FINANCIAL

MANAGEMENT
 PREPARED BY
(GROUP – 9)
PRITAM BAG (3)
TANUMAY DUTTA (7)
SOURAV NASKAR (20)
AMARJIT RAJAK (32)
SOUMYA BANERJEE (36)
SNEHASISH GHOSH (49)
ANIRUDDHA ROY (57)
Introduction
The present age is the age of industrialization. Large industries are being
established in every country. It is very necessary to arrange finance for building,
plant and working capital, etc. for the established of these industries. How much
of capital will be required, from what sources this much of finance will be
collected and how will it be invested, is the matter of financial management.
Financial management is the process of planning decisions in order to maximize
the owners' wealth. Financial managers have a major role in cash management,
in the acquisition of funds, and in all aspects of raising and allocating financial
capital, taking into account the trade-off between risk and return. Financial
managers need accounting and financial information to carry out their
responsibilities.

Definitions
Financial management is that managerial activity which is concerned with the
planning and controlling of the firm's financial resources. Planning, directing,
monitoring, organising and controlling of the monetary resources of an
organisation.

Financial management entails planning for the future of a person or a business

enterprise to ensure a positive cash flow. It includes the administration and
maintenance of financial assets. Besides, financial management covers the
process of identifying and managing risks.

The primary concern of financial management is the assessment rather than the
techniques of financial quantification. A financial manager looks at the
available data to judge the performance of enterprises. Managerial finance is an
interdisciplinary approach that borrows from both managerial accounting and
corporate finance.

Some experts refer to financial management as the science of money

management. The primary usage of this term is in the world of financing
business activities. However, financial management is important at all levels of
human existence because every entity needs to look after its finances.
Levels
Broadly speaking, the process of financial management takes place at two
levels. At the individual level, financial management involves tailoring
expenses according to the financial resources of an individual. Individuals with
surplus cash or access to funding invest their money to make up for the impact
of taxation and inflation. Else, they spend it on discretionary items. They need
to be able to take the financial decisions that are intended to benefit them in the
long run and help them achieve their financial goals.

From an organizational point of view, the process of financial management is

associated with financial planning and financial control. Financial planning
seeks to quantify various financial resources available and plan the size and
timing of expenditures. Financial control refers to monitoring cash flow. Inflow
is the amount of money coming into a particular company, while outflow is a
record of the expenditure being made by the company. Managing this
movement of funds in relation to the budget is essential for a business.

At the corporate level, the main aim of the process of managing finances is to
achieve the various goals a company sets at a given point of time. Businesses
also seek to generate substantial amounts of profits, following a particular set of
financial processes.

Financial managers aim to boost the levels of resources at their disposal.

Besides, they control the functioning on money put in by external investors.
Providing investors with sufficient amount of returns on their investments is one
of the goals that every company tries to achieve. Efficient financial management
ensures that this becomes possible.

Strong financial management in the business arena requires managers to be able

to:

* Interpret financial reports including income statements, Profits and Loss or

P&L, cash flow statements and balance sheet statements

* Improve the allocation of working capital within business operations

* Review and fine tune financial budgeting, and revenue and cost forecasting

* Look at the funding options for business expansion, including both long
and short term financing
 * Review the financial health of the company or business unit using ratio
analyses, such as the gearing ratio, profit per employee and weighted cost of
capital

* Understand the various techniques using in project and asset valuations

* Apply critical financial decision making techniques to assess whether to

proceed with an investment

* Understand valuations frameworks for businesses, portfolios and intangible

assets

Components of Financial Management

Financial Management involves the following activities:

* Financial planning, which predicts the performance of the business in

financial terms to give an overall measure of how it is performing and to
provide a basis for financial decision-making and for raising finance.

* Financial accounting, which clarifies, records and interprets in monetary

terms transactions and events of a financial nature. Financial accounting will
involve maintaining records of transactions (book-keeping), preparing balance
sheets and profit and loss accounts, preparing value added statements, managing
cash, handling depreciation and inflation accounting. The accounts prepared by
the firm will be audited to ensure that they present a 'true and fair view' of its
financial performance and position. But there is scope within the law and
accounting rules for company accountants to indulge in 'creative accounting' to
improve the picture the accounts present to the outside world (the City and
investors).

* Financial analysis, which analyses the performance of the business in terms

of variance analysis, cost-volume-profit analysis, sales mix analysis, risk
analysis, cost-benefit analysis and cost-effectiveness analysis.

* Management accounting, which accounts for and analyses costs, provides

the basis for allocation costs to products or processes, prepares and controls
financial budgets and deals specifically with overhead and responsibility
accounting. Management accounting provides the data for financial analysis and
for capital appraisal and budgeting.
 * Capital appraisal and budgeting, which selects and plans capital
investments based on the returns likely to be obtained from those investments.
The capital appraisal techniques comprise accounting rate of return, payback
and discounted cash flow.

