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2012467
Fundamentals of financial
management
Aameer sherief.

Introduction
FINANCE: money required for carrying out business activities is called business finance.
Almost all business activities require some finance. Finance is needed to establish a business, to
run it, to modernize it, to expand, or diversify it. It is required for buying a variety of assets,
which may be tangible like machinery, factories, buildings, offices, or intangible such as
trademarks, patents, technical expertise, etc. also, finance is central to running like day-to-day
operations of business, like buying material, paying bills, salaries, collecting cash from
customers etc. needed at every stage in the life of a business entity. Availability of adequate
finance is, thus, very crucial for the survival and growth of business
Functions of Finance: “Finance function is the process of acquiring and utilizing funds by a
business.”
Scope of finance: functions of financial management are concerned with optimal
procurement as well as usage of finance. For optimal procurement, different available sources of
finance are identified and compared in terrns of their costs and associated risks and various
decisions regarding finance functions.
Achievement of material goods.
Particular forms of material goods where cash should be invested.
The sum of its liabilities is covered under the scope of finance function.
Financial management: all finance comes at some cost. It is quite imperative that it needs
to be carefully managed. Financial management is concerned with optimal procurement –as well
as the usage of finance. For optimal procurement different available sources of finance are
identified and compared in terms of their costs and associate risks. Similarly, the finance so
procured needs to be invested in a manner that the returns from the investment exceed the cost at
which procurement has taken place. Financial management aims at reducing the cost of funds
procured. Keeping the risk under control and achieving effective deployment of such funds. It
also aims at ensuring availability of enough funds whenever required as well as avoiding idle
finance. Controlling the financial activities goes hand in hand for the financial management,
because if it did not control the financial activities and budgeting there can be high chances of

going in to losses or getting into trouble of double overlapping. It collects the money and uses it
for the wellbeing of the company. Needless to emphasize, the future of a business depends a
great deal on the quality of its financial management.
Definition of Financial Management
Solomon Ezra says that, “financial management is concerned with the efficient use of an
important economic resource, namely capital fund.”
Wheeler A.H. defines financial management as “that activity which is concerned with the
acquisition and administration of capital funds in meeting the financial needs and overall
objectives of business enterprise.”
Financial management is chiefly worried by means of maximizing the wealth of owners through
wise and rational investment of funds.
Importance of financial management.
The role of financial management cannot be over-emphasized, since it has a direct bearing on the
financial health of a business. The financial statements, such as Balance sheet and Profit and
Loss Account, reflect a firm‟s financial position and its financial health. Almost all items in the
financial statements of a business are affected directly or indirectly through some financial
management decisions. Some prominent examples of the aspects being affected could be as
under:
1) The size and the composition of fixed assets of the business: for example, a capital
budgeting decision to invest a sum of R.O. 100,000 in fixed assets would raise the size
of fixed assets block by this amount.
2) The quantum of current assets and its break-up into cash inventory and
receivables: with an increase in the investment in fixed assets, there is a commensurate
increase in the working capital requirement. The quantum of current assets is also
influenced by financial management decisions. In addition. Decisions about credit and
inventory management affect the amount of debtors and inventory which in turn affect
the total current assets as well as their compositions
3) The amount of long-term and short-term funds to be used: financial management,
among others, involves decision about the proportion of long-term and short-term funds.
An organization wanting to have more liquid assets would raise relatively more amount
on a long-term basis. There is a choice between liquidity and profitability. The
underlying assumption here is that current liabilities cost less than long term liabilities.
4) All items in the profit and loss account e.g. interest, expense, depreciation, etc:
higher amount of debt means higher interest expense in future. Similarly, use of higher
equity may entail higher payment of dividends. Similarly, an expansion of business

