Financial management means money management. Financial management is relating
with the planning and controlling of the financial resources of the business enterprises.
The term financial management has emerged from the general regulation of management.
As an academic discipline, the subject of financial management has undergone essential
changes in relation to its scope, functions and objectives. In the past, the
financial management was controlled to raising of the funds and its routine aspects.
In the broader sense, it is now relating with the best use of financial income
in addition to its procurement. Therefore, financial management is that part of
management which is concerned mainly with:
· Fund Raising: raising the right type of funds in the
most economic and appropriate way.
· Use of Funds: using the funds in the most advantageous
and safes possible way.
The simple definition of Financial Management is ‘the ways and means of
managing money’. This statement can be further expanded to define Financial
Management: the determination, acquisition, distribution and consumption of the
financial resources with the aim of achieving the goals and objectives of the
According to James Van
“Financial management connotes responsibility for obtaining and effectively
utilizing funds necessary for the efficient operation of an enterprise.”
“Financial management is that managerial activity which is concerned with
the planning and controlling of the firm’s financial resources”.
Archer and Ambrosia:
“Financial management is the application of the planning and control
functions to the finance function”.
Joseph and Massie:
“Financial management is the operational activity of a business that is
responsible for obtaining and effectively utilizing the funds necessary for
Financial management provides the best guide for future resource allotment
by the firm. In fact, finance is the bright thread running through all business
activity. It influences and limits the activities of marketing, production, and
purchasing and personnel management. The success of a business is calculated largely
in financial terms. The well-organized organisation and administration of the
finance function is therefore very important to the successful functioning of
every business enterprise.
1.2 ROLE OF THE
The traditional role of the finance
manager is to shut in to the raising of funds in order to meet working necessities
of the business. This traditional approach has been criticized by modern
There was a change from traditional
approach to the modern concept of finance function. The industrialization,
technological innovations and inventions and a change in economic and
environment factors required the efficient and able utilization of financial
resources. Because then, finance has been viewed as an essential part of the
management. The finance manager is, therefore, concerned with all financial
activities of planning, raising, allocating and controlling the funds in an
efficient manner. In addition, profit planning is another important function of
the finance manager. This can be done by decision making in respect of the
Investment Decisions: for obtaining
maximum productivity after taking the time value of the money into account.
Financing decisions: through a
balanced capital structure of Debt-Equity ratio, source of finance, and
interest coverage ratio etc.
Dividend decisions: issue of Bonus
Shares and retention of profits with objective of maximization of market value
of the equity share.
Best utilization of fixed assets.
Efficient working capital management:
through inventory, debtors, cash marketable securities and current liabilities.
Taking the cost of capital, risk,
return and control aspects into account.
Pricing, volume of output,
product-mix and cost-volume-profit analysis.
Stock Market: Analyses the trends in
the stock market and their impact on the price of Company’s share and share
1.2.1 Goals / Objective of Financial Management:
Financial Management deals with
activities which have financial implications. Well-organized financial
management requires the continuation of some objectives or goals because
decision as to whether or not a financial decision is efficient must be made in
the light of some objectives it includes:
The primary objective of a business is to earn profit; therefore the objective
of financial management is also profit maximisation. If profit is given undue
importance, a number of problems can arise, such as-
§ It does not take
into account the time pattern of returns.
§ It fails to take
into account the social consideration to workers, customers etc.
§ The term profit
is unclear – it conveys a different meaning to different people .e.g. total
profit, rate of profit etc.
In wealth maximisation business firm maximise its market value, it implies that
business decision should seek to increase the net present value of the economic
profit of the firm. It is the duty of the finance manager to see that the share
holders get good return on the share. Therefore, the value of the share should
increase in the stock market. The wealth maximisation objective is generally in
accord with the interest of the various groups such as owners, employees etc.
to limitation in profit maximisation, in today’s real world situations which is
unsure and multi-period in nature, wealth maximisation is a better objective
.Where the time period is short and degree of uncertainty is not great, wealth maximisation
and profit maximisation amount to essentially the same.
Other Goals Or Objectives Of Financial Management:
a) To make sure enough returns to the shareholders this should be fair in
the given market situation.
b) To contribute to the operational efficiency of all other areas of
c) To introduce financial discipline in the organization.
d) To build up a strong financial base so that the enterprise can fall back
upon its reverses during lean years and resist the shocks of the business.
