This document discusses the key aspects and functions of financial management. It can be summarized as follows: Financial management involves both procuring funds from various sources like equity and debt, as well as effectively utilizing those funds. The main functions of a financial manager include estimating funding needs, determining capital structure, making investment decisions, and managing cash flow. Financial management is important for all organizations, as it plays a crucial role in utilizing resources efficiently. A key objective is maximizing shareholder wealth over the long run by considering factors like future cash flows, risk, and social responsibilities, rather than just short-term profit maximization. Financial management also requires interfacing with other departments to ensure funding decisions support business goals and

1. In today’s extremely competitive world, the importance and judicious use of funds need not
be over emphasized. In a business whether commercial or charitable management of funds
is primary concern of the financial management.
Thus financial management is concerned with efficient use of an important economic
resource, namely capital funds.
Financial management is concerned with the managerial decision that results in the
acquisition and financing of short term and long term credit needs of the firm.
Financial management deals with procurement of funds and their effective utilisation of
business.
From the above definitions, we can conclude that there are two basic aspects of financial
management – procurement of funds and effective utilisation of funds.
PROCUREMENT OF FUNDS
Funds can be procured from different sources depending upon interest rate, repayment
schedule and other terms and conditions.
The sources of funds can be categorised in two ways – one equity capital and debt capital.
From the risk point of view, raising funds by issuing equity shares is the best. However it will
involve dilution of control. Moreover, cost of equity is the highest when compared with
other sources of finance. From the cost and control point of view raising funds through
debentures (debt funds) would be best because interest is paid out of profits before tax and
debenture holders do not get any ownership rights. On the other side it involves high
degree of risk. Hence finance manager has to strike a balance between cost, control and
risk while procuring funds.
Share holder are of two types – ordinary and preference. Preference share holders receive
dividend at fixed rate and they have priority over ordinary share holders. The dividend rate
for ordinary share holder is not fixed and vary from year to year depending profits earned
by the company and decision of the board of directors. Payment of dividend to ordinary

2. share holders is not a legal obligation but depends upon the discretion of board of
directors. Since ordinary share holders receive dividend after meeting obligations of others
To be more precise procurement of funds includes –
a. Identification of source of finance
b. Determination of finance mix
c. Raising of funds
d. Retention of profits
Effective utilisation of funds – finance manager must always keep in mind that funds have
some cost and entail some risk. While deploying funds he must ensure that returns
generated are sufficient to cover the cost of and provide some profit for risk taking. Simply
saying the funds must be deployed properly and profitably.
SCOPE OF FINANCIAL MANAGEMENT
a. There is common notion that financial management is useful only for private
enterprises. However financial management is essential for all types of organisation
as it plays crucial role in utilisation of funds.
b. We study history to learn lessons from the past. Commercial history is full of
examples where firms have been liquidated because their technology is obsolete. The
main cause of liquidation of such companies was either over trading, or over-
expanding without adequate financial base.
c. If proper financial management is used, enterprises can reduce their capital
employed and improve their return on investment.
d. A non-profit organisation may not be keen on making profit, in the traditional sense
of the term, but surely it needs to cut down its cost and use the funds at its disposal
to their optimum capacity.
e. A sound sense of financial management has to be cultivated among bureaucrats,
administrators, engineers, educationists, and public at large. Unless this is done,
wastage of national resources cannot be stopped.
Difference between Financial Accounting and Financial Management –

3. Financial Accounting is the systematic way of recording, classifying, summarizing and
preparing financial statements. On the other hand, financial management deals with
procurement of funds and their effective utilisation in business.
Financial accounting is a data collection and preparation process, whereas financial
management is decision making process.
Objectives of Financial Management
Profit maximisation – it has been traditionally argued that the objective of a company is to
earn profit, hence the objective of financial management is also profit maximisation. The
statement implies that the finance manager has to make his decision in the manner that
the profits are maximised. However profit maximisation cannot be sole objective of a
company. It is at best limited objective. If profit is accorded undue importance it can give
rise to number of problems-
A – sole objective of profit maximisation generally ignores the risk. There is direct
relationship between risk and profit. If profit maximisation if the only goal then risk factor is
altogether ignored. This implies that finance manager will accept highly risky proposals if
they give high returns. In practice however risk is very important and has to be balanced
with profit objective.
B – Profit maximisation as an objective does not take into account the time pattern of
returns. For example proposal A may give higher amount of profits as compared to
proposal B yet proposal B may be preferred if returns flow is quiker.
C – Profit maximisation as an objective is too narrow. It fails to take into account social
consideration as also that of other stake holders. The shareholders are more particularly
interested in wealth maximisation.
Hence companies which follow profit as sole objective, may adopt policies yielding
exorbitant profits in short run which are unhealthy to growth, survival and overall interest
of the business. Thus a company may not undertake planned and prescribed shut down of
the plant. Instead simply continue to run the plant to maximise profits in the short run.