Objectives
The objectives or goals or financial management are (a) Profit maximization,
(b) Return maximization, and (c) Wealth maximization. We shall explain these
three goals of financial management as under:

1.Goal of Profit maximization: Maximization of profits is generally

regarded as the main objective of a business enterprise. Each company collects
its finance by way of issue of shares to the public. Investors in shares purchase
these shares in the hope of getting medium profits from the company as
dividend It is possible only when the company's goal is to earn maximum
profits out of its available resources. If company fails to distribute higher
dividend, the people will not be keen to invest their money in such firm and
persons who have already invested will like to sell their stocks. On the other
hand, higher profits are the barometer of its efficiency on all fronts, i.e.,
production, sales a management. A few replace the goal of 'maximization of
profits' to 'fair profits'. 'Fair Profits' means general rate of profit earned by
similar organisation in a particular area.

2.Goal of Return Maximization: The second goal of financial management

is to safeguard the economic interest of the persons who are directly or
indirectly connected with the company, i.e., shareholders, creditors and
employees. The all such interested parties must get the maximum return for
their contributions. But this is possible only when the company earns higher
profits or sufficient profits to discharge its obligations to them. Therefore, the
goal of maximization of returns are inter-related.

3.Goal of Wealth Maximization: Frequently, Maximization of profits is

regarded as the proper objective of the firm but it is not as inclusive a goal as
that of maximising it value to its shareholders. Value is represented by the
market price of the ordinary share of the company over the long run which is
certainly a reflection of company's investment and financing decisions. The log
run means a considerably long period in order to work out a normalized market
price. The management can make decision to maximize the value of its shares
on the basis of day-today fluctuations in the market price in order t raise the
market price of shares over the short run at the expense of the long fun by
temporarily diverting some of its funds to some other accounts or by cutting
some of its expenditure to the minimum at the cost of future profits. This does
not reflect the true worth of the share because it will result in the fall of the
share price in the market in the long run. It is, therefore, the goal of the financial
management to ensure its shareholders that the value of their shares will be
maximized in the long-run. In fact, the performances of the company can well
be evaluated by the value of its share.

Functions
1. Estimation of capital requirements: A finance manager has to make
estimation with regards to capital requirements of the company. This will
depend upon expected costs and profits and future programmes and policies of a
concern. Estimations have to be made in an adequate manner which increases
earning capacity of enterprise.

2. Determination of capital composition: Once the estimation has been

made, the capital structure have to be decided. This involves short- term and
long- term debt equity analysis. This will depend upon the proportion of equity
capital a company is possessing and additional funds which have to be raised
from outside parties.

3. Choice of sources of funds: For additional funds to be procured, a

company has many choices like-

a. Issue of shares and debentures

b. Loans to be taken from banks and financial institutions

c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source
and period of financing.

4. Investment of funds: The finance manager has to decide to allocate funds

into profitable ventures so that there is safety on investment and regular returns
is possible.
5. Disposal of surplus: The net profits decision has to be made by the finance
manager. This can be done in two ways:

a. Dividend declaration - It includes identifying the rate of dividends and

other benefits like bonus.

b. Retained profits - The volume has to be decided which will depend

upon expansional, innovational, diversification plans of the company.

6. Management of cash: Finance manager has to make decisions with

regards to cash management. Cash is required for many purposes like payment
of wages and salaries, payment of electricity and water bills, payment to
creditors, meeting current liabilities, maintenance of enough stock, purchase of
raw materials, etc.

7. Financial controls: The finance manager has not only to plan, procure and
utilize the funds but he also has to exercise control over finances. This can be
done through many techniques like ratio analysis, financial forecasting, cost and
profit control, etc.

Scope
Financial management, at present is not confined to raising and allocating
funds. The study of financial institutions like stock exchange, capital, market,
etc. is also emphasized because they influenced under writing of securities &
corporate promotion. Company finance was considered to be the major domain
of financial management. The scope of this subject has widened to cover capital
structure, dividend policies, profit planning and control, depreciation policies.
Some of the functional areas covered in financial management are discussed as
such-

1. Determining financial needs: A finance manager is supposed to meet

financial needs of the enterprise. For this purpose, he should determine financial
needs of the concern. Funds are needed to meet promotional expenses, fixed and
working capital needs. The requirement of fixed assets is related to types of
industry. A manufacturing concern will require more investments in fixed assets
than a trading concern. The working capital needs depend upon scale of
operations. Larger the scale of operations, the higher will be the needs for
working capital. A wrong assessment of financial needs may jeopardize the
survival of a concern.
2. Choosing the sources of funds: A number of sources may be available
for raising funds. A concern may be resort to issue of share capital and
debentures. Financial institutions may be requested to provide long-term funds.
The working capital needs may be met by getting cash credit or overdraft
facilities from commercial bands. A finance manager has to be very careful &
cautions in approaching different sources.

