Financial Management refers to the efficient acquisition and use of funds to achieve the goals of a business. It involves planning, organizing, directing, and controlling financial activities such as procurement and utilization of funds.
1. Meaning and Importance of Financial Management:
Meaning: It is the process of managing the financial resources of a business to maximize shareholder wealth.
Importance:
Ensures regular and adequate supply of funds.
Increases efficiency in the use of funds.
Helps in financial planning and decision-making.
Aims at maximizing shareholders’ wealth.
2. Objectives of Financial Management:
Primary Objective: Wealth Maximization of shareholders.
Also ensures sufficient liquidity, profitability, and proper fund utilization.
3. Financial Decisions:
There are three key financial decisions in financial management:
a. Investment Decision:
Also known as capital budgeting.
Concerned with allocating funds to long-term assets.
Affects growth, profitability, and risk.
b. Financing Decision:
Concerned with raising finance from various sources.
Includes choices between debt and equity.
Affects the capital structure and risk-return trade-off.
c. Dividend Decision:
Related to the distribution of profits to shareholders.
Decides what portion to retain and what to distribute.
Affects retained earnings and shareholder satisfaction.
4. Factors Affecting Financial Decisions:
Investment Decision Factors:
Cash flows of the project
Rate of return
Risk involved
Financing Decision Factors:
Cost of capital
Risk
Control
Cash flow position
Floatation costs
Dividend Decision Factors:
Earnings
Stability of earnings
Growth opportunities
Cash flow position
Shareholder preferences
Taxation policy
5. Financial Planning:
Meaning: Estimating the capital requirements and determining its sources.
Objectives:
Ensure availability of funds at right time.
Ensure proper balance between inflow and outflow of funds.
Importance:
Avoids business shocks and surprises.
Helps in coordination of various business functions.
Links present with future.
6. Capital Structure:
Meaning: The mix of debt and equity in the total capital of a firm.
Factors Affecting Capital Structure:
Cash flow position
Interest coverage ratio
Control considerations
Cost of capital
Stock market conditions
7. Fixed Capital and Working Capital:
Fixed Capital:
Refers to investment in long-term assets.
Affected by nature and scale of business, technology, etc.
Working Capital:
Refers to funds needed for day-to-day operations.
Affected by nature of business, credit policy, inventory levels, etc.
Conclusion:
Financial Management is crucial for sound financial health and success of a business. It helps in making prudent financial decisions, achieving financial discipline, and ensuring optimal use of resources.