Financial management refers to the efficient and effective management of the financial activities and capital funds of a business or organization. It involves planning, organizing, directing, and controlling financial undertakings to support the goals of the organization. The key goals of financial management include profit maximization, maximizing earnings per share, and shareholder wealth maximization by focusing on factors like risk, timing of returns, and capital market understanding. Financial managers play an important role in raising funds, allocating funds, profit planning, and understanding capital markets to optimize organizational performance and value.

1. FINANCIAL
MANAGEMENT

2. 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 to the efficient and effective management of
money (funds) in such a manner as to achieve the goals of
the organization.

3. DEFINITION OF FINANCIAL MANAGEMENT
• “According to Solomon “Financial management is concerned with the
efficient use of an important economic resource, namely Capital
Funds”.
• Financial management is the operational activity of a business that is
responsible for obtaining and effectively utilizing the funds necessary
for efficient operations.” – J. L. Massie.
• “Financial management deals with procurement of funds and their
effective utilisation in the business.” – S. C. Kuchal.

4. FINANCIAL GOALS
4
□ Profit maximization (profit after tax)
□ Maximizing Earnings per Share
□ S h a r e h o l d e r ’s We a l t h Maximization

5. PROFIT MAXIMIZATION
5
□ Maximizing the Rupee Income of
Firm
□ Resources are efficiently utilized
□ Appropriate measure of firm
performance
□ Serves interest of society also

6. OBJECTIONS TO PROFIT MAXIMIZATION
6
□ It is Vague
□ It Ignores the Timing of Returns
□ It Ignores Risk
□ Assumes Perfect Competition
□ In new business environment profit
maximization is regarded as
□ Unrealistic
□ Difficult
□ Inappropriate
□ Immoral.

7. 8
Vikas Publishing House Pvt. Ltd.
MAXIMIZING EPS
□ Ignores timing and risk of the
expected benefit
□ Market value is not a function of EPS.
Hence maximizing EPS will not result in
highest price for company's shares
□ Maximizing EPS implies that the firm
should make no dividend payment so long
as funds can be invested at positive rate
of return - such a policy may not always
work
Financial Management, Ninth Edition © I M Pandey

8. 9
SHAREHOLDERS’ WEALTH
MAXIMIZATION
□ Maximizes the net present value of a course of action to shareholders.
□ Accounts for the timing and risk of the expected benefits.
□ Benefits are measured in terms of cash flows.
□ Fundamental objective – maximize the market value of the firm’s shares

9. FINANCE MANAGER’S
ROLE
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□ Raising of Funds
□ Allocation of Funds
□ Profit Planning
□ Understanding Capital Markets

10. SIGNIFICANCE / IMPORTANCE OF FINANCIAL MANAGEMENT
• Sound financial management is essential in both profit and nonprofit organisations.
The financial management helps in monitoring the effective deployment of funds
in fixed assets and in working capital. The finance manager estimates the total
requirement of funds, both in the short period and the long period. The finance
manager assesses the financial position of the company through working out of the
return on capital, debt-equity ratio, cost of the capital from cach source, etc., and
comparison of the capital structure with that of similar companies.
• Financial management also helps in ascertaining how the company would perform
in future. It helps in indicating whether the firm will generate enough funds to
meet its various obligations like repayment of the various instalments due on loans,
redemption of other liabilities.
• Sound financial management is indispensable for any organisation. It helps in profit
planning, capital spending, measuring costs, controlling inventories, accounts
receivable, etc. Financial management essentially helps in optimising the output
from a given input of funds.

11. • Helps organisations in financial planning;
• Assists organisations in the planning and acquisition of funds;
• Helps organisations in effectively utilising and allocating the funds received or
acquired;
• Assists organisations in making critical financial decisions;
• Helps in improving the profitability of organisations;
• Increases the overall value of the firms or organisations;
• Provides economic stability;
• Encourages employees to save money, which helps them in personal financial
planning.

12. ROLE OF FINANCE MANAGER
• Forecasting Financial Requirements
• Financing Decision
• Investment decision
• Dividend decision
• Deciding overall objectives
• Supply of funds to all parts of the organization
• Evaluating financial performance
• Financial negotiation
• Keeping touch with stock exchange quotations and behaviour of share prices

13. LIQUIDITY VS PROFITABILITY (RISK-RETURN TRADE-OFF)
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□ Risk and expected return move in
tandem; the greater the risk, the greater
the expected return.
□ Financial decisions of the firm are
guided by the risk-return trade-off.
□ The return and risk relationship:
Return = Risk-free rate + Risk
premium
□ Risk-free rate is a compensation for time
and risk premium for risk.

14. FINANCE FUNCTIONS
14
□ Investment or Long Term Asset Mix
Decision
□ Financing or Capital Mix Decision
□ Dividend or Profit Allocation Decision
□ Liquidity or Short Term Asset Mix
Decision