FINANCIAL MANAGEMENT

21CS602

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UNIT - I

TIME VALUE OF MONEY

Financial Management: Concepts and Meaning – Introduction to Finance; Objectives of Financial

Management; Profit Maximization; EVA; Changing Role of Financial Managers. Time Value of Money:
Techniques and Applications of Compounding And Discounting

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1.1 INTRODUCTION

Finance is the life blood of business. Finance may be defined as the art and science of managing money.
Finance also is referred as the provision of money at the time when it is needed. Finance function is
the procurement of funds and their effective utilization in business concerns.

The term financial management has been defined by Solomon, “It is concerned with the efficient use
of an important economic resource namely, capital funds”. The most popular and acceptable definition
of financial management as given by S. C. Kuchal is that “Financial Management deals with
procurement of funds and their effective utilization in the business. Financial management is the
operational activity of a business that is responsible for obtaining and effectively utilizing the funds
necessary for efficient operations. Thus, Financial Management is mainly concerned with the effective
funds management in the business.

Financial management is that activity of management which is concerned with the planning, procuring
and controlling of the firm's financial resources. It means applying general management principles to
financial resources of the institutions. Financial activities of an institutions is one of the most important
and complex activities of a firm. Therefore in order to take care of these activities a financial manager
performs all the requisite financial activities. A financial manager is a person who takes care of all the
important financial functions of an organization. The person in charge should maintain a far
sightedness in order to ensure that the funds are utilized in the most efficient manner. His actions
directly affect the Profitability, growth and goodwill of the firm

1.2 DEFINITION OF FINANCIAL MANAGEMENT

“Financial management is the activity concerned with planning, raising, controlling and administering
of funds used in the business.” – Guthman and Dougal

“Financial management is that area of business management devoted to a judicious use of capital and
a careful selection of the source of capital in order to enable a spending unit to move in the direction
of reaching the goals.” – J.F. Brandley

“Financial management is the operational activity of a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient operations.”- Massie

1.3 EVOLUTION OF FINANCE FUNCTION:

Financial management came into existence as a separate field of study from finance function in the
early stages of 20th century. The evolution of financial management can be separated into three
stages:

1. Traditional stage (Finance up to 1940): The traditional stage of financial management

continued till four decades. Some of the important characteristics of this stage are:

i) In this stage, financial management mainly focuses on specific events like formation expansion,
merger and liquidation of the firm.
ii) The techniques and methods used in financial management are mainly illustrated and in an
organized manner.
iii) The essence of financial management was based on principles and policies used in capital
market, equipments of financing and lawful matters of financial events.
iv) Financial management was observed mainly from the prospective of investment bankers,
lenders and others.

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2. Transactional stage (After 1940): The transactional stage started in the beginning years of
1940‟s and continued till the beginning of 1950‟s. The features of this stage were similar to the
traditional stage. But this stage mainly focused on the routine problems of financial managers in
the field of funds analysis, planning and control. In this stage, the essence of financial management
was transferred to working capital management.

3. Modern stage (After 1950): The modern stage started in the middle of 1950‟s and observed
tremendous change in the development of financial management with the ideas from economic
theory and implementation of quantitative methods of analysis. Some unique characteristics of
modern stage are:
i) The main focus of financial management was on proper utilization of funds so that wealth of
current share holders can be maximized.
ii) The techniques and methods used in modern stage of financial management were analytical and
quantitative.

Since the starting of modern stage of financial management many important developments took
place. Some of them are in the fields of capital budgeting, valuation models, dividend policy,
option pricing theory, behavioral finance etc.

1.4 NATURE OF FINANCIAL MANAGEMENT

1. Financial Management is an integral part of overall management. Financial considerations are

involved in all business decisions. So financial management is pervasive throughout the organisation.

2. In most of the organizations, financial operations are centralized. This results in economies.

3. Financial management involves with data analysis for use in decision making.

4. The central focus of financial management is valuation of the firm. That is financial decisions are
directed at increasing/maximization/ optimizing the value of the firm.