which is a result of capital budgeting decision is likely to affect virtually all items in the
profit and loss account of the business.
It can, thus, be stated that the financial statements of a business are largely determined by
financial management decisions taken earlier. Similarly, the future financial statements would
depend upon past as well as current financial decisions. Thus, the overall financial health of a
business is determined by the equality of its financial management. Good financial management
resources at a lower cost and deployment of these in most lucrative activities.
Modern corporation
The concept of modern corporate power holds that the rights of the participants as well as the
conduct of the enterprise must be the subject of managerial discretion. Modern corporation‟s
most important trait is to partition of association from ownership. The most important feature of
modern corporation is that the separation of management from ownership. Industrial
management’s corporation requires executive managers as well as corporate bureaucracy to
oversee all of its complex and interlacing activities.
The large company firms have powerfully affected the manipulation of property in the present
world. These large company firms are typically controlled a small number of stock holders.
There are many countless methods which are used by these small minorities of stock holders to
gain control of large corporations. These include pooling of bulk of stock in the labor of trustees
possessing the manipulation to choose it and the use of various proxies. These proxies are
generally are utilized because stock holders rarely tend to attend meeting or term proxies
except than those consoled to them by management.
Recently the new type of corporation is the holding company, coordinated to buy a controlling
interest in supplementary corporations, this kind of firm usually possess no physical assets. The
cash that is needed to handle a concern is narrowed by pyramiding holding companies. This is
achieved by creating a company to hold a voting control of one or more than one operating
companies. The third company is crafted to hold a controlling interest in the second, and so on.
The control of the last firm is more than adequate to manipulate all. And such control because
of the dispersing of stock and countless small stock holders, cold demand the ownership of
merely 10 or 20% of the stock available.

In depth critical analysis of financial management
Investment decision.
Firm‟s resources are scarce in comparison to the uses to which they can be put. A firm, therefore,
has to choose where to invest these resources, so that they are able to earn the higest possible
return for their investors. The investment decision, therefore, relates to how the firm‟s funds are
invested in different assets.
Investment decision can be long-term or short-term. A long-term investment decision is also
called a capital budgeting decision. It involves committing the finance on a long-term basis.
These decisions are very crucial for any business since they affect its earning capacity in the long
run. The size of assets, profitability and competitiveness are all affected by capital budgeting
decisions. Moreover, these decisions normally involve huge amounts of investment and are
irreversible except at a huge cost. Therefore, once made, it is often almost impossible for a
business to wriggle out of such decisions. Therefore, they need to be taken with utmost care.
These decisions must be taken by those who understand them comprehensively. A bad capital
budgeting decision normally has the capacity to severely damage the financial fortune of a
business.
Short-term investment decisions are concerned with the decisions about the levels of cash,
inventory and receivables. These decisions affect the day-to-day working of a business. These
affect the liquidity as well as profitability of a business. Efficient cash management, inventory
management and receivables management are essential ingredients of sound working capital
management.
Objectives of investment decisions.
1. Determination of priority: the importance of various capital projects is
determined so that the management is able to select the most profitable
project.
2. Capital expenditure: An effective control of investment decisions helps in
comparing actual expenditure with predetermined expenditure.

3. Analysis of past decisions: expenditure incurred in the past are analyzed in investment
decisions, this enables the management to know the extent to which these decisions were
correct.
Investment decisions process
Investment deception process involves:
1. Assignment generation
2. Assignment valuation
3. Assignment selection
4. Assignment implementation
5. Performance review
Financial decisions.
This decision is about the quantum of finance to be raised from various long-term sources. Short-
term sources are studied under the „working capital management‟.
Importance of financing decisions
It involves identification of various available sources. The main sources of funds
for a firm are shareholders funds and borrowed funds. The shareholders funds refer
to the equity capital and the retained earnings. Borrowed funds refer to the finance
raised through debentures or other forms of debt. A firm has to decide the portion
of funds to be raised from either source, based on their basic characteristics.
Interest on borrowed funds has to be paid regardless of whether or not a firm has
earned a profit. Likewise, the borrowed funds have to be repaid at a fixed time.
The risk of default on payment is known as financial risk which has to be
considered by a firm likely to have insufficient shareholders to make these fixed
payments. Shareholders funds, on the other hand, involve no commitment
regarding the payment of returns or the repayment of capital. A firm, therefore,
needs to have a judicious mix of both debt and equity in making financing

