Finance is concerned with the management of assets and liabilities and planning for future growth, while accounting focuses on day-to-day financial transactions. The key functions of financial management include investment decisions about allocating funds, financing decisions around obtaining funds, and dividend decisions about distributing profits. The objectives of financial management are to maintain liquidity and profitability, maximize shareholder wealth over the long run, and ensure the efficient utilization of financial resources.

1. Introduction

2. Accounting vs Finance
• The difference between finance and
accounting is that accounting focuses on
the day-to-day flow of money in and out of
a company or institution, whereas finance
is a broader term for the management of
assets and liabilities and the planning of
future growth.

3. Finance –
A
concept
Henry ford remarked once, “Money is an arm
or a leg. You either use it or lose it.”
Finance is one of the basic foundations of all
kinds of economic activities, it is the master
key which provides access to all the sources for
being employed in manufacturing and
merchandising activities.
Business finance is that business activity which
is concerned with the acquisition and
conservation of capital funds in meeting
financial needs and overall objectives of
business enterprises.

4. Key issues in Finance
• Where to raise financial resources from?
• Wherein to invest the resources?
• How much of profit to distribute and how
much to retain?

5. Meaning of Financial Management
The planning, organizing, directing and controlling
the financial activities of an enterprise.
Concerns with procurement, allocation and control
of financial resources.
It refers the efficient and effective management of
money (funds) in such a manner as to achieve the
goals of the organization.

6. Financial
management
• Financial management mainly
involves rising of funds and their
effective utilization with the
objective of maximising
shareholders’ wealth.
• According to Joseph & Massie,
“Financial management is the
operational activity of a business
that is responsible for obtaining
and effectively utilising funds
necessary for efficient operations”.

7. 3 A’s of
Financial
Management
Financial
manager
has to
forecast
expected
events in
business
such as
Anticipating financial needs (estimation
of funds required for investment in
fixed assets and current assets).
Acquiring financial resources (where
and how to obtain the funds to finance
the anticipated financial needs)
Allocating funds in business (allocation
of available funds among the best plans
of assets, which are able to maximize
shareholders’ wealth.
Thus, the decisions of FM can be
divided into – investment, financing
and dividend decision.

8. Decisions of Financial
Management
Financial
decisions
Investment
Financing
Dividend

9. Investment
decisions
• It relates to the selection of assets,
that a firm will invest funds.
i. Long-term funds (fixed assets: Plant
& machinery, Land & building, etc.)
which involve huge investment and
yield a return over a period of time
in future. Investment in long-term
funds is popularly known as “Capital
budgeting”.
ii. Short-term funds (Current assets:
raw materials, work in process,
finished goods, debtors, cash etc.).
That can be converted into cash
within a financial year. Investment in
current assets is known as ‘Working
Capital Management’.

10. Financing decisions
• It is related to the financing mix or capital structure and to
determine the proportion of debt and equity. There should be an
optimum finance mix, which maximizes shareholders’ wealth.

11. Dividend
decisions
• Third financial decisions, which relates to
dividend policy. Dividend is a part of
profits, that are available for distribution to
equity shareholders. There are two options
available in dealing with the net profits i.e.,
distribution of profits as dividends to the
shareholders’ with no retention of
earnings or they can retained in the firm
for business expansion.

12. Importance of financial
management
1. Sound financial planning – successful promotion
of a business concern depends on efficient
financial management. If the plan adopted, fails
to provide adequate capital to meet the
requirements of fixed and working capital, then
firm cannot carry on its business successfully.
Therefore, sound financial planning is quite
essential for the success of a firm.

13. 2. Smooth running – Since finance is required at every stage of
the business such as promotion, expansion,
management of day to day expenses, etc. proper
financial administration becomes necessary for the
smooth running of a business enterprises.
3. Decision Making – FM provides scientific analysis of all
facts and figures through various financial tools such as
ratio analysis, variance analysis, budget etc., such an
analysis helps the management to evaluate the
profitability of the plan, so that a proper decision can be
taken to minimize the risk.

14. • 4. Solutions to financial problems – Efficient FM
helps the top management by providing solutions
to the various financial problems faced by it.
• 5. Measure of performance – Financial
management is considered as a yard stick to
measure the performance of the firm.

15. Scope of
Financial
Management
• Changes that takes place over the
years is known as ‘Scope of
financial management’. Hence, it is
necessary to divide the scope in
two approaches.
• 1. Traditional approach- the scope
was limited to raising and
administering of funds needed by
the firm to meet their financial
needs. It deals with following
aspects –
i. Arrangement of funds from
financial institutions.
ii. Arrangement of funds through
financial instruments like shares,
bonds etc.

16. • Finance manger had a limited role to perform. He was
expected to keep accurate financial records, prepare
reports on firm’s status and performance and manage
cash in a way that the firm was in a position to pay its
obligations (liabilities) on time.
• Due to some limitations in traditional approach such as
finance taken up from the view point of suppliers of
funds (bankers, investors), ignored internal financing
decisions, ignored working capital financing (day to day
financial activities) etc.

17. 2. Modern approach – this approach provides
a conceptual and analytical framework for
financing decision-making. In this
approach, finance function covers both
acquisition and allocation of funds. Hence,
the decision in financial management can
be divided into –
i. The investment decision
ii. The financing decision
iii. The dividend decision
iv. The funds requirement decision

18. Functions of
financial
management
1. Liquidity – ascertained
on 3 important
consideration-:
• Forecasting cash flows – matching
inflows against cash outflows.
• Raising funds – financial manager
has to ascertain the sources from
which funds may be raised and
the time when these funds may be
needed.
• Managing the flow of internal
funds.

19. Functions of
financial
management
2. Profitability – following
factors are taken into
consideration –
• Cost control & Reduction
• Pricing
• Forecasting future profits
• Measuring cost of capital
• 3. Management – it includes
• The management of long-term funds
• The management of short-term funds

20. Objectives of
Financial
Management
Basic objectives
• Maintenance of liquid assets – firm must be
able to meet its obligations at all times.
However, investment in liquid assets has to
be adequate – neither too low nor too
excessive. There must be a balance between
profitability and liquidity.
• Maximization of Profits – ‘profit
maximization’ goal implies that the
investment, financing and dividend policy
decision of the firm should be oriented to
profit maximization.
• Wealth maximization- also called ‘Value
maximization’. It means maximizing the
present value of a course of action. It takes
care of – lenders/creditors,
workers/employees, public/society,
management/employer.

21. Objectives of
Financial
Management
2. Other objectives
can be –
• Ensuring a fair return to
shareholders
• Building up reserves for
growth & expansion
• Effective and efficient
utilization of finance
• Ensuring financial discipline
in management.

22. Profit Maximisation
• • Main aim is earning profit.
• • Profit is the parameter of the
business operation.
• • Profit reduces risk of the business
concern.
• • Profit is the main source of
finance.

23. Finance Manager’s
Role
• Forecasting of
Cash Flows
• Raising Funds
• Allocation of
Funds
• Profit
Planning
•
Understanding
Capital Markets
• Managing the
Flow of Internal
Funds
• Facilitate
Pricing of
Product
• Measuring
Required
Return
• Managing
Assets

24. Wealth
Maximisation
• This concept is to improve
the value or wealth of the
shareholders.
• It considers both time
and risk of the business
concern.
• It provides efficient
allocation of resources.