5. Financial management essentially involves risk-return trade-off Decisions on investment involve

choosing of types of assets which generate returns accompanied by risks. Generally higher the risk,
returns might be higher and vice versa. So, the financial manager has to decide the level of risk the
firm can assume and satisfy with the accompanying return.

6. Financial management affects the survival, growth and vitality of the firm. Finance is said to be the
life blood of business. It is to business, what blood is to us. The amount, type, sources, conditions and
cost of finance squarely influence the functioning of the unit.

7. Finance functions, i.e., investment, rising of capital, distribution of profit, are performed in all firms
- business or non-business, big or small, proprietary or corporate undertakings.

8. Financial management is a sub-system of the business system which has other subsystems like
production, marketing, etc. In systems arrangement financial sub-system is to be well-coordinated with
others and other sub-systems.

9. Financial Management is the activity concerned with the control and planning of financial resources.

10. Financial management is multi-disciplinary in approach. It depends on other disciplines, like

Economics, Accounting etc., for a better procurement and utilisation of finances.

1.5 IMPORTANCE OF FINANCIAL MANAGEMENT

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The role of financial management is as such that it has a direct impact on all the financial
aspects/activities of a company. Certain aspects affected by financial management decisions
are
1. Size and composition of fixed assets: The amount of money invested in fixed assets is an
outcome of investment decisions. So, if more amount of capital is decided to be invested in
fixed assets, then it will increase the value of the total share of fixed assets by
the amount invested.
2. Amount and composition of current assets: The quantum of current assets and its
constituents like cash, bills receivable, inventory etc. is also influenced by management
decisions. It is also dependent on the amount invested in fixed assets, decisions about credit
and inventory management etc.
3. Amount of long-term and short-term funds to be used: Financial management determines
the quantum of funds to be raised for the short term and long term. In case a
firm requires more liquid assets, then it will prefer to have more long-term finance even when
their profits will decrease due to payment of more interest in comparison to short-term debts.
4. Proportion of debt and equity in capital: Financial management also takes decisions
regarding the proportion of debt and/or equity.
5. All items in profit and loss account: All items in the profit and loss account are affected
by financial management decisions. For example, higher amount of debt will lead to increase
in the expense in the form of interest payment in the future.

1.6 FINANCE AND OTHER RELATED DISCIPLINES :

Financial management is an integral part of the overall management, on other disciplines and fields of
study like economics, accounting, production, marketing, personnel and quantitative methods. The
relationship of financial management with other fields of study is explained below

(i) Finance and Economics

Finance is a branch of economics. Economics deals with supply and demand, costs and profits,
production and consumption and so on. The relevance of economics to financial management can be
described in two broad areas of economics i.e., micro economics and macroeconomics. Micro
economics deals with the economic decisions of individuals and firms. It concerns itself with the
determination of optimal operating strategies of a business firm. These strategies include profit
maximization strategies, product pricing strategies, strategies for valuation of firm and assets etc. The
basic principle of micro economics that applies in financial management is marginal analysis. Most of
the financial decisions should be made taken into account the marginal revenue and marginal cost. So,
every financial 4 manager must be familiar with the basic concepts of micro economics.
Macroeconomics deals with the aggregates of the economy in which the firm operates.
Macroeconomics is concerned with the institutional structure of the banking system, money and
capital markets, monetary, credit and fiscal policies etc. So, the financial manager must be aware of
the broad economic environment and their impact on the decision making areas of the business firm.

(ii) Finance and Accounting

Accounting and finance are closely related. Accounting is an important input in financial decision
making process. Accounting is concerned with recording of business transactions. It generates
information relating to business transactions and reporting them to the concerned parties. The end
product of accounting is financial statements namely profit and loss account, balance sheet and the

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statements of changes in financial position. The information contained in these statements assists the
financial managers in evaluating the past performance and future direction of the firm (decisions) in
meeting certain obligations like payment of taxes and so on. Thus, accounting and finance are closely
related.

(iii) Finance and Production

Finance and production are also functionally related. Any changes in production process may
necessitate additional funds which the financial managers must evaluate and finance. Thus, the
production processes, capacity of the firm are closely related to finance.

