Introduction to Financial Management – Part 2

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Goals/Objectives of Financial Management –

  1. Profit Maximization [Traditional]
  2. Shareholders wealth Maximization [Modern]

Profit Maximization – It is a traditional and narrow approach which aims at maximization of returns by the firm in terms of monetary resources and increasing the earning per share of the shareholders. Under such approach maximization of profit is the sole objective of a business and the behavior of a firm is analyzed in terms of its profit maximization ability.

Shareholders Wealth Maximization – It refers to maximization of the net present value of a course of action for increasing shareholders wealth.

Functions of a Financial Manager:-

A Financial Manager is a person with a key position in a company, who is solely responsible for carrying out the finance functions of the company.

  1. Financial Forecasting and Planning
  2. Acquisition of Funds
  3. Analysis of investment activities
  4. Evaluation of Investment Opportunities
  5. Cash management and Profit planning
  6. Understanding Capital/Financial markets
  7. Financial Decision Making
  8. Management of Risk
  9. Performance Measurement
  10. Coordination and Control

Functions of Financial Management:

Executive Functions-

  • Financial forecasting
  • Financial Planning
  • Financial Decision Making
  • Financial Negotiation
  • Investment Decision
  • Profit allocation/Dividend Decision
  • Management of cash flows
  • Appraisal of financial performance

 

Routine Functions-

  • Record keeping
  • Preparation of various financial statements
  • Arrangement of cash balances as per requirement
  • Management of credit
  • Safety of significant financial documents

 

Various Decisions under Financial Management –

 

(1) Investment Decision:

The investment decisions are concerned with identification of investment opportunities and efficient allocation and utilization of funds to maximize a company`s profitability in the long run.

(2) Financing decisions:

These are Concerned with when, where from and how to acquire funds to meet a firm’s investment needs. It involves determining the proper asset mix for a business.

(3) Profit allocation or Dividend decision:

It is concerned with disbursement of profits back to the shareholders and investors of the business.

(4) Liquidity Decision:

It is concerned with proper management of a firm`s current assets. These decisions have time horizon of less than a year and involves management of day to day fund requirements of a firm.

Time Value of Money

The actual worth of money available at present time is more than its worth in the future due to potential earning capacity of money.

Therefore, given a choice of receiving a certain sum of money today or in the future, a rational person will always choose to receive the money now as it has more value today than in the future. This phenomenon is known as time preference of money.

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