluating the profitability of the plan in the given circumstances, so that a
proper decision can be taken to minimise the risk involved in the plan.
(v) Determinant of Business Success. It has been recognised, even in India that the financial manger splay a very important role in the success of business organisation by advising the top management the solutions of the various financial problems as experts. They present important facts and figures regarding financial position an the performance of various functions of the company in a given period before the top management in such a way so as to make it easier for the top management to evaluate the progress of the company to amend suitably the principles and policies of the company. The financial manges assist the top management in its decision making process by suggesting the best possible alternative out of the various alternatives of the problem available. Hence, financial management helps the management at different level in taking financial decisions.
(vi) Measure of Performance. The performance of the firm can be measured by its financial results, i.e, by its size of earnings Riskiness and profitability are two major factors which jointly determine the value of the concern. Financial decisions which increase risks will decrease the value of the firm and on the to the hand, financial decisions which increase the profitability will increase value of the firm. Risk an profitability are two essential ingredients of a business concern.
(v) Determinant of Business Success. It has been recognised, even in India that the financial manger splay a very important role in the success of business organisation by advising the top management the solutions of the various financial problems as experts. They present important facts and figures regarding financial position an the performance of various functions of the company in a given period before the top management in such a way so as to make it easier for the top management to evaluate the progress of the company to amend suitably the principles and policies of the company. The financial manges assist the top management in its decision making process by suggesting the best possible alternative out of the various alternatives of the problem available. Hence, financial management helps the management at different level in taking financial decisions.
(vi) Measure of Performance. The performance of the firm can be measured by its financial results, i.e, by its size of earnings Riskiness and profitability are two major factors which jointly determine the value of the concern. Financial decisions which increase risks will decrease the value of the firm and on the to the hand, financial decisions which increase the profitability will increase value of the firm. Risk an profitability are two essential ingredients of a business concern.
FUNCTIONS OF FINANCE MANAGER
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. At present, every business concern
concentrates more on the field of finance because, it is a very emerging part
which reflects the entire operational and profit ability position of the
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.
Finance manager performs the following major
functions:
1. Forecasting Financial Requirements
It is the primary function of the Finance
Manager. He is responsible to estimate the financial requirement of the
business concern. He should estimate, how much finances required to acquire
fixed assets and forecast the amount needed to meet the working capital
requirements in future.
2. Acquiring Necessary Capital
After deciding the financial requirement, the
finance manager should concentrate how the finance is mobilized and where it
will be available. It is also highly critical in nature.
3. Investment Decision
The finance manager must carefully select
best investment alternatives and consider the reasonable and stable return from
the investment. He must be well versed in the field of capital budgeting
techniques to determine the effective utilization of investment. The finance
manager must concentrate to principles of safety, liquidity and profitability
while investing capital.
4. Cash Management
Present days cash management plays a major
role in the area of finance because proper cash management is not only
essential for effective utilization of cash but it also helps to meet the
short-term liquidity position of the concern.
5. Interrelation with Other Departments
Finance manager deals with various functional
departments such as marketing, production, personel, system, research,
development, etc. Finance manager should have sound knowledge not only in
finance related area but also well versed in other areas. He must maintain a
good relationship with all the functional departments of the business
organization.