(iv) Finance and Marketing

Marketing and finance are functionally related. New product development, sales promotion plans,
new channels of distribution, advertising campaign etc. in the area of marketing will require additional
funds and have an impact on the expected cash flows of the business firm. Thus, the financial manager
must be familiar with the basic concept of ideas of marketing.

(v) Finance and Quantitative Methods

Financial management and Quantitative methods are closely related such as linear programming,
probability, discounting techniques, present value techniques etc. are useful in analyzing complex
8financial management problems. Thus, the financial manager should be familiar with the tools of
quantitative methods. In other way, the quantitative methods are indirectly related to the day-to-day
decision making by financial managers. 5

(vi) Finance and Costing

Cost efficiency is a major strategic advantage to a firm, and will greatly contribute towards its
competitiveness, sustainability and profitability. A finance manager has to understand, plan and
manage cost, through appropriate tools and techniques including Budgeting and Activity Based
Costing.

(vii) Finance and Law

A sound knowledge of legal environment, corporate laws, business laws, Import Export guidelines,
international laws, trade and patent laws, commercial contracts, etc. are again important for a finance
executive in a globalized business scenario. For example the guidelines of Securities and Exchange
Board of India [SEBI] for raising money from the capital markets. Similarly, now many Indian corporate
are sourcing from international capital markets and get their shares listed in the international
exchanges. This calls for sound knowledge of Securities Exchange Commission guidelines, dealing in
the listing requirements of various international stock exchanges operating in different countries.

(viii) Finance and Taxation

A sound knowledge in taxation, both direct and indirect, is expected of a finance manager, as all
financial decisions are likely to have tax implications. Tax planning is an important function of a finance
manager. Some of the major business decisions are based on the economics of taxation. A finance
manager should be able to assess the tax benefits before committing funds. Present value of the tax
shield is the yardstick always applied by a finance manager in investment decisions.

(ix) Finance and Treasury Management

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Treasury has become an important function and discipline, not only in every organization. Every
finance manager should be well grounded in treasury operations, which is considered as a profit
center. It deals with optimal management of cash flows, judiciously investing surplus cash in the most
appropriate investment avenues, anticipating and meeting emerging cash requirements and
maximizing the overall returns.

(x) Finance and Banking

Banking has completely undergone a change in today‟s context. The type of financial assistance
provided to corporate has become very customized and innovative. Banks provides both long term and
short term finance, besides a number of innovative corporate and retail 6

banking products, which enable corporate to choose between them and reduce their cost of
borrowings. It is imperative for every finance manager to be up-to date on the changes in services &
products offered by banking sector including several foreign players in the field.

(xi) Finance and Insurance

Evaluating and determining the commercial insurance requirements, choice of products and insurers,
analyzing their applicability to the needs and cost effectiveness, techniques, ensuring appropriate and
optimum coverage, claims handling, etc. fall within the ambit of a finance manager‟s scope of work &
responsibilities.

(xii) International Finance

Capital markets have become globally integrated. Indian companies raise equity and debt funds from
international markets, in the form of Global Depository Receipts (GDRs), American Depository Receipts
(ADRs) or External Commercial Borrowings (ECBs) and a number of hybrid instruments like the
convertible bonds, participatory notes etc. Finance managers are expected to have a thorough
knowledge on international sources of finance, merger implications with foreign companies, Leveraged
Buy Outs (LBOs), acquisitions abroad and international transfer pricing. This is an essential aspect of
finance manager‟s expertise. Similarly, protecting the value of foreign exchange earned, through
instruments like derivatives, is vital for a finance manager as the volatility in exchange rate movements
can erode in no time, all the profits earned over a period of time.

(xiii) Finance and Information Technology

Information technology is the order of the day and is now driving all businesses. It is all pervading. A
finance manager needs to know how to integrate finance and costing with operations through
software packages including ERP. The finance manager takes an active part in assessment of various
available options, identifying the right one and in the implementation of such packages to suit the
requirement.

