Introduction to Financial Management Module- 1

Meaning of Finance
Finance is the process of conversion of accumulated funds to productive use. In simple terms finance is
defined as the activity concerned with the planning, raising, controlling and administering of funds used in the
business.

Definition of Finance
According to B.O. Wheeler “Finance is that business activity which is concerned with the
acquisition and conservation of capital fund in meeting the financial needs and overall objectives of
business enterprise.”

According to Guthumann “Finance can broadly be defined as the activity concerned with planning,
raising, controlling, administering of the funds used in the business.”

According to Calvin Potter “Finance is concerned with how, the finance of business enterprise should be
managed”.

Meaning of Finance Function

Finance function refers to the providing of funds needed by a business concern on most suitable terms.
OR
In other words, it refers to the raising of funds and their effective utilization. It does not stop only by finding out
sources and raising of funds but it also covers proper utilization of funds.
Organization of Finance function

Board Of Directors

Vice - Vice -
Vice -
President President
President Sales
Operations Finance

Treasurer Controller

Capital Cash Cost Accounting Data Processing

Budgeting Management Manager Manager

Commerical Banking Credit Financial

Tax Manager
& Investment Banking Management Accounting

Financial
Portfolio Fund Raising
Internal Audit Statements
Manager Manager
Preparation

Inventory Preparing
Manager Budgets

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Introduction to Financial Management Module- 1
Objectives of Finance function
a) Financial Planning: Developing comprehensive financial plans that align with the organization's strategic
goals and objectives.

b) Financial Control: Monitoring and evaluating financial performance through effective control
mechanisms to ensure adherence to budgets and financial targets.

c) Financial Decision Making: Providing relevant financial information and analysis to support decision-
making processes across the organization.

d) Optimal Utilization of Funds: Ensuring efficient allocation and utilization of funds to maximize returns
and minimize costs.

e) Risk Management: Identifying, assessing, and managing financial risks to protect the organization from
adverse financial impacts.

f) Liquidity Management: Maintaining adequate liquidity to meet short-term obligations while optimizing
the use of cash resources.

g) Profitability: Maximizing profitability through effective management of revenues, expenses, and

investments.

h) Long-term Financial Stability: Establishing strategies to achieve and maintain long-term financial
stability and sustainability.

i) Compliance: Ensuring compliance with financial regulations, accounting standards, and internal policies.

j) Stakeholder Communication: Communicating financial performance and strategies effectively to

stakeholders, including shareholders, investors, and creditors.

Functions of Finance
Functions

Managerial Routine
Functions Functions
Managerial Functions Involves:
1. Investment decision: It involves the type and volume of the assets to be acquired.
2. Financial Decision: It involves the decision about the various sources and the extent of the funds to be
obtained.
3. Dividend Decision: It involves the extent of the profit to be allocated to the shareholders and the extent of
the profit to be retained.

Routine Functions involves:

1. Supervision of Cash Receipts and Payments
2. Managing financial resources to generate profit.
3. Recording & reporting all the financial transactions in the business.
4. Supporting & safeguarding of securities, Policies.

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 Introduction to Financial Management Module- 1
Types of Finance
Financing in a business is done through a number of ways including equity investments and credit arrangements.
This kind of finance is also concerned with determining an excellent debt policy for a new company or the perfect
strategy for asset allocation for an investor.
There are four branches of finance:
1. Corporate or Business Finance
2. Personal Finance
3. Public Finance
4. Private Finance
1. Corporate Finance
It is about funding the company expenses and building the capital structure of the company. It deals with the
sources of funds and the channelization of those funds like the allocation of funds for resources and
increasing the value of the company by improving the financial position. Corporate finance focuses on
maintaining a balance between the risk and opportunities and increasing the asset value

2. Personal Finance
Personal finance deals with the financial decisions and activities of an individual or household which include
budgeting, insurance, mortgage planning, savings and retirement planning.

3. Public Finance
This type of finance is related to states, municipalities and provinces in short government required
finances. It includes long term investment decisions related to public entities. Public finance is a branch of
finance which deals with tax systems, expenditures of the government, budget procedures, stabilization
policy, instruments, debt issues and other related concerns of the government.

4. Private Finance
It is an alternative corporate finance method that helps an organization to raise cash to avoid limited time
frame monetary shortfalls. This method typically serves a firm that is not listed on a security exchange or is
unable to seek financing on such markets. It is plan also may be suitable for non-profit entity.

