Financial Management Theory and Practice

1. AKKI MARUTHI
ASSISTANT PROFESSOR OF COMMERCE
SKNG,GOVERNMENT FIRST GRADE COLLEGE, GANGAVATHI,
KOPPAL DIST.
akkimaruthi@gmail.com

2. LEARNING OBJECTIVES OF FINANCIAL
MANAGEMENT
• Introduction of Financial Management
• Meaning and Definition of Financial Management
• Objectives of Financial Management
• Wealth Maximization V/S Profit Maximization
• References

3. INTRODUCTION TO FINANCIAL MANAGEMENT
A business organization seek to achieve their objectives by
obtaining funds from various sources and then investing them in
different types of assets, such as plant, buildings, machinery,
vehicles etc.
Financial management is managing the finances through
scientific decision-making.
For making right decisions, financial management needs to
understand financial environment within which these decisions
operate. Financial management will then be able to analyze
these financial information’s to predict likely future results and
to plan more carefully their proposed course of action.

4. CONT.,
Success of a firm depends on the ability to raise funds, invest in
assets and manage wisely.
it is an applied branch of general management. It looks after the
finance function of the business. In itself it constitutes a sub-
system of the business enterprises, inter-related very closely with
production, marketing and personnel functions or sub-systems.
It deals with finding out various sources for raising funds for the
firm. The sources must be suitable and economical for the needs
of the business. The most appropriate use of such funds also
forms a part of financial management.

5. CONT.,
Financial management is called upon to take three major
decisions:
1. Investment decision; e.g., capital budgeting or financial plan.
2. Financing decision or formulation of the best financing mix or
capital structure of the enterprise; and
3. Dividend decision or dividend policy
Financial management involves the implementation of these three
major decisions. The decisions are interrelated and should be
implemented jointly. Together, these vital decisions determine the
value of the enterprise to its shareholders and investors.

6. MEANING AND DEFINITION OF FINANCIAL
MANAGEMENT
Financial management refers to that part of the management
activity which is concerned with the planning and controlling of
firm’s financial resources.
Financial Management means planning, organizing, directing and
controlling the financial activities such as procurement and
utilization of funds of the enterprise.
It means applying general management principles to financial
resources of the enterprise.

7. CONT.,
DEFINITIONS
“The financial management deals with how the corporation
obtains the funds and how it uses them.” —Hoagland
According to J.L. Massie, “Financial management is the operational
activity of a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient operations.”
Howard and upon are of the opinion that financial management is
the application of the planning and control functions to the
finance function

8. OBJECTIVES OF FINANCIAL MANAGEMENT
(a) Profit Maximization:
(b) Wealth Maximization:
(a) Profit Maximization:
The process of increasing the profit earning capability of the
company is referred to as Profit Maximization. It is mainly a short-
term goal and is primarily restricted to the accounting analysis of the
financial year.
Profit Maximization is the ability of the company to operate
efficiently to produce maximum output with limited input or to
produce the same output using much lesser input. So, it becomes
the most crucial goal of the company to survive and grow in the
current cut-throat competitive landscape of the business
environment.
SOURCE *(www.wallstreetmojo.com)

9. CONT.,
Given the nature of this form of financial management, companies
mainly have a short-term perspective when it comes to earning
profits, and that is very much limited to the current financial year.
If we get into the details, profit is actually what remains out of the
total revenue after paying for all the expenses and taxes for the
financial year. Now to increase the profit, companies can either try
to increase their revenue or try to minimize their cost structure.
It may need some analysis of the input-output levels to diagnose the
operating efficiency of the company to identify the key
improvement areas where processes could be tweaked or changed
in their entirety to earn larger profits.

10. CONT.,
(b) Wealth Maximization:
The ability of a company to increase the value of its stock for all the
stakeholders is referred to as Wealth Maximization. It is a long-term
goal and involves multiple external factors like sales, products,
services, market share, etc.
Wealth Maximization is the ability of the company to increase the
value for the stakeholders of the company, mainly through an
increase in the market price of the company’s share over some time.
The value depends on several tangible and intangible factors like
sales, quality of products or services, etc.

11. CONT.,
It is mainly achieved throughout the long-term as it requires the
company to attain a leadership position, which in turn translates to a
larger market share and higher share price, ultimately benefiting all
the stakeholders of the company.
To be more specific, the universally accepted goal of a business
entity has been to increase the wealth for the shareholders of the
company as they are the actual owners of the company who have
invested their capital, given the risk inherent in the business of the
company with expectations of high returns.

12. OTHER OBJECTIVES OF FINANCIAL MANAGEMENT
To ensure regular and adequate supply of funds to the concern.
To ensure adequate returns to the shareholders which will depend
upon the earning capacity, market price of the share, expectations
of the shareholders.
To ensure optimum funds utilization. Once the funds are procured,
they should be utilized in maximum possible way at least cost.
To ensure safety on investment, i.e., funds should be invested in
safe ventures so that adequate rate of return can be achieved.
To plan a sound capital structure-There should be sound and fair
composition of capital so that a balance is maintained between
debt and equity capital

13. Wealth Maximization vs Profit Maximization
• Wealth Maximization
It is defined as the
management of financial
resources aimed at increasing
the value of the stakeholders
of the company.
Focuses on increasing the
value of the stakeholders of
the company in the long term.
It considers the risks and
uncertainty inherent in the
business model of the
company.
• Profit Maximization
It is defined as the
management of financial
resources aimed at increasing
the profit of the company.
Focuses on increasing the profit
of the company in the short
term.
It does not consider the risks
and uncertainty inherent in the
business model of the
company.

14. CONT.,
• Wealth Maximization
It helps in achieving a larger
value of a company’s worth,
which may reflect in the
increased market share of the
company.
it recognizes the timing of
return.
It is a modern approach to
financial management.
It is used to increase the
current net value of business.
• Profit Maximization
It helps in achieving efficiency
in the company’s day-to-day
operations to make the
business profitable.
It ignores timing of return.
it is the most important
assumption used by economists
to formulate various economic
theory such as prize and
production theory.
It is used to determine the
optical level of sale to achieve
the highest profit.

15. REFRENCES
• FINANCIAL MANAGEMENT BY I.M. PANDEY
• FINANCIAL MANAGEMENT BY PRASAN CHANDRA
• FINANCIAL MANAGEMENT THEORY AND PRACTICE
BY SHASHI K GUPTAAND R.K SHARMA 8th Edition
2014/ 2016
• FINANCIAL MANAGEMENT BY M.Y KHAN AND JAIN
• FINANCIAL MANAGEMENT BY DR.G.B BALIGAR