1.7 SCOPE OF FINANCIAL MANAGEMENT/ FUNCTIONS OF FINANCIAL MANAGEMENT

Financial management is mainly concerned with the following decisions:

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A. Investment Decisions
A firm must decide where to invest the funds such that it can earn maximum returns.
Such decisions are known as investment decisions and can be classified as long-term and
short-term investment decisions.
• Long-term investment decisions:
It refers to long-term investment decisions such as investment in a new fixed asset,
new machinery or land.They are also known as capital budgeting decisions. It affects a
firm’s long-term earning capacity and profitability and also has long-term implications on
the business. Moreover, such investment involves a large amount of money, so it is
very difficult to revert such decisions. Example: Decision to purchase a new fixed asset,
opening a new branch etc.
• Short-term investment decisions
These decisions are also known as working capital decisions and affect day-to-day
business operations. It also affects the liquidity and profitability of a business. Example:
Decisions related to cash management, inventory management etc.

B. Financial Decisions
Financing decisions involve decisions with regard to the volume of funds to be raised
from various sources. These decisions also include identification of sources of
finance. There are two main sources of raising funds, namely shareholders’ funds
(equity) and borrowed funds (debt). Taking into consideration factors such as cost, risk
and profitability, a company must decide an optimum combination of debt and
equity. For example, while debt proves to be cheaper than equity, it involves greater
financial risk. Financial decisions must be taken judiciously as they have an impact on
the overall cost of capital of the firm and also involves financial risk. Generally, a mixture
of both debt and equity funds proves to be beneficial for the company.

C. Dividend Decisions
Dividend decisions involve decisions regarding how the company would distribute its
profit or surplus. Dividend is basically a part of profit which is distributed to shareholders.
The company decides whether to distribute it to equity shareholders in the form of
dividends or to keep it in the form of retained earnings. So, the main decision is
regarding how much profit is to be distributed and how much is to be retained in the
business. This decision is generally taken considering the objective of maximising
shareholder’s strength and also retaining earnings to increase the future earning capacity
of the organisation.

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1.8 OBJECTIVES OF FINANCIAL MANAGEMENT
To make wise decisions a clear understanding of the objectives which are sought tobe achieved in
necessary. The objectives provide a framework for optimum financial decision-making. In other words,
they are concerned with designing a method of operating the internal investment and financing of a
firm. We discuss in this section the alternative approaches in financial literature. There are two widely-
discussed approaches:
(i) Profit maximisation approach and (ii) Wealth maximisation approach.
It should be noted at the outset that the term ‘objective‘ is used in the sense of a goal or decision
criterion for the three decisions involved in financial management. It implies that what is relevant is
not the overall objective or goal of a business but an operationally useful criterion by which to judge a
specific set of mutually interrelated business decisions, namely, investment, financing and dividend
policy. The second point that should be clearly understood to that the term objectives provides a
normative framework. That is the focus in financial literature is on what a firm should try to achieve
and on policies that should be followed if certain goals are to be achieve. The implication is that these
are not necessarily followed by firms in actual practice. They are rather employed to serve as a basis
for theoretical analysis and do not reflect contemporary empirical industry practices. Thus, the term is
used in a rather narrow sense of what a firm should attempt to achieve with its investment, financing
and dividend policy decisions.