Meaning of Financial Management

Financial management is that managerial activity which is concerned with planning and controlling of
firm's financial resources.
In other words, it is concerned with acquiring, financing and managing assets to accomplish the overall
goal of an enterprise.
Definition of Financial Management
“It is concerned with the efficient use of an important economic resource namely, capital funds”.
– Solomon.
“Financial Management as an application of general managerial principles to the area of financial decision-
making”.
– Howard and Upton.
“Is an area of financial decision making, Harmonizing Individual motives and enterprise goals”.
-Western and Brigham
Significance/ Importance of the financial management

1. Financial Planning
Financial management helps to determine the financial requirement of the business concern and leads to take
financial planning of the concern. Financial planning is an important part of the business concern, which helps

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 Introduction to Financial Management Module- 1
to promotion of an enterprise.

2. Acquisition of Funds
Financial management involves the acquisition of required finance to the business concern. Acquiring needed
funds play a major part of the financial management, which involve possible source of finance at minimum
cost.

3. Proper Use of Funds

Proper use and allocation of funds leads to improve the operational efficiency of the business concern. When
the finance manager uses the funds properly, they can reduce the cost of capital and increase the value of the
firm.

4. Financial Decision
Financial management helps to take sound financial decision in the business concern. Financial decision will
affect the entire business operation of the concern. Because there is a direct relationship with various
department functions such as marketing, production personnel, etc.

5. Improve Profitability
Profitability of the concern purely depends on the effectiveness and proper utilization of funds by the business
concern. Financial management helps to improve the profitability position of the concern with the help of
strong financial control devices such as budgetary control, ratio analysis and cost volume profit analysis.

6. Increase the Value of the Firm

Financial management is very important in the field of increasing the wealth of the investors and the business
concern. Ultimate aim of any business the nation.

7. Promoting Savings
Savings are possible only when the business concern earns higher profitability and maximizing wealth.
Effective financial management helps to promoting and mobilizing individual and corporate savings.

Goals / Objectives / Aims of Financial Management

Goals of Financial
Management

Specific Objectives General Objectives

Profit Wealth Balanced Asset

Liquidity
Maximization Maximization Structure

Judicious Planning of Funds Efficiency

Financial Discipline

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Introduction to Financial Management Module- 1
I. Specific Objectives: this is further classified as
1. Profit Maximization
A business concern is also functioning mainly for the purpose of earning profit. Profit is the measuring
techniques to understand the business efficiency of the concern. Profit maximization is also the traditional
and narrow approach, which aims at, maximizes the profit of the concern.
Points in favor of profit maximization
1. Aim of business: The profit maximization objectives are the actions that increases profit should be
undertaken and those that decrease profit are be avoided.
2. Income of the owner: The profit of the company becomes the income of the owners or shareholders.
Maximization of profits assures protection and safeguard of self-interest of the shareholders, and they
decide the actions of the company, and ensure that these are carried out. It attracts investors to invest
their savings in securities.
3. Resources are efficiently utilized: Profit maximization objectives leads to efficient allocation of
resources, as resources tend to be directed to uses which in terms of profitability are most desirable.
4. Test for measuring of economic efficiency: Real test for measuring comparative economic efficiency or
performance of firms is profit. So, this is the ground of rationality.
5. Change of economic conditions in business: Business may undergo recession, depression, and serve
competition, as economic conditions do not remain the same. When conditions are favourable for
business, the company has to make more profits to withstand the unfavourable situations when arise.
Company can rely on the past earnings, if it sustains loss. So every firm has to concentrate to make more
money, when business is going good.
6. Evaluation of performance: Profit maximization is a barometer through which the performance of a
business unit can be measured.
7. Business growth: Companies can accumulate profits, which could be a supporting or main source of
finance for expansion and growth in future years.
8. Social objectives: It is also stated that profit maximization objectives lead to social objective. When
profits are high, a company can help the society economic welfare.

Points against profit maximization

1. Vague and Ambiguity: The term 'profit' is vague and ambiguous, and has different interpretations. It does
not have precise meaning. Profit figure will widely vary depending upon accounting interpretations.
(Economic profit, Accounting profit, Gross profit, Operating profit, Profit before tax, Profit after tax,
Profits available to shareholders and Profit per share).
2. Timing and value of money ignored: The fact that a rupee received today is more valuable than the rupee
received later is ignored. It ignores the difference is time in respect of benefits arising from the similar
amount of investment.
3. Ignores Quality: The most problematic aspect of profit maximization as an objective is that it ignores the
intangible benefits such as quality, image, technological advancements etc. The contribution of intangible
assets in generating value for a business is not worth ignoring. They indirectly create assets for the
organization.
4. Reduces the life of the asset: If the profit maximization objective is adopted by financial management,
then it may lead to high profit in short - run at the cost of future damages, e.g. lesser provision shall be
made for repairs and maintenance of asset which may increase the current year profit but shall reduce the
life of the asset.