1.2.2 Financial System in India
The economic development of any
country largely depends on efficiency of the financial system. The well
developed financial system helps economy to achieve growth in savings and
investment. It also ensures proper functioning of financial intermediaries and
facilitates flow of funds from surplus areas to shortage areas. The governments
as well as regulators apply suitable policies to make financial system more
efficient and exciting. The financial system of any country is comprised of
and Capital Markets Intermediaries which includes banks & financial
(iii) Financial services or products or instruments
including Government and Government appointed agencies.
Functions of Financial System
Financial System performs the
1) Mobilisation of Savings: The
financial system encourages individuals, corporate, and others to save for the
purpose of economic development. The financial intermediaries play a important
role in mobilization of savings & making available funds to the entrepreneurs
for investments. The household & corporate sectors save through use of
different financial products. For example, household sector uses bank deposit products
& mutual funds products for the savings.
2) Ensures Liquidity: The financial
system provides liquidity in respect of many financial assets like equity, debt
instruments etc. This encourages investors to invest in financial assets. Ultimately
this help corporate to raise funds from financial markets through issue of
financial instruments. The financial system ensures liquidity for many of these
financial assets through strengthening secondary market.
3) Settlement of Commercial Transactions:
The financial system facilitates settlement of commercial transactions & financial
claims arising out of sale & purchase of goods & Services. For this money
is used as an instrument which is legally accepted. Therefore values of all
transactions including sale & purchase of goods and services are expressed
in terms of money only. Over a period of time, the financial system has developed
other instruments like cheques, demand drafts, credit card etc. for settlement
of economic transactions. These instruments are recognized by law as an alternate
for money. In view of this, market participants use new instruments like credit
and debit card as well as new facilities like internet banking and mobile
banking for settlement of business and commercial transactions.
4) Implementation of Economic
Policies of Government: The presence of strong financial system helps the
Government to frame appropriate economic policies for increasing savings &
investment, achieving desired economic growth in industry and agriculture
sector, etc. It also facilities government borrowings from the domestic market
for meeting planned budgetary expenditures. It also helps Government to attract
foreign capital for its investment in domestic market.
5) Support for Managing Risk in
Financial Transactions: The financial system not only facilitates to carry out
business and commercial transactions but also helps to manage risk in such
transactions. On account of deregulation of financial markets, participants are
showing to various market risks. The financial system offers a variety of
financial products like derivative products etc. to deal with risk in
commercial transactions. The players who are part of financial system use
variety of derivative products or financial contracts like forward futures,
options and swaps to manage variety types of risk in commercial and business
1.2.3 Financial Assets
These assets are used for production
or utilization or further creation of assets. The financial assets are the
claims of money and perform some functions of money. They have high degree of
liquidity but not as liquid as money has. The financial asset is different from
physical assets. Financial assets are useful for further production of goods or
for earning income. The physical assets are not useful for further production
or for earning income.
Classification of Financial Assets
Financial assets can be classified
in different ways.
· Primary assets – those are the financial claim against real
sector units created by themselves for raising funds to finance their deficient
spending. They are the ultimate borrowers i.e. bills, bonds, equities etc are
· Secondary assets – these are financial claims issued by
financial institution against themselves to raise funds from the public. These
assets are the obligations of financial institution i.e. bank deposits, life
insurance policies; UTI units etc are secondary assets.
· Marketable assets – These are the financial assets which can
be transferred from person to person without difficulty. It consists of shares,
government securities, bonds, mutual funds units, UTI units, bearer debentures
· Non marketable assets – These are financial assets which
cannot be transferred easily. It consists of bank deposits, provident funds, LIC
schemes, company deposits, Post office certificates.
· Cash assets – Money assets consist of coins and currency
notes and created money. Reserve bank has the sole authority to issue
· Debt assets – different type of organization issues debt
assets for raising their debt capital. There is a fixed time schedule for
payment of principal and interest. Debt capital is raised by way of issuing debentures
or bonds, raising long term loans etc.
· Stock asset – Corporate issue stocks for the purpose of
raising their fixed capital. There are mainly two types of stocks such as
preference and equity stock. Equity stock holders are the real owners of the
organization. Preference shareholders have a preferential right to get a fixed
percentage of dividends if there is a profit.