Profit Maximisation Decision Criterion

According to this approach, actions that increase profits should be undertaken and those that decrease
profits are to be avoided. In specific operational terms, as applicable to financial management, the
profit maximisation criterion implies that the investment, financing and dividend policy decisions of a
firm should be oriented to the maximisation of profits. The term ‘profit‘ can be used in two senses.
As a owner-oriented concept it refers to the amount and share of national income which is paid to the
owners of business,that is, those who supply equity capital. As a variant it is described as profitability.
It is an operational concepts and signifies economic efficiency. In other words, profitability refers to a
situation where output exceeds input, that is, the value created by the use of resources is more than
the total of the input resources. Used in this sense, profitability maximisation would imply that a firm
should be guided in financial decision making by one test; select assets, projects and decisions which
are profitable and reject those which are not. In the current financial literature, there is a general
agreement that profit maximisation is used in the second sense. The rationale & behind profitability
maximisation, as a guide to financial decision making, is simple. Profit is a test of economic efficiency.
It provides the yardstick by which economic performance can be judged. Moreover, it leads to efficient
allocation of resources, as resources tend to be directed to uses which in terms of profitability are the
most desirable. Finally, it ensures maximum social welfare. The individual search for maximum
profitability provides the famous ‘invisible hand‘ by which total economic welfare is maximised.
Financial management is concerned with the efficient use of an important economic resource (input),
namely, capital. It is, therefore, argued that profitability maximisation should serve as the basic
criterion for financial management decisions.
The profit maximisation criterion has, however, been questioned and criticized on several grounds.
The reasons for the opposition in academic literature all into two broad groups: (i) those that are based
on misapprehensions about the workability and fairness of the private enterprise itself, and (2) those
that arise out of the difficulty of applying this criterion management, refers to an explicit operational
guide for the internal investment and financing of a firm and not the overall goal of business
operations. We, therefore, focus on the second type of limitations to profit maximisation as an
objective of financial management. The main technical flaws of this criterion are ambiguity, timing of
benefits, and quality of benefits.

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Ambiguity: One practical difficulty with profit maximisation criterion for financial decision making is
that the term-profit is a vague and ambiguous concept. It has no precise connotation. It is amenable
to different interpretations by different people. To illustrate, profit may be short term or long term; it
may be total profit or rate of profit; it may be before-tax or before-tax or after-tax; it may be return on
total capital employed or total assets or shareholders equity and so on. If profit maximisation is taken
to be the objectives, the question arises, which of these variable of profit should a firm try to
maximise? Obviously, a loose expression like profit of operational criterion for financial management.
Timing of Benefits. A more important technical objection to profit maximisation, as a guide to financial
decision making, is that it ignores the differences in the time pattern of the benefits received from
investment proposals or courses of action. While working out profitability, ‘the bigger the better‘
principle is adopted, as the decision is based on the total benefits received over the working life of the
asset, irrespective of when they were received. Consider Table 1.1 below

It can be seen from Table 1.1 that the total profits associated with the alternatives, A and B, are
identical. If the profit maximisation is the decision criterion, both the alternatives would be ranked
equally. But the returns form both the alternatives differ in one important respect, while alternative A
provides higher returns in earlier years, the returns from alternative B are larger in later years. As a
result, the two alternative courses of "action are not strictly identical. This is primarily because a basic
dictum of financial planning is the earlier the better as benefits received sooner are more valuble than
benefits'. received later. The reason for the superiority of benefits now over benefits later lies in the
fact that the former can be reinvested to earn a return. This is referred to as time value of money. The
profit maximisation criterion does not consider the distinction between returns received in different
time periods and treats all benefits irrespective of the timing, as equally valuable. This not true in
actual practice as benefits in early years should be valued more highly than equivalent benefits in later
years. The assumption of equal value is inconsistent with the real world situation.
Quality of Benefits. Probably the most important technical limitation of profit maximistion as an
operational objective, is that it ignores the quality aspect of benefits associated with a financial course
of action.2 The term quality here refers to the degree of certainty with which benefits can be expected.
As a rule, the more certain the expected return, the higher is the quality of the benefits. Conversely,
the more uncertain/fluctuating is the expected benefits, the lower is the quality of the benefits. An
uncertain and fluctuating return implies risk to the investors. It can be safely assumed that the
investors are risk-averters, that is they want to avoid or at least minimise risk. They can, therefore, be
reasonably expected to have a preference for a return which is more certain in the sense that it has
smaller variance over the years. The problem of uncertainty renders profit maximisation unsuitable as
an operational criterion for financial management as it considers only the size of benefits and gives no
weight to the degree of uncertainty of the future benefits. This is illustrated in Table 1.2.

