Financial Management

In simple terms, financial management is the business function that deals with investing the
available financial resources in a way that greater business success and return-on-
investment (ROI) is achieved.
Financial management professionals plan, organize and control all transactions in a business.
They focus on sourcing the capital whether it is from the initial investment by the
entrepreneur, debt financing, venture funding, public issue, or any other sources.
Financial management professionals are also responsible for fund allocation in an optimized
way to ensure greater financial stability and growth for the organization.

Finance functions
Fundraising (Finance Decisions): For any business to grow confidently and have a good
market reputation, an adequate amount of cash and liquidity is critical. Therefore,
businesses raise funds by equity or debt financing. Financial managers take decisions on
maintaining a healthy balance between debt and equity to ensure that the company’s
financial health is not impacted.
Fund Allocation (Investment Decision): Smart fund allocation is as critical to a business’s
financial health as fund-raising itself. The funds that a company has must be allocated in the
best way possible after due diligence on:
o Business size and growth potential
o Whether the assets are short-term or long-term before spending on them
o Mode of fundraising
Profit Planning (Dividend Decision): Unless it is a social organization, earning more profits
would be among any business’s primary goals. The profits a company makes determine its
financial health and future growth. Therefore, adequate usage of the money generated as
profit is needed. Whether they have to be ploughed back to acquire assets and expand
coverage, or to be spent on marketing, acquiring other businesses or invested to act as a
buffer resource, all these considerations are made by financial leaders.

Importance of Financial Management

The financial management of an organization determines the objectives, formulates the
policies, lays out the procedures, implements the programmes, and allocates the budgets
related to all financial activities of a business.
Through a streamlined financial management practice, it is possible to ensure that there are
sufficient funds available for the company at any stage of its operations.
The importance of financial management can be assessed by taking a look at its core
mandate:
o Availability of sufficient funds
o Maintaining a balance between income and expenses to ensure financial stability
o Ensuring efficient and high ROI
o Creating and executing business growth and expansion plans
o Safeguarding the organization against market uncertainties through ensuring buffer
funds

Scope of financial statement

Financial management in a company is governed by the principle that it must protect the
financial interests of the investors, shareholders, and ensure business growth.
Apart from securing their interests, financial managers are also expected to ensure greater
ROI that generates more wealth for all shareholders.
o Assessing Capital Needs: Financial managers need to evaluate factors such as cost of
current and fixed assets, cost of marketing, need for buffer capital, long-term
 operation and human resources cost etc. Successful businesses have clearly defined
short-term and long-term financial requirement projections in place.
o Determination of Capital Structure: A company’s capital structure is the framework
that determines decisions such as debt-equity ratio in the short as well as long term.
o Creation of Effective Financial Policies: There is a need to frame efficient financial
policies that govern cash control, the lending and borrowing processes and so on.
o Resource Optimization: Great financial managers are able to navigate through
different scenarios by making optimum use of the available financial resources. This
would reduce the cash burn and increase the cash churn to generate maximum ROI.

Financial goals of the firm

Every firm has a predefined goal or an objective. Therefore the most important goal of a
financial manager is to increase the owner’s economic welfare. Here economics welfare may
refer to maximization of profit of shareholders wealth. Therefore Shareholders wealth
maximization (SWM) plays a very crucial role as far as financial goals of a firm are concerned.
Two main goals of any firm is to maximize the following:
o Profit maximization: Profit is the remuneration paid to the entrepreneur after
deduction of all expenses. Maximization of profit can be defined as maximizing the
income of the firm and minimizing the expenditure.
It is seen that when a firm tends to increase profit it eventually makes use
of its resources in a more effective manner. Profit is regarded as a parameter to
measure firm’s productivity and efficiency. Firms which tend to earn continuous
profit eventually improvise their products according to the demand of the
consumers
o Wealth maximization: When business managers try to maximize the wealth of their
firm, they are actually trying to increase the company's stock price. As the stock
price increases, the value of the firm increases, as well as the shareholders' wealth.
Shareholder wealth maximization is a principle of corporate governance that sets
one primary goal for business managers. It considers the time value of money
The wealth of shareholder is always measured in present value concept. The
wealth of the shareholder is determined as follows:
wealth = No. of shares * MPS

Agency problem
An agency problem is a conflict of interest inherent in any relationship where one party is
expected to act in another's best interests. In corporate finance, an agency problem usually
refers to a conflict of interest between a company's management and the company's
stockholders.
The manager, acting as the agent for the shareholders, or principals, is supposed to make
decisions that will maximize shareholder wealth even though it is in the manager’s best
interest to maximize their own wealth.
The agency problem does not exist without a relationship between a principal and an agent.
In this situation, the agent performs a task on behalf of the principal. Agents are commonly
engaged by principals due to different skill levels, different employment positions, or
restrictions on time and access.
The agency problem may also be minimized by incentivizing an agent to act in better
accordance with the principal's best interests. For example, a manager can be motivated to
act in the shareholders' best interests through incentives such as performance-based
compensation, direct influence by shareholders, the threat of firing, or the threat of
takeovers.
What Causes an Agency Problem?
Agency problems arise during a relationship between a principal and an agent. Agents are
commonly engaged by principals due to different skill levels, different employment
positions, or restrictions on time and access.
The agency problem arises due to an issue with incentives and the presence of discretion in
task completion. An agent may be motivated to act in a manner that is not favorable for the
principal if the agent is presented with an incentive to act in this way.

Emerging role of Finance Managers in India

Reflecting the emerging economic and financial environment in the post-liberalization era,
the role/ job of financial managers in India has become more important, complex and
demanding, The key challenges are, intern in the areas specified below:
o financial structure,
o foreign exchange management,
o treasury operations,
o investor communication,
o management control and
o investment planning.
The main elements of the changed economic and financial environment, inter alia, are the
following:
o Considerable relaxation in industrial licensing framework in terms of the
modifications in the Industries Development (Regulations) Act;
o Abolition of the Monopolies and Restrictive and Trade Practices Act and its
replacement by the Competition Act;
o Repeal of Foreign Exchange Regulation Act (FERA) and enactment of a liberalized
Foreign Exchange Management Act (FEMA);
o Abolition of Capital Issues (Control) Act and the setting-up of the Securities and
Exchange Board of India (SEBI) under the SEBI. Act for the regulation and
development of the securities market and the protection of investors;
o Enactment! of the Insurance Regulatory and Development Authority (IRDA) Act and
the setting-up of the IRDA for the regulation of the insurance sector and the
consequent dismantling of the monopoly of UC and GIC and its subsidiaries;
o Emergence of the capital market at the center-stage of the financing system and the
disappearance of the erstwhile development/public financial/term lending
~institutions from the Indian financial scene;
o Emergence of a’ highly articulate and. sophisticated money market;’
o Globalization,. convertibility of rupee, liberalized foreign resentments in India, Indian
foreign investment abroad;
o Market-determined interest rate, emergence of highly innovative financial
instruments:
o Growth of mutual funds; credit rating, other financial services;
o Rigorous prudential, credit risk management framework for banks and financial
institutions;
o Access to Euro-issues, American Depository Receipts (ADRs);
o Privatization/disinvestment of public sector undertakings.