3. Financial analysis and interpretation: The analysis & interpretation of

financial statements is an important task of a finance manager. He is expected to
know about the profitability, liquidity position, short term and long-term
financial position of the concern. For this purpose, a number of ratios have to be
calculated. The interpretation of various ratios is also essential to reach certain
conclusions financial analysis and interpretation has become an important area
of financial management.

4. Cost-volume profit analysis: This is popularly known as “CVP

relationship”. For this purpose, fixed costs, variable costs and semi variable
costs have to be analyzed. Fixed costs are more or less constant for varying
sales volumes. Variable costs vary according to the sales volume. Semi-variable
costs are either fixed or variable in the short-term. The financial manager has to
ensure that the income of the firm will cover its variable costs, for there is no
point in being in business, if this is not accomplished. Moreover, a firm will
have to generate an adequate income to cover its fixed costs as well. The
financial manager has to find out the break-even point that is, the point at which
the total costs are matched by total sales or total revenue.

5. Working capital management: Working capital refers to that part of

firm’s capital which is required for financing short-term or current assets such
as cash, receivables and inventories. It is essential to maintain proper level of
these assets. Finance manager is required to determine the quantum of such
assets.

6. Dividend policy: Dividend is the reward of the shareholders for

investments made by them in the shares of the company. The investors are
interested in earning the maximum return on their investments whereas
management wants to retain profits for future financing. These contradictory
aims will have to be reconciled in the interests of shareholders and the
company. Dividend policy is an important area of financial management
because the interest of the shareholders and the needs of the company are
directly related to it.

7. Capital budgeting: Capital budgeting is the process of making investment

decisions in capital expenditures. It is an expenditure the benefits of which are
expected to be received over a period of time exceeding one year. It is
expenditure for acquiring or improving the fixed assets, the benefits of which
are expected to be received over a number of years in future. Capital budgeting
decisions are vital to any organization. Any unsound investment decision may
prove to be fatal for the very existence of the concern.

Advantages
1. It helps the management in decision making.
2. It helps in accountability.
3. It helps in resource allocation.
Compare profit maximisation and wealth maximisation as
objectives of financial management.
Ans:
Profit Maximization: Profit Maximization is the process by which a firm
determines the price and output level that returns the greatest profit. There are
several approaches to this problem. The total revenue–total cost method relies
on the fact that profit equals revenue minus cost, and the marginal revenue–
marginal cost method is based on the fact that total profit in a perfectly
competitive market reaches its maximum point where marginal revenue equals
marginal cost.

Wealth Maximization: That means maximizing the net present value of the
wealth of the shareholders.

For Example in taking an investing decision management should choose that

project for investment, which will give maximum return to the share holders.

Similarly in other financial Decision and for that matter any decision should be
taken to with the objectives of maximization of wealth of the shareholders.

The objective of the shareholders wealth maximization takes care of the

question of timing and risk of the expected benefits.

These problems are handled by selecting an appropriate rate (the shareholders

opportunity cost of capital) for calculating (discounting) the Expected flow of
the future flow of the benefit.

It is calculated by this formula:

RETUN=RISK FREE RATE+RISK PREMIUM

Proxy Maximization Vs Wealth Maximization

We have discussed above the goals of financial management. Now the question
arises of the choice, i.e., which should be the goal of decision making be profit
maximization or which strengthen the case for wealth Maximization as the goal
of business enterprise.
The objections are:-

(i) Profit cannot be ascertained well in advance to express the probability of

return as future is uncertain. It is not at possible to maximize what cannot be
known.

(ii) The executive or the decision maker may not have enough confidence in the
estimates of future returns so that he does not attempt future to maximize. It is
argued that firm's goal cannot be to maximize profits but to attain a certain level
or rate of profit holding certain share of the market or certain level of sales.
Firms should try to 'satisfy' rather than to 'maximize'

(iii) There must be a balance between expected return and risk. The possibility
of higher expected yields are associated with greater risk to recognise such a
balance and wealth Maximization is brought in to the analysis. In such cases,
higher capitalisation rate involves. Such combination of expected returns with
risk variations and related capitalisation rate cannot be considered in the
concept of profit maximization.

(iv) The goal of Maximization of profits is considered to be a narrow outlook.

Evidently when profit maximization becomes the basis of financial decisions of
the concern, it ignores the interests of the community on the one hand and that
of the government, workers and other concerned persons in the enterprise on the
other hand.

Keeping the above objections in view, most of the thinkers on the subject have
come to the conclusion that the aim of an enterprise should be wealth
Maximization and not the profit Maximization. Prof. Soloman of Stanford
University has handled the issued very logically. He argues that it is useful to
make a distinction between profit and 'profitability'. Maximization of profits
with a view to maximising the wealth of shareholders is clearly an unreal
motive. On the other hand, profitability Maximization with a view to using
resources to yield economic values higher than the joint values of inputs
required is a useful goal. Thus the proper goal of financial management is
wealth maximization.