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 Introduction to Financial Management Module- 1
5. Ignores the risk factor: There is a direct relationship between risk and return. More the risk and more
will be the profit. If the profit maximization is the goal of financial management, then it has to choose
risky project, and has to borrow even beyond its capacity to finance a risky project, which is expected to
yield higher profit.
6. Ignores the interest of stake holders: Shareholders are owners of the company while professional
managers are managing the business. There are several holders, employees, customers, stakeholders, in the
joint stock company suppliers, government and society. Due to varied stakeholders, their interests are
suppliers, government and society. Due to v diverse and so financial management has to reconcile their
divergent and conflicting interests. Therefore, in this changed scenario, the concept of 'profit maximizing'
is unrealistic and inappropriate.
7. Ignores societal responsibilities: Business has some social responsibilities also; ignoring which business
may lose its reputation in long-run. If the profit maximization is the sole goal of the financial management,
then the business may produce goods and services, which may not be necessary and beneficial to the
society. So, it is indeed, doubtful how for the profit maximization objective serves or promotes social
responsibility towards society.
8. Attracts competition: The decision taken by a business enterprise to enter a specific line of business is
usually based on profit potential, Economic profit attracts new entrants in long run and because of new
entrants offer similar products, they draw customers away from other firms in the market, thereby
reducing the demand facing other firms. Entry continues in the long run until economic profits disappear.
9. Leads to corrupt practices: Profit maximization has been over-pampered so much so that in a free
market, where competition is the order of the day, cutting costs may leads to many underhand tactics of
evading taxes, exploiting workers and political corruption is intricately linked to the process capital
accumulation and profit maximization.
10. Induces Government intervention: Governments looking to increase revenue usually target highly
profitable business sectors. Government's intervention includes direct and indirect taxes, royalty
arrangements, nationalization and economic empowerment policies, as well as regulatory compliance with
environmental and other government standards and business criteria.
11. Profit maximization is a narrow concept; later if affects the long-term liquidity of a company.
12. Modem concept of marketing does not encourage profit maximization.
13. The true and fair picture of the organization is not reflected through profit maximization.
2. Wealth Maximization
It refers to gradual growth of the value of Assets of the firms in terms of benefits. The term wealth means
shareholder's wealth or the wealth of person who are involved in the business concern. This also known as
value maximization or NPV maximization.
The wealth maximization attained by a cany is reflected in the market value of share. In short term, it is the
process of creating wealth of an organization. This will maximize the wealth of the shareholders.
Wealth maximization concept can also be expressed as the increase in market value of shares of an investor.
Wealth of firm = Numbers of shares owned × Price per share in market
This can be symbolically expressed as:
Wo= NPo

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Introduction to Financial Management Module- 1
Arguments in favor of Wealth Maximization
1. Wealth maximization is a Clear term: Here, the present value of cash flow is ken into consideration.
The net effect of investment and benefits can be measured clearly.
2. It considers the concept of time value of money: The present value of cash inflows and outflows helps
the management to achieve the overall objectives of a company.
3. Wealth maximization is universally accepted concept: because it takes care of interest of Financial
Institutions, owners, employees, management and Society at large.
4. Wealth maximization considers the impact of risk factor: while calculating the NPV at a particular
discount rate; adjustment is being made to cover the risk that is associated with the Investments.
5. It has a long-term perspective: since it considers all the expected cash flows (future benefits) flowing
from the firm to shareholders.
6. It serves the fundamental objectives: wealth maximization is maximizing the market value of firm
equity shares.
7. Formulating Dividend policy: Wealth maximization guides the management in formulating a
consistent strong Dividend policy to reach maximum returns to the equity holders.
8. Growing dependence on capital market: Higher need for funds and increased availability of these
funds through capital markets has induced firms to be more shareholders friendly so as to attract their
investments.
9. Growing importance of financial institutions, foreign institutional investors, etc: The institutions
while providing funds have straight norms. They force the companies to follow policies beneficial the
stakeholders i.e., lenders and investors.