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It is clear from Table 1.2 that the total returns associated with the two alternatives are identical in a
normal situation but the range of variations is very wide in case of alternative B, while it is narrow in
respect of alternative A. To put it differently, the earnings associated with alternative. B are more
uncertain (risky) as they fluctuate widely depending on the state. of the economy. Obviously,
alternative A is better in terms of risk and uncertainty, The profit maximisation criterion fails to reveal
this, To conclude, the profit maximisation criterion is inappropriate and unsuitable as an operational
objective of investment, financing and dividend decisions of a firm. It is not only vague and time value
of money. It follows from the above that an appropriate operational decision criterion for financial
management should (i) be precise and exact, (ii) be based on the ‘bigger the better‘ principal, (iii)
consider both quantity and quantity dimensions of benefits, and (iv) recognise the time value of
money. The alternative to profit maximisation, that is wealth maximisation is one such measure.
Wealth Maximisation Decision Criterion
This is also known as value maximisation or net present worth maximisation. In current academic
literature value maximisation is almost universally accepted as an appropriate operations decision
criterion for financial management decisions as it removes the technical limitations which characterise
earlier profit maximisation criterion Its operational features satisfy all the three requirement of a
suitable operation objective of financial courses of action, namely, exactness, quality of benefits and
the time value of money. The value of an asset should be viewed in terms of the benefits it can
produce. The worth of a course of action can similarly be judged in terms of the value of the benefits
it produces less the cost of undertaking it. A significant element in computing the value of a financial
course of action, is the precise estimation of the benefits associated with it. The wealth maximisation
criterion is based on the measurement of benefits in the case of the profit maximisation criterion. Cash
flow is a precise concept with a definite connotation. Measuring benefits in terms of case flow avoids
the ambiguity associated with accounting profits. This is the first operational feature of the net present
worth maximisation criterion. The second important feature of the wealth maximisation criterion is
that it considers is that it considers both the quantity and quality dimensions of benefit. At the same,
it also incorporates the time value of money. The operational implication of the uncertainty and timing
dimensions of the benefits emanating from a financial decision is that adjustment should be made in
the cash flow pattern, firstly, to incorporate risk and, secondly, to make an allowance for differences in
the timing of benefits. The value of a course of action must be viewed in teams of its worth to those
providing the resources necessary for its undertaking. In applying the value maximisation criterion, the
term value is used in terms of worth to the owners, that is, ordinary shareholders. The capitalisation
(discount) rate that is employed is, therefore, the rate that reflects the time and risk preferences of
the result of higher risk longer time period. Thus, a stream of case flows that is quite certain might be
associated with a rate a 5 per cent, while a very risky stream may carry a 15 per cent discount rate. For
the above reason the net present value maximisation is superior to the profits maximisation as an
operational objective. As a decision criterion, it involves a comparison of value to cost. An action that
has a discounted value ‘ reflecting both time and risk that exceeds its cost can be said to create value.
Such actions should be undertaking.

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Conversely, actions, with lees value than cost, reduce wealth and should be alternative with the
greatest net present value should be selected. In the words of Ezra Solomon, The gross present worth
of a course of action is equal to the capitalised value of the flow of future expected benefit, discounted
(or capitalised) at a 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 being discussed. Any financial action which creates wealth or which has a net present
worth above zero is a desirable one and should be undertaken. Any financial action which does not
meet this test should be rejected.

1.9 ECONOMIC VALUE ADDED

1.10 ORGANIZATION OF FINANCE FUNCTION

The finance function is almost the same in most enterprises. The details may differ but the
important features are universal in nature. The finance function occupies such a major place
that it cannot be the sole responsibility of the executive. The important aspects of the finance
function have to be carried on by the top management i.e., the Managing Director and the Board
of Directors. It is the Board of Directors, which makes all the material final decisions involving
finance. Financial management in many ways is an integral part of the jobs of managers who
are involved in planning, allocation of resources and control. The responsibilities for financial
management are disposed throughout the organization.

Example:
1. The engineer, who proposes a new plant, shapes the investment policy of the firm.
2. The marketing analyst provides inputs in the process of forecasting and planning.
3. The purchase manager influences the level of investment in inventories.
4. The sales manager has a say in the determination of receivable policy.
5. Departmental managers, in general, are important links in the financial control system
of the firm.

