V.GopalaKrishnan.,M.Com.,M.B.A.,M.Phil.,PGDMM.,Assistant professor,Dept of Commerce, Kamaraj College, Tuticorin

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FINANCEFinance is the life-blood of business.Without finance neither any business can be started nor successfully run . Finance is needed to promote or establish business, acquire fixed assets, make necessary investigations, develop product keep man and machines at work ,encourage management to make progress and create values.

FINANCEFinance is defined as the provision of money at the time when it is required. It is the life-blood of the an enterprise. Without adequate finance, no enterprise can possibly accomplish its objectives

FINANCE

FINANCIAL MANAGEMENTTraditionally known as Business Finance and Corporation FinanceAccording to Guthmann & Dougall Business finance can be broadly defined as the activity concerned with planning, raising, controlling and administering the funds used in the business.

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FINANCIAL MANAGEMENTFinancial management is one the functional area of management. It refer to that part of the management activity which is concerned with the planning and controlling of firms financial resources.

DEFINITIONFinancial management is the application of planning and control function of the finance function Howard and Upton

Importance of FMNo business, whether big, medium, or small can be started without an adequate amount of finance. Right from the very beginning, i.e., conceiving an idea to business, finance is needed to promote or establish the business, acquire fixed assets, make investigation such as market survey etc, develop product, keep men & machine at work, encourage management to make progress and create values

Importance of FMThe importance of corporation finance has arisen because of the fact that present day business activities are predominantly carried on company or corporate from of the organisation. Following factors further increased the importance of FM

The increase in size and influence of the business enterpriseWide distribution of corporate ownershipSeparation of ownership & management

Importance of FMFM is indispensible to any orgn as it helps

Financial planning & successful promotion of an enterpriseAcquisition of funds as & when required at minimum possible costProper use & allocation of fundsTaking sound financial decisionImproving the profitability through financial controlsIncreasing the wealth of investors and nations, &Promoting & mobilising individual & corporate savings

Finance functionFinance function is the most important of all functions. It remains a focus of all activities. It is not possible to substitute or eliminate this function bcoz the business will close down in the absence of finance. The need for money is continuous. It start with setting up of an enterprise & remains at all times. The development & expansion of business rather needs more commitment of funds.

Finance functionThe fund will have to be raised from various sources. The receiving money is not enough, its utilisation is more important. The money once received will have be returned also. If its use is proper then its return will be easy otherwise it will create difficulties for repayment. The management should have an idea of using the money profitably. It may be easy to raise funds but it may be difficult to repay them.

Approaches to finance functionThe Traditional approach

It relates to the initial stage of its evolution during 1920s & 1930s when the term corporate finance was used to describe what is known as financial management today. According to this approach, the scope of finance function was confined to only procurement of funds needed by a firm on most suitable terms. The utilisation of funds was considered beyond the purview of finance function. It was felt that decisions regarding the application of funds are taken somewhere else in the organisation

The Modern approachIt includes both raising of funds as well as their effective utilisation. The cost of raising funds and the returns from their use should be compared. The funds raised should be able to give more returns than the cost involved in procuring them.This approach considers the three decisions

Investment decision, Financing decisions & Dividend decision

Aims of Finance functionAcquiring Sufficient FundsProper Utilisation FundsIncreasing profitabilityMaximising firms Value

Scope / Content of FMEstimating Financial RequirementDeciding Capital StructureSelecting a Source of FinanceSelecting a Patten of InvestmentProper Cash ManagementImplementing Financial ControlProper use of surplus

Objective of FMFM is concerned with procurement &use of funds. Its main aim is to use business fund in such a way that the firms value or earnings are maximised. This objective can be achieved byProfit maximisationWealth maximisation

PROFIT MAXIMISATION Arguments are in favour of profit maximisation:

When profit earning is the aim of business then profit maximisation should be the obvious objective.Profitability is the barometer for measuring efficiency.A business will be able to survive under unfavourable situation, only if it has some past earningsProfit are the main sources of finance for growth of a business.Profitability is essential for fulfilling social goals also

PROFIT MAXIMISATIONArguments against profit maximisation

AmbiguityIgnores Time Value of MoneyIgnores Risk FactorDividend Policy

WEALTH MAXIMISATIONArguments in favour of wealth maximisation

It serves the interest of owners & other stake holdersIt is consistent with the objective of owners welfareIt implies long-run survival & growth of the firmIt takes into consideration the risk factor & time value of moneyThe effect of dividend policy on market price of shares also consideredThis leads towards maximising shareholders utility or value maxmisation of equity share holders

WEALTH MAXIMISATIONArguments against wealth maximisation

It is a prescriptive ideaThis objective not necessarily socially desirable.There is some controversy as to whether objective is to maximise the shareholders wealth or wealth of the firmThis objective may also face difficulties when ownership & management are separated

FINANCIAL DECISIONInvestment DecisionLong-term investment decisionShort-term investment decisionFinancing DecisionDividend Decision

Functional areas of FMDetermining Financial NeedsSelecting the Source of FundsFinancial Analysis & interpretationCost-Volume Profit AnalysisCapital BudgetingWorking capital ManagementProfit planning & controlDividend policy

Functions of Financial ManagerFinancial Forecasting & PlanningAcquisition of FundsInvestment of FundsHelping in valuation decisionMaintain proper liquidity

The financial decision involvesInvestment, Financial & Dividend decisionInvestment, Capital budgeting& Dividend decisionInvestment, financing &Dividend decision

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Value or wealth maximisation objectives stands for Maximisation of earnings per shareMaximisation of value of debt instumentMaximising the value of equity None of these

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F M is concerned with theRaising of fund from the marketInvesting the funds in most appropriate asstsProcurement of funds & their effective utlisationManagement of working fund only

Objective of the firm in FM isProfit MaximisationProfitability maximisationWealth maximisationCash maximisation

Profit maximisation lacksTime value of moneyRisk & uncertaintyVague & ambiguousAll of the above

Intrinsic value of a share is equal to itsBook valueMarket valueTrue value justified by earning capacityPar value

Decision regarding long-term investment is called Solvency decisionCapital budgetingCapital structuringLong-term investment decision

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