Criticisms / Objections against Wealth Maximization

1. It is a prescriptive idea. The object is not descriptive of what the firms actually do.
2. Wealth maximization increasing the wealth of the shareholders but not for socially desirable.

Significances of Wealth Maximization

The Company, although its cares more for economic Welfare of the shareholders, it cannot forget other who
directly or indirectly contribute effectively for the overall development of the company, Namely, lenders or
creditors, workers or employees, public or society and Management.
1. Creditors/ Lenders
2. Workers/ Employees
3. Society/ Public
4. Management
1. Creditors/lenders: To creditors or lenders to a corporate enterprise refers to Financial Institutions,
commercial banks, private money lenders, debentures, and trade creditors. The company has to meet their
obligation of paying interest and principal on the due dates. This helps in improving their confidence in
industrial financing.
2. Workers/employees: Workers or employees are the backbone of the industry. They are the main
contributors to the growth and success of an industry. It is the basic obligation of the company to keep
the workers in good humour and harmony. This is achieved only when a company pays for salary and
provides good working condition with appropriate welfare measures.
3. Society/public: It is the obligation of business to meet the demand and provide welfare facilities to the
public. Take care consumers are to be given good quality product with fair prices. It has to care for society
by participating directly or indirectly in its social actions namely sponsoring social programs free medical
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Introduction to Financial Management Module- 1
camps, free educational programs etc. it helps the company to gain a good reputation and credit
worthiness in the society for a long run.
4. Management: The total success of a company or business mainly depends on the decision of the
management. The contribution of Finance manager to this is substantial. He has to make and guide the
management in taking 'right decision at the right time'. He has to have maximum control over the
movement of funds in the profitable avenues to reach maximum profits.

II. GENERAL OBJECTIVES

1. Balanced asset structure: The subject of financial management must have a goal of maintaining balanced
asset structure of company. That means the size of fixed assets and current assets. The sizes of fixed
assets are to be decided scientifically. The size of current assets must permit the company to exploit the
investment on fixed assets. Therefore, balance between fixed and current assets have to be maintained.
2. Liquidity: The liquidity objective of a company will exploit the long-term vision of a company. If a firm is
'liquid', it is an indication of positive growth. The application of management of cash flows yielded in
increasing the company's capacity to meet short term as well as long term obligation of the company.
3. Judicious planning of funds: The concept of wealth or profit maximization is achieved only when a
company reduces its cost. Cost here not only refers to the overall cost of operations but also the cost of
funds.
4. Efficiency: If a company is Innovative or efficient, it can be run successfully in its future periods. The
threat of competition alarmed the Businessman to be made creative and efficient. Hence it is the
obligation of a finance manager to be vigilant in increasing the efficiency level of a company.
5. Financial discipline: As in the recent past, country as witness different types of scandals, Corporate
financial indiscipline, misuse of funds. Hence it has become an obligatory responsibility of a company to
have financial discipline through various techniques of financial management viz., capital budgeting, fund
flow and cash flow statement, performance budgeting, CVP analysis etc.

Difference Between Wealth and Profit Maximization

Sl.
Basis Wealth Maximization Profit Maximization
No.
It is defined as the management of financial It is defined as the management of financial
1. Definition resources aimed at increasing the value of resources aimed at Increasing the profit of the
the Stakeholders of the company. company.
Focuses on increasing the value of the
Focuses on increasing the profit of the
2. Focus stakeholders of the company in the long
company in the short term.
term.
It considers the risks and uncertainty It does not consider the risks and
3. Risk inherent in the business model of the uncertainty inherent in the business model
Company. of the company.
It helps in achieving a larger value of a It helps in achieving efficiency in the
4. Usage
company’s worth. Company’s.
5. Tenure It is suitable for only long-term business It is suitable for short term business.
Tax burden is less compared to profit
6. Tax Tax burden increase as the profit increases.
maximization.
Its objectives is to enhance the
7. Target It ignores the interest of the community.
shareholders wealth.

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Introduction to Financial Management Module- 1
Time value It considers the time value factors of cash It ignores the time value factor for the
8.
of money inflows. profits of a projects.

Scope/ Functions of Financial Management

1. Financial Planning: This involves setting financial goals and objectives for the organization and developing
strategies to achieve them. It includes forecasting financial needs, preparing budgets, and establishing
financial policies.

2. Capital Budgeting: This function involves evaluating and selecting long-term investment projects that align
with the organization's goals. It includes analyzing potential investments, estimating their costs and
benefits, and determining their financial feasibility.

