Financial Management M.Com Sem 1 CC 701 Dr. K.H.kharecha

The procurement of funds and their effective utilization. Financial Management Finance may be define as the provision of money at the time it is wanted. The procurement of funds and their effective utilization. Business finance- activity concerned with planning, raising, controlling and administrating of the funds used in the business

“Financial management deals with how the corporation obtains the funds and how it uses them” -Hoagland “Financial management is concerned with the efficient use of an important economic resource, namely, Capital Funds” -Soloman It concerned with the proper management of funds.

Objectives Basic Objectives: 1. Maintenance of liquid assets Other objectives Basic Objectives: 1. Maintenance of liquid assets 2. Maximization of Profit of the firm 3. Maximization of shareholders wealth

Maintenance of liquid assets To meet its obligations at all times. Investment in liquid assets has to be adequate- neither too low nor too high. A balance between liquidity and profitability. Invers relation-ship between two. The more the assets are liquid, less they are profitable and vice versa.

2. Maximization of Profit of the firm A business firm is a profit seeking organization so naturally maximization of profit is one of the basic objectives of financial management. The Objectives of profit maximization that financial management should ensure that the profit of the firm are maximized.

The Objectives of profit maximization • By increasing the sales and there by increasing the revenues. • By reducing the cost of production through efficient use of the resources. • By making judicious choice of funds. • By minimizing risk

The arguments in favour Profit is the prime motive which contributes to better and more efficient performance. 2. It ensures maximum returns to the shareholder. 3. If this object is not there their would not be any place for competition. 4. It plays important role in growth of a business. It act as a protection against risk. It is a test of Economic Efficiency. It leads to efficient allocation of resources. It insures maximum Social Welfare.

The arguments against It is Vague- which profit, long term or short term, profit before tax or after tax, profit or rate of return ….. It ignores timings- project A gives cash flow of 20% for 3 years , project B gives cash flow of 17% for 5 years …. It overlooks Quality aspect of future activities- profit maximization at the cost of social or moraloblogations is a short-sighted policy.

Wealth maximisation The gross present worth of a course of action is equal to the capitalised value of the flow of future expected benefits, Discounted (or Capitalised) at the rate which reflects their certainty or uncertainty. Wealth or net present worth is the difference between gross present worth and the amount of capital investment required to achieve the benefits.

Any financial action which creates wealth or which has a net present worth above zero is a desirable one and should be taken and which does not meet this test should be rejected. In short, the operating objective for financial management is to maximise the wealth or net present worth.

Steps for Wealth maximisation Avoid high level of risks. (High risk- High gain). Pay Dividends. (Reputation, value of shares, Trend, Expectations etc..) Maintain growth in sales. (large, stable and diversified sales, recession, trend , preference, new markets etc….) Maintain price of firms Equity Shares. (Encourage people to invest by explaining their actions, past performance and glorious future, create new demand for shares which will push up the value of its Equity Shares)

Limitations of Wealth Maximisation Social Responsibility- Interest of consumer, workers, shareholders and society in general. Physical facilities, environmental issues etc….. Government constrains- Govt. restrictions i.e. establishment, expansion, closure.

Other Objectives Ensuring fare return to shareholders. Building up reserve for growth and expansion. Ensuring maximum operational efficiency by effective and efficient utilisation of finances. Ensuring financial discipline in the organisation.