Basics

1. CONCEPT OF FINANCIAL
MANAGEMENT
AbdulRehmansiddiqui@MIM

2.  The general meaning of finance refers to providing
funds, as and when needed.
 However, as management function, the term ‘Financial
Management’ has a distinct meaning.
 Financial management deals with the study of
procuring funds and its effective and judicious
utilization, in terms of the overall objectives of the
firm, and expectations of the providers of funds.
 The basic objective is to maximize the value of the firm.
 The purpose is to achieve maximization of share value
to the owners i.e. equity shareholders.
AbdulRehmansiddiqui@MIM

3. DEFINITIONS
The term financial management has been defined, differently, by
various authors. Some of the authoritative definitions are
given below:
 “Financial Management is concerned with the efficient use of
an important economic resource, namely, Capital Funds” —
Solomon
 “Financial Management is concerned with the managerial
decisions that result in the acquisition and financing of short-
term and long-term credits for the firm” —Phillioppatus
 “Business finance is that business activity which is concerned
with the conservation and acquisition of capital funds in
meeting financial needs and overall objectives of a business
enterprise” —Wheeler
AbdulRehmansiddiqui@MIM

4. AIMS OF FINANCE FUNCTION
 Acquiring Sufficient and Suitable Funds
 Proper Utilization of Funds
 Increasing Profitability
 Maximising Firm’s Value
AbdulRehmansiddiqui@MIM

5. FUNCTIONS OF FINANCE
(A) Investment Decision or Long-term Asset mix
decision
(B) Finance Decision or Capital mix decision
(C) Liquidity Decision or Short-term asset mix
decision
(D) Dividend Decision or Profit allocation decision
AbdulRehmansiddiqui@MIM

6. OBJECTIVE OF FINANCE FUNCTION
Profit
Maximization
Wealth
Maximization
AbdulRehmansiddiqui@MIM

7. PROFIT MAXIMIZATION
 Any business activity aims at earning profits.
 According to this principle, all the functions of the
business will also have the profit as the main
objective.
 But this was only a traditional believe.
 Now, profit cannot be the sole and only goal or
objective of the finance function, because ……..
The term profit is AMBIGUOUS CONCEPT which
isn’t having precise connotation.
It also involves risk factor, Time pattern of returns,
Social aspects, stake Holders
AbdulRehmansiddiqui@MIM

8. Other factors
Profit
Maximization
AbdulRehmansiddiqui@MIM

9. WEALTH MAXIMIZATION
 The new objective of the business is to maximization its
wealth and value of the shares of the company.
 The value of any asset is judged not in terms of its cost but in
terms of the benefits it produces.
 Similarly the value of a course of action is judged in terms of
the benefits it produces less the cost of undertaking it.
 Thus wealth maximization goal as decision criteria suggest
that any financial action which creates wealth or which has
discounted stream of future benefits exceeding its cost, is
desirable & should be accepted & that which does not satisfy
this test should be rejected.
AbdulRehmansiddiqui@MIM

10.  Wealth maximization uses the concept of future expected cash
flows rather then the ambiguous term Profits.
 It considers time value of money.
 It considers Risk associated with investment
 Also the Pay Back Period of specific projects.
Risk Associated
Future expected cash
flow
Pay back Period Time Value of Money
Wealth
maximization
AbdulRehmansiddiqui@MIM

11. ROLES & RESPONSIBILITIES OF FINANCE
MANAGER
 Procuring the funds as and when necessary, at the
lowest cost.
 Investing the funds in those assets, which are more
profitable.
 Distributing the dividends to the shareholders to meet
their expectations and facilitate expansion to achieve the
long-term goals of organization.
 Control of funds
 Evaluation of Performance
 Corporate taxation
AbdulRehmansiddiqui@MIM