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The Chief Financial Officer (CFO) is basically to assist the top management. He has an
important role to contribute to good decision-making on issues that involve all the functional
areas of the business. He must clearly bring out financial implications of all decisions and make
them understood. CFO (his designation varies from company to company) works directly under
the President or the Managing Director of the company. Besides routine work, he keeps the
Board of Directors informed about all the phases of business activity, including economic,
social and political developments affecting the business behaviour. He also furnishes
information about the financial status of the company by reviewing from time-to-time. The
CFO may have different officers under him to carry out his functions. Broadly, the functions
are divided into two parts.
1. Treasury function
2. Control function
Treasury function (headed by financial manager) is commonly responsible for handling
financial activities, such as financial planning and fund raising, making capital expenditures
decisions, managing cash, managing credit activities, managing the pension fund and managing
foreign exchange. The control function (headed by Chief Accountant/Financial Controller)
typically handles the accounting activities such as corporate accounting, tax management,
financial accounting and cost accounting. The treasurer’s focus tends to be more external, the
controllers’ focus is more internal:

1.11 DUTIES AND RESPONSIBILITIES OF FINANCIAL MANAGER (OR) FUNCTIONS OF FINANCIAL

MANAGER OR) ROLE OF FINANCIAL MANAGER.
Finance manager is an integral part of corporate management of an organization. With his profession
experience, expertise knowledge and competence, he has to play a key role in optimal utilization of
financial resources of the organization. With the growth in the size of the organization, degree of
specialization of finance function increases. In large undertakings, the finance manager is a top
management executive who participants in various decision making functions.
A) Determining financial needs:-
One of the most important functions of the financial manager is to ensure the availability

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of adequate financing, financial needs have to be assessed for different purposes. Money may be
required for initial promotional expenses, fixed capital and working capital needs. Promotional
expenditure includes expenditure incurred in the process of company formation.
B) Determining sources of funds:
The financial manager has to choose source of funds. He may issue different types of securities and
debenture, may borrow form a number of finance institutional and the public. The financial manager
must definitely know what he is doing, workout strategies to ensure good financial health of the firm.
C) Financial analysis:
It is the evaluation & interpretation of a firm‟s financial position and operation and involves a
comparison and interpretation of accounting data. The financial manager has to interpret different
statements.
D) Optimal capital structure:
The financial manager has to establish an optimum capital structure and ensure the maximum rate of
return on investment and the liabilities carrying – fixed charges has to be defined.
E) Cost –volume profit analysis;
This is popularly known as the CVP relationship for this purpose are fixed cost, variable cost and semi-
variable cost must be analyzed.
F) Profit planning and control:
Profit planning and control have assumed great importance in the financial activities of modern
business. Profit planning ensures the attainment of stability and growth. The break-even analysis and
cost volume profit it analysis are important tools in profit planning and control of the firms.
G) Fixed assets management:-
A firms fixed assets are land, building, machinery and equipment, furniture and such intangibles as
patents, copy rights and goodwill. These fixed assets are justified to the extent of the utility or their
production capacity.
H) Capital budgeting:
It refers to the long-term planning for (1) investment in projects and fixed assets and (2)methods of
financing the approved projects. It includes the methods of mobilization of long-terms funds and their
deployments in profitable projects. Capital budgeting is considered as the process of making
investment decisions on capital expenditure.
i) Dividend policies:
The dividend policy of a firm determines the magnitude of the earnings distributed to share holders.
The net operating profit or profit after tax (PAT) has to be intelligently apportioned between divided
payments, and investments. The dividend policy determines the amount of dividend payment to be
made to the shareholders, the date of payments of dividends and the effect of the dividend policy on
the value of the firm.
J) Acquisition and mergers
A merger is a transaction where two firms agree to integrate their operations on a relatively equal
basis because they have resources and capabilities that together may create a stronger competitive
advantage. Two or more companies combine to form either a new company or one of the combining
companies survives, which is generally the acquirer.

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1.12 EMERGING ROLE OF FINANCIAL MANAGER IN INDIA

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