Financial Management: Financial management refers to that part of the management activity which is concerned with the planning

and controlling of firms financial resources. It deals with finding out various sources for raising funds for the firm. The most appropriate use of such funds also forms a part of financial management. As a separate managerial activity, it has a recent origin. This draws heavily on the economics for its theoretical concepts. Finance function: The finance function includes both raising of funds as well as their Effective utilisation .The finance function does not stop only by finding out sources of Raising enough funds, their proper utilisation is also to be considered.The cost of raising Funds and the returns from their use should be compared.The funds raised should be able To give more returns than the cost involved in procuring them. The utilisation of funds requires decision making. So finance function, according to this approach , covers financial Planning, raising of funds, allocation of funds, financial control etc. The modern approach considers the three basic management decisions, i.e., investment decisions, financing decisions and dividend decisions within the scope of finance function. Finance Functions or Finance Decisions: Financial decisions refer to decisions concerning Financial matters of a business firm..We can classify these decisions into three major groups. 1 Investment Decisions 2 3 Financing Dividend Decisions Decisions.

1 Investment Decisions: The investment decisions can be classified under two broad groups: Long-term investment decision and (ii) Short-term investment decision. The long term Investment decision refers to as the capital budgeting and the short-term investment decision as working capital management .Capital budgeting is the process of making Investment decisions in the capital expenditure.The finance manager has to assess the Profitability of various projects before committing the funds. The investment proposal Should be evaluated in terms of expected profitability, costs involved and the risks associated

With the projects. Two important aspects of investment are: a) the evaluation of the Prospective profitability of new investment , b) the measurement of a cut-off rate against That the prospective return of new investments could be compared.Future benefits of Investment are difficult to measure and cannot be predicted with certainty. Risk in investment Arise because if uncertain returns. Investment proposals should, therefore be evaluated In terms of both expected return and risk. Short term investment decision, relates to the allocation of funds as among cash and Equivalents, receivables and inventories. Such a decision is influenced by a trade off between liquidity and profitability. Lack of liquidity in extreme situations can lead to the To the firms insolvency.If the firm does not invest sufficient funds in current assets, it may Become illiquid and therefore, risky. But it would lose profitability, as idle current assests Would not earn anything. 2 Financing Decisions: Once the firm has taken investment decision, it must decide when,

where from and how to acquire funds to meet the firms investment needs. A financial manager has to select such sources of funds which will make optimum capital structure. The mix of debt-equity is known as the firms capital structure.The debt- equity ratio should be fixed in such a way that helps in maximising the profitability of the concern. The raising of more debts will involve fixed interest liability and dependence upon outsiders. It may help in increasing the return on equity but will enhance the risk. The raising of funds Through equity will bring permanent funds to the business but the shareholders will expect Higher rates of earnings. The financial manager has to strike a balance between various sources so that the overall profitability of the concern improves. If the capital structure is able to minimise the risk and raise the profitability then the market prices of the shares will go up maximising the wealth of shareholders. 3 Dividend Decision: Dividend decision is the third major financial decision. The term

dividend refers to that part of profits of the company which is distributed by it among Its shareholders.The dividend decision is concerned with the quantum of profits to be

distributed among shareholders. A decision has to taken whether all the profits are to Distributed, to retain all the profits in business or to keep a part of profits in the business

and distribute others among shareholders.The higher rate of dividend may raise the market Price of shares and thus, maximise the wealth of shareholders.Dividends are generally paid in cash. But firm may issue a bonus shares. Bonus shares are shares issued to the existing Shareholders without any charge. Objectives of Financial Management or Goals of Business Finance: Finacial management is concerned with procurement and use of funds.The main objective of a business is to maximise the owners economic welfare. The objective can be achieved By: 1 Profit Maximisation 2 1 Wealth Maximisation. Profit Maximisation: Profit earning is the main aim of every economic activity. A business

Being an economic institution must earn profit to cover its costs and provide funds for Growth. The following arguments are advanced in favour of profit maximisation as the objective of business: (i) When profit earning is the aim of business then profit maximisation should be the obvious

objective. (ii) (iii) Profitability is a barometer for measuring efficiency and economic prosperity of a business. There may adverse business conditions like recession, depression, severe competition etc.

A business will be able to survive under unfavourable situation, only if it has some past Earnings to rely on. (iv) Profits are the main sources of finance for the growth of a business. So, a business should Aim at maximisation of profits for enabling its growth and development. (v) Profitability is essential for fulfiling social goals also. A firm by pursuing the objective of

Profit maximisation also maximises socio-economic welfare.

Profit maximisation has been rejected because of the following drawbacks: 1 The term profit is vague and it cannot be precisely defined. It means different things for Different people. Should we consider short-term profits or long-term profits? Does it mean Total profits or earnings per share? Should we take profit before tax or after tax? Does it mean Operating profit or profit available for shareholders?Further, it is possible that profits may Increase but earnings per share decline. 2 Profit maximisation objectives ignores the time value of money and does not consider the Magnitude and timings of earnings. It treats all earnings as equal though they occur in Different periods. It ignores the fact that that the cash received today is more important than The same amount of cash received after three years. The stockholders may prefer a regular From investment even it is smaller than the expected higher returns after a long period. 3 It does not take into consideration the risk of the prospective earnings stream. Some projects Are more risky than others. Two firms may have same expected earnings per share, but if the earning stream of one is more risky then the market value of its shares will be Comparatively less. (iv) The effect of dividend policy on the market price of shares is also not considered in the

Objective of profit maximisation. Wealth Maximisation: Wealth maximisation is the appropriate objective of an enterprise. Financial theory asserts that wealth maximisation is the single substitute for a stockholders Utility. When the firm maximises the stockholder can use this wealth to maximise his Individual utility. A stockholders current wealth in the firm is the product of the number of shares owned , multiplied with the current stock price per share. Stockholders current wealth in a firm= ( Number of Shares owned) x ( Current Stock price per share) Wo= NPo Given the number of shares that the stockholder owns, the higher the stock price per share The greater will be the stockholders wealth. Thus, a firm should aim at maximising its current

Stock price. This objective helps in increasing the value of shares in the market..The shares market price serve as performance index or report card of its progress. What is meant by shareholders wealth maximisation ? SWM means maximising the net present value of a course of action to shareholders. Net Present value(NPV) or wealth of a course of action is the difference between the present Value of its benefits and the present value of its costs. A financial action that has a positive NPV creates wealth for shareholders and therefore is desirable. A financial action resulting in negative NPV should be rejected since it would destroy Shareholders wealth.Between mutually exclusive projects the one with the highest NPV should be adopted.