decisions, which may be debt, equity, preference share capital, and retained
earnings. The cost of each type of finance has to be estimated. Some sources may
be cheaper than others. Debt is considered to be the cheapest of all the sources, tax
deductibility of interest makes it still cheaper. Associated risk is also different for
each source. The overall financial risk depends upon the proportion of debt in the
total capital. The fund raising exercise also costs something. This cost is called
floatation cost. It also must be considered while evaluating different sources.
Financing decision is, thus, concerned with the decisions about how much to be
raised from which source. This decision determines the overall cost of capital and
the financial risk of the enterprise.
Asset management decisions.
Asset management decision is considered as the art and science of making the correct decisions
and utilizing these processes. A common goal is to reduce the whole life cost of assets but there
may be other various critical factors such as risk or business continuity to be taken objectively in
this decision making.
Asset management decision is concerned with managing the physical assets as well as their
selection, maintenance, inspection and renewal. It plays an important role in determining the
operational performance and profitability of industries that operate assets as a part of their main
core business. Various categories of other assets covered by the scope of the discipline include:
information, finance, competence and other intangibles insofar as they relate to asset
management decisions.
After the assets are being purchased for the management alongside a proper financial
controlling, this kind of assets must be handled with care and the financial manager in the
management has the responsibility in controlling these assets. Management of the client's
investments by commercial services firm, and is usually Investment Bank. The firm will invest
on behalf of their clients and give them admission to an expansive scope of data to produce
standard and alternative market. The commercial managers are the one who are accountable for

considering of the assets that the stable has purchased. They have to keep an eye on the
presentation and responsibility or the market so that they accord a maximum worth of the firm.
Profit maximization
Profit maximization is a process that companies undergo to consider the best output and price
levels in order to maximize the returns. The company generally adjusts influential factors such as
production costs, sale prices and output levels as a way of reaching its profit objective. The
rationale behind the maximization of profits is simple because Profit is main incentive for
efficient performance It is rational in nature Profit is the test of economic efficiency With the
profit maximization, it is assumed that there is efficient allocation and use of economic resources
. It is also assumed that when individual firms pursue the interest of maximizing profits, society's
resources are efficiently used It is the main source of inspiration It is the basis of decision
making.
Therefore, through efficient use of economic resources of a country becomes possible under the
principle of maximization of its profits.
Arguments against profit maximization
1. A firm pursuing the objective of profit maximization exploits workers and the consumers.
2. It is said that in the modern world there are many things which have changed according
to the environment; similarly profit maximization was suitable before in the earlier years
but now in the modern market profit maximization form of behavior cannot be the
primary objective of the firm.
3. In the new company nature, profit maximization is considered as unrealistic, tough,
improper and immoral.
4. Since we all know that profit maximization is the process in which there is maximization
of profit and the income of the firm, this kind of behavior by the companies will lead to
extensive production of goods, this in turn will exceed the society‟s satisfaction margin,
which in turn will create unnecessary wastage of goods.
According to Ezra Solomon It suffers from the following limitations: It is vague It ignores time
value of money It ignores risks It ignores social responsibility so profit maximization is not an
ultimate objective. Prof Solomon has rightly stated that the best criterion for financial decisions
should be maximization of wealth concept

Wealth maximization
Wealth maximization is considered to be a new modern approach to financial management. The
important role of business was to maximize the profit and financial management until the wealth
management came into being. It is a superior goal compared to profit maximization as it takes
broader arena into consideration. Wealth or Value of a business is defined as the market price of
the capital invested by shareholders.
The wealth maximization‟s goal is just maximizing the money of the owners by raising the worth
of the company which will be represented by the market price of the company's shares.
Finance managers job is to look after the interest of share holders and they are the agents of
shareholders. The main objective of any investor would be max return on their capital and safety.
Both of them are well served by the wealth maximization as a decision criterion to business.
Comparison and contrast of wealth maximization and profit
maximization:
In the modern world the business market is advanced thus the financial managers should think
practically and also think about the society, so now the financial management would prefer to
select wealth maximization mode of behavior than going with profit maximization, this is
because goals of wealth maximization go hand in hand with the goals of financial management,
which is there should be an increase in the market price of the company's shares in the long term.
It is true indicator of the company's progress and the shareholders wealth. However profit
maximization can be a part of wealth maximization strategy.
Conclusion
This project is concerned with the financial statement and its gives maximum detail, how the
complex decisions are made by the managers. They mainly gaze above the essential for finance.
They debate concerning the financial strategy and investment decision, financial decision and
assets management decision.CFO is ought to monitor the financial management powerfully to
achieve optimum utilization of the reserves in the business. Management acts can be fictional
company as a head of the ship.
References
1. http://www.entrepreneur.com/management/index.html

2. Jain,P.K financial management-text, problems tata Mc graw hill publishing. 6th
edition.
3. S.N,financial management-Principals, Sultan Chand, 9th
edition
4. Prasanna Chandra, financial management- Theory, tata McGraw.

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