Financial managementFinancial management refers to that part of management activity which is concerned with the planning and controlling of firm’s financial resources.Definition:-Weston and Brigham, “Financial management is an area of financial decision-making, harmonizing individual motives and enterprise goals.”J.F.Bradley, “ The area of the business management devoted to a judicious use of capital and a careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals.”J.L.Massie, “ Financial management is the operational activity of a business that is responsible for obtaining and effectively utilising the funds necessary for efficient operations.”

Financial management is indispensable to any organization as it helps in:-

1.Financial planning and successful promotion of an enterprise.

2.Acquisition of funds as and when required at the minimum possible cost

3. Proper use and allocation of funds

4. Taking sound financial decisions

5. Improving the profitability through financial controls

6. Increasing the wealth of the investors and the nation, and

7. Promoting and mobilizing individual and corporate savings.

FINANCE FUNCTIONSFinance function includes:-

1. Longterm asset-mix or investment decision

2. Financing decisions

3. Profit allocation or dividend decision

4. Short-term asset-mix or liquidity decision.

Financial manager and his functions:-A financial manager is a person who is

responsible, in a significant way, to carry out the finance functions.

Functions of financial manager:-1. Financial forecasting and planning2. Acquisition of funds3. Investment of funds4. Helping in valuation decisions5. Maintaining proper liquidity6. Profit planning7. Understanding capital markets

Financial Goal:- Profit maximisation Vs Wealth maximisation

The financial goal of every enterprise is to maximize the owner’s economic welfare, which can be achieved by:-

1. Profit maximization

2. Wealth maximization

Profit maximization

Profit is essential to cover the costs and provide funds for growth. No business can survive without earning profit. Thus, profit maximization is considered as the main objective of business, which can be proved by the following points:-

i. When profit-earning is the aim of business then profit maximization should be the obvious objective.

ii. Profitability is a barometer for measuring efficiency and economic prosperity of a business enterprise.

iii. There may be 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 upon.

iv. Profits are the main sources of finance for the growth of a business. So, a business should aim at maximization of profits for enabling its growth and development.

v. Profitability is essential for fulfilling social goals also. A firm by pursuing the objective of profit maximization also maximize socio-economic welfare.

However, profit maximizations has been criticized on many grounds. A firms pursuing the objective of profit maximizations starts exploiting workers and the consumers. Hence, it is immoral and leads to a number of corrupt practices. The objective of profit maximizations has been criticized because of the following drawbacks:-

1. Ambiguity

2. Ignores time value of money

3. Ignores risk factor

4. Dividend policy

WEALTH MAXIMISATION:- Wealth maximisation is the appropriate

objective of an enterprise. Financial thoery asserts that wealth maximisation is the single substitute for a stockholder’s utility. When the firm maximises the stockholder’s wealth, the individual stockholder can use this wealth to maximise his individual utility. It means that by maximising stockholder wealth the firm is operating consistently towards maximizing stockholder’s utility.

The following arguments are advanced in favor of wealth maximizations as the goals of financial management:-

1. It serves the interest of owners, as well as other stakeholders in the firm, i.e, suppliers of loaned capital, employees, creditors and society.

2. It is consistent with the objective of owners economic welfare.

3. The objective of wealth maximization implies long-run survival and growth of the firm.

4. It takes into consideration the risk factor and the time value of money as the current present value of any particular course of action is measured.

5. The effect of dividend policy on market price of shares is also considered as the decisions are taken to increase the market value of the shares.

6. The goal of wealth maximization leads towards maximizing stockholder’s utility or value maximiza tion of equity shareholders though increase in stock price per share.

Risk Return Trade off:-Financial decisions of the firm are guided by the risk-

return trade-off. These decisions are interrelated and jointly affect the market value of its shares by influencing return and risk of the firm. The relationship between return and risk can be simply expressed as follows:-

Return = Risk-free rate + Risk premiumAgency problems:-The conflict between the interests of shareholders and

managers is referred to as agency problem and it results into agency costs. Agency costs include the less than optimum share value for shareholders and costs incurred by them to monitor the actions of managers and control their behavior. The agency problems vanish when managers own the company.