Before knowing about Financial Management, firstly we should know the Meaning of Finance. In simple words, Finance is the Money which we spend on our basic and other needs. Basically, in Business Terms, finance is the lifeblood of the business. Without finance, You can’t think about running the Business. It is required for both short term as well as the Long term.
Financial Management is not only Acquiring the funds but allocating the funds in a manner to achieve the firm’s objectives. In simple words, it means to manage your finance or funds in a proper way.
Objectives of Financial Management
There are only two objectives of Financial Management:
- Profit Maximization
- Wealth Maximization
Profit Maximization- In this, firms the only objective is to Increase the profits and Profit is known through the price factor, that how the Demand and Supply affect the Price factor. Here, the firm has to achieve profits. They can even achieve the profit also by Selling the product at higher prices.
Drawbacks of this Objective-
- Confusing or vague in nature.
- It ignores the time value of money.
- Includes the Risk or uncertainty.
Wealth Maximization- In this, the firm has the objective to Increase the Wealth of the Firm through the NPV Method.
Its basically means to increase the Net Present value(NPV) of the firm.
NPV is the difference between the present value of its benefits and the present value of its Cost.
A Positive NPV increases the wealth of the firm and A Negative NPV decreases the wealth of the firm.
Between both Mutually exclusive events, the one with the Higher NPV got selected.
Nature of Financial Management
- Helps in Achieving the Objectives.
- Acquiring relevant things.
- Optimum Utilization of funds.
- Controlling the operations.
- Profit Planning
- Helps in determining the demand for producing the products.
- CVP Analysis.
- Capital Budgeting.
Scope of Financial Management
- Cost of Capital
- Capital Structure
- Capital Budgeting
- Financial and Combined Leverages.
- Dividend Policy
- Working Capital Management
- Inventory Management
- Cash Management
- Receivable Management
Now come to the Functions of Financial Management, which means where it is helpful.
Functions of FM-
There are two types of Functions for Financial Management that are for-
- Short Term
- Long Term
Short Term- Short Term Finance is considered with the Liquidity of the firm. It is basically for the short-term.
In this, we invest in our Current assets so as to maintain the Liquidity of the firm. It is related to the basic requirement of finance such as the purchase of raw material etc.
Long Term- For long term, it is divided into three major parts that are-
- Investment Decision
- Financial Decision
- Dividend Decision
It is related to the Long- term Investment Decision. It is irreversible in Nature. In this, the risk amount is high but the amount of Profit is also high.
Factors Determining the Investment Decisions
- Investment should be Profitable.
- Payback Period.
- Post Payback Period.
It is related to the Decision regarding Debt and Equity. It is also Known as Capital Structure Decision. In this, we have to maintain a balance between both. The Ideal Ratio is 2:1.
The dividend is the part of the Profit which we give to our Shareholders.
The amount of Dividend which we give to our Shareholders are known as Dividend Ratio and the other amount is known as the Remaining Ratio. In Dividend Decision, we have to take the decision that how much part of Profit we have to give our shareholders and how much we have to retain.
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