Unit 1: Financial Management - Meaning, Objectives, Functions & Scope

Financial Management

Author: Janardan Kukreja, Assistant Professor, PIMR Gwalior (M.P.)

📘 What You Will Learn

Main functions and objectives of financial management
Role of a finance manager
Link between finance and other business functions
Scope of corporate finance

💡 What is Finance?

Finance is the backbone of any business operation. It’s like the blood in the human body or oil in machinery—essential for functioning and growth. Without finance, it's impossible to start or sustain a business.

📚 Meaning of Financial Management

Financial management is an integral part of general management. It involves planning, raising, allocating, and controlling funds to help achieve business goals efficiently.

📖 Definitions:

“Financial management deals with how corporations obtain and use funds.” — Hoagland
“Application of planning and control functions to finance.” — Archer & Ambrosio
“Judicious use of capital and selection of capital sources to reach business goals.” — J.F. Bradley

📌 Scope of Financial Management

Forecasting
Financing
Co-ordination & control of funds
Profit planning
Decision making

🎯 Objectives of Financial Management

Maintain a sufficient fund supply
Ensure returns to shareholders
Optimize fund utilization
Create secure investment opportunities

🏗️ Finance Functions

Traditional Concept

Focuses only on raising funds. Decisions revolve around capital sources and amounts.

Modern Approach

Includes acquiring funds and using them efficiently. Key questions addressed:

How much fund is needed?
Which assets to acquire?
Sources of funds?
Liability composition?
Profit allocation?

🔑 Key Financial Decisions

Investment Decisions: Choosing between long-term (fixed) and short-term (current) assets.
Financing Decisions: Selecting between debt (fixed interest) and equity (variable dividends).
Dividend Decisions: Deciding profit distribution vs reinvestment.

📋 Functions of Financial Management

Executive Functions

Financial forecasting and planning
Financing and investment decisions
Cash flow and income management
Financial performance appraisal

Routine Functions

Record-keeping and statement preparation
Managing cash and credit
Handling financial documents

🏁 Financial Goals & Theories

Macro Level Objectives

Efficient use of resources
Providing affordable products/services

Micro Level Objectives

Profit Maximization: Focus on highest returns and efficient resource allocation.
Wealth Maximization: Focus on long-term value and market share price (Net Present Value).

  Note: Wealth maximization is widely accepted as a better operational criterion over profit maximization.

💼 Importance of Financial Management

Ensures business success and growth
Improves investment efficiency
Assists shareholders, fund providers, and top management