Assignment No.2

Financial Management

Introduction:

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

Financial management is an academic discipline which is concerned with decision-making. This decision is concerned with the size and composition of assets and the level and structure of financing. In order to make right decision, it is necessary to have a clear understanding of the objectives. Such an objective provides a framework for right kind of financial decision making. The objectives are concerned with designing a method of operating the Internal Investment and financing of a firm. There are two widely applied approaches.

(a) Profit maximization and

(b) Wealth maximization.

For example: the analysis required for a long-term investment decision such as the purchase of heavy machinery or the evaluation of lease-buy alternatives, is essentially the same regardless of the size of the firm. Once the decision is made, the financing alternatives available to the firm may be radically different, but the decision process will be generally similar.

Financial management in the small firm is characterized, in many different cases, by the need to confront a somewhat different set of problems and opportunities than those confronted by a large corporation. One immediate and obvious difference is that a majority of smaller firms do not normally have the opportunity to publicly sell issues of stocks or bonds in order to raise funds. The owner-manager of a smaller firm must rely primarily on trade credit, bank financing, lease financing, and personal equity to finance the business. One therefore faces a much more severely restricted set of financing alternatives than those faced by the financial vice president or treasurer of a large corporation. On the other hand, many financial problems facing the small firm are very similar to those of larger corporations.

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.

Discussion:

Now after the Introduction part here comes the discussion part and now in this part we will discuss the scope, functions, and objectives of the financial management in detail.

Scope Investment decisions includes investment in fixed assets (called as capital budgeting). Investments in current assets are also a part of investment decisions called as working capital decisions. Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby. Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:

1. Dividend for shareholders- Dividend and the rate of it has to be decided.
2. Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be:

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders?

3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.

4. To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.

5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

Functions of Financial Management

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 programmers’ 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. 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.

4. Disposal of surplus: The net profits decisions have to be made by the finance manager. This can be done in two ways:
1. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
2. Retained profits - The volume has to be decided which will depend upon expansion, innovational, diversification plans of the company.

5. 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.

6. 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.

Conclusion:

It is concluded that profit management is a body which is overall in-charge of handling financial investment in any project and also responsible for profits which may improve the financial health of the project undertaken in future. Financial management is also responsible for all the loans taken for the project and its repayments. It handles the future financial health of the project and its assets and liabilities.

Submitted To: Gurdeepak Sir

Submitted By:

Ishtdeep Singh (M B 32 Sec “A”)

Richa Sharma(M B 157 Sec “C”)