4. Wealth Maximisation –
The value or wealth of a firm is defined as the market price of the firm’s stock. The market
price of the firm’s stock represents the judgement of all market participants as to what the
value of the particular firm is. It takes into account present and future earnings of the firm,
dividend policy and many other factors have bearing upon market price of the stock.
Value or wealth maximisation of firm is superior to profit maximisation due to following
reasons.
- Value maximisation considers future cash flows, dividends, earnings per share, risk of
a decision etc., whereas profit maximisation does not consider this.
- Firm with objective of profit maximisation would refrain from paying dividends to
share holders.
- The maximisation of firms value as reflected in its share price is viewed as proper
goal of a firm. The profit maximisation can be considered as part of the wealth
maximisation strategy.
Functions of Finance Manager –
Estimating requirements of funds –
a. Requirements of funds have to be carefully estimated
b. Exact timings of requirements of such funds must be know
c. An assessment has to be made regarding requirements of working capital
d. Amounts blocked in current and fixed assets should be correctly determined
e. Funds likely to be generated for short period from current liabilities should be
determined
Decision regarding capital structure –
a – a proper mix of various sources of finance has to be worked out.
b – finance manager has to carefully look into the existing capital structure and see how
the various sources of raising finance will affect it.

5. c – he has to maintain proper balance between long term and short term funds
d – he has to raise sufficient long term funds in order to finance fixed assets and other long
term investments, and to provide for permanent needs of working capital
e – he has to maintain proper balance between own funds and loan funds
f- he has to ensure that overall capitalisation of company is such that the company is able
to procure funds at minimum cost and is able to tolerate shocks of lean period.
Investment Decision –
- Investment of funds in a project should be made after careful assessment of various
projects through capital budgeting
- Part of long term funds should also be kept for working capital requirement
- Inventory policy should be determined keeping in view the requirement of
production, future price estimates and availability of funds
Dividend Decision –
- He has to decide what amount has to be paid to share holder and what amount
should be retained in the company
- Due consideration has to be given to share price, funds for future growth, cash flow
situation, tax position of shareholders etc.
Cash Management –
- He has to ensure that all sections – branches, factories, departments and units of the
organisation are supplied with adequate funds.
- He must ensure that sections having excess cash contribute to the central pool for
the use in other sections which need funds. An adequate supply of cash at all points
of time is essential for smooth functioning of the business.
- He should also ensure that there is no excess cash at any point of time.
Evaluating Financial Performance –

6. - Finance manager has to constantly review the financial performance of various units
of the organisation.
- Depending upon analysis of performance management can assess how the funds
have been utilised in various divisions and what can be done to improve it.
Other functions –
- The finance manager has to carry out negotiations with financial institutions, banks,
depositors and other lenders.
- He must ensure that funds raised after following due process of law.
- He has to analyse trends in stock market and judge impact on company’s share price
INTERFACE BETWEEN FINANCE AND OTHER FUNCTIONS –
Marketing – Finance Interface –
- There are many decisions marketing manager takes which have significant impact on
the profitability of the firm.
- He should weigh the benefits of keeping a large inventory of finished goods in
anticipation sales, against the cost of maintaining that inventory.
- He may extend liberal terms of credit in eagerness to meet the sales target.
- Other key decisions of marketing manager which have financial implications are
pricing, product promotion and advertisement, choice of product mix and
distributions policy
Production – Finance Interface
- The production Manager controls major part of investment in the form of
equipment, material and men.
- He should organise his department in such a way that equipments under his control
are used most productively, the inventory of work-in-process or unfinished goods
and stores and spares is optimised and idle time and work stoppages are minimised.

7. - While price at which output can be sold depends upon many external factors,
production cost is more amenable to the control of production manager.
- He has to make decision regarding make or buy, buy or lease, etc for which he has to
evaluate financial implications of before arriving at decision.
Top Management – Finance Interface
- Top management itself finds convenient to use the financial statements as a means
of keeping itself informed of the overall effectiveness of the enterprise.
- Strategic planning and management control are two important functions of the top
management. Finance function provides basic input needed for undertaking these
activities.
With the liberalisation of Indian economy towards globalisation, finance managers are
presently facing new challenges like – treasury operations, foreign exchange, financial
structuring, maintaining share price, management control etc.
Thus from the above discussion we can conclude that finance forms backbone of any
organisation. Also it is one of major yardstick measure the performance or evaluate the
company. If somebody is aspiring to move to top management of the company then he
should have good knowledge of finance.