Block 1 Introduction to

Financial Management

PREPARED BY : GROUP 5

Finance Every organization big, medium or small

needs finance to undertake its business operations and to attain objectives.

Introduction to financial Management

“Financial Management is concerned with the acquisition, financing and management of assets with some overall goal in mind.”

“Business finance can be broadly classified as the activity concerned with planning, raising, controlling and administering of funds and in the business.”

Meaning & Definition of Financial Management

Financial Management is concerned with the activities of procuring funds and effective use of these funds.

The main objectives of Financial Management are: • Profit Maximization • Wealth Maximization

Goals of Financial Management

As the business organizations uses the resources of a country like land, labor, capital and other resources, it has an obligation to utilize these resources effectively to earn maximum profit.

Profit Maximization

Profit is the main aim of all business activity The profit is the barometer maximum returns to its shareholders all

investors. timely payment of interest and principal

amount to the creditors of the company.

Arguments in favors of Profit Maximization:

The term ‘profit’ is vague. Time value of money is completely ignored Encourages a number of corrupt practice Profit maximization attracts cut throat

competition

Arguments against Profit Maximization

Wealth maximization is a process of maximizing wealth of the organization and in turn maximizes the shareholders wealth.

This means by maximizing shareholders wealth the firm is continuously working towards the maximization of shareholders utility.

Wealth Maximization

Shareholders current wealth in a firm

Number of shares ownedCurrent stock price per share

• If the share market price per share is higher for a certain number of shares, then the shareholders wealth will be greater•The market price of shares acts as performance index of a company.

The present value of cash flow is considered

Considers time value of money Universally accepted concept Helps in proper management Risk factor in the calculation

Advantages of Wealth Maximization

The Agency Relationship arises when an owner hires a person and gives him the decision making authority in some organization.

This leads to conflict of interest between the owners and the management known as Agency Problem

Agency Problems

Financial functions involve rising of funds and the allocation of these funds in an effective manner

The role of financial management can be defined from the duties and responsibilities of a financial manager.

Role of Financial Management

1. Raising of Funds2. Allocation of Funds 3. Profit Planning4. Capital Market decisions

Cont…

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