3. Capital Structure Management: Financial management deals with deciding the mix of debt and equity
financing used to fund the organization's operations and investments. This includes determining the optimal
capital structure that minimizes the cost of capital while maximizing shareholder value.

4. Working Capital Management: This function involves managing the day-to-day financial operations of the
organization, such as managing cash, inventories, receivables, and payables. The goal is to ensure that the
organization has enough liquidity to meet its short-term obligations while optimizing the use of working
capital.

5. Financial Risk Management: Financial management involves identifying, assessing, and mitigating various
financial risks that the organization may face. This includes risks related to interest rates, currency
fluctuations, credit, liquidity, and operational risks.

6. Profit Planning and Control: Financial management focuses on analyzing financial performance,
monitoring variances between actual and budgeted results, and taking corrective actions as needed. This
helps ensure that the organization achieves its profitability goals.

7. Dividend Policy: Financial management includes deciding how much of the organization's profits should
be distributed to shareholders as dividends and how much should be retained for reinvestment in the
business.

8. Financial Reporting and Analysis: This function involves preparing and interpreting financial statements
(such as income statements, balance sheets, and cash flow statements) to provide insights into the financial
health and performance of the organization. It also includes communicating financial information to
stakeholders

9. Tax Planning: Financial management involves managing tax liabilities effectively by planning and
strategizing around tax laws and regulations to minimize the organization's tax burden while remaining
compliant

10. Corporate Finance Strategy: Financial management plays a strategic role in aligning financial decisions
with overall business strategy to support growth, expansion, and competitive advantage.

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Introduction to Financial Management Module- 1
Role of Finance manager in India-

1. Financial Planning and Strategy: Finance managers in India are responsible for developing financial
strategies and plans that align with the organization's goals. This involves forecasting financial trends,
preparing budgets, and setting financial targets.

2. Capital Budgeting and Investment Decisions: Finance managers evaluate potential investments and
projects to determine their financial viability and impact on the organization's growth. They analyze risks
and returns associated with investments and make recommendations to senior management.

3. Financial Reporting and Analysis: Finance managers oversee the preparation of financial statements (such
as balance sheets, income statements, and cash flow statements) and ensure their accuracy and compliance
with regulatory requirements. They provide financial analysis and insights to support decision-making.

4. Risk Management: Finance managers identify and manage financial risks that the organization may face,
such as market risk, credit risk, liquidity risk, and operational risk. They develop strategies to mitigate these
risks and ensure financial stability.

5. Cost Management and Control: Finance managers monitor and control costs within the organization to
optimize resource allocation and improve profitability. This includes analyzing cost structures, identifying
cost-saving opportunities, and implementing cost-control measures.

6. Cash Flow Management: Finance managers manage the organization's cash flow to ensure that there is
enough liquidity to meet short-term obligations while optimizing the use of working capital. They oversee
cash flow projections, cash management policies, and financing arrangements.

7. Capital Structure and Financing: Finance managers determine the optimal capital structure of the
organization by balancing debt and equity financing. They evaluate financing options, negotiate terms with
lenders or investors, and manage relationships with financial institutions.

8. Tax Planning and Compliance: Finance managers develop tax strategies to minimize the organization's
tax liabilities while ensuring compliance with tax laws and regulations in India. They stay updated on tax
reforms and changes that may impact the organization.

9. Corporate Governance and Compliance: Finance managers ensure that the organization adheres to
corporate governance practices and regulatory requirements. They implement internal controls, policies,
and procedures to safeguard assets and maintain transparency.

10. Strategic Financial Management: Finance managers play a strategic role in advising senior management
on financial implications of business decisions, mergers, acquisitions, and expansion strategies. They
contribute to strategic planning and long-term growth initiatives.

11. Stakeholder Communication: Finance managers communicate financial performance, forecasts, and
strategies to internal stakeholders (such as management and board of directors) and external stakeholders
(such as investors, creditors, and regulatory bodies).

Financial Plan
A financial plan is a statement of estimating the amount of the capital requirements and determining its
composition.
Financial Planning
Meaning:

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 Introduction to Financial Management Module- 1
It is the process of estimating the capital required and determining its composition. It is the process of
framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
Definition:
“Financial planning pertains only to the function of finance and includes the determination of the firm’s
financial objectives, formulating and promulgating financial policies and developing financial procedures”.
-WALKER
Types of Financial Plans
Financial plans formulated by an organization are of Three types, namely

[Link]-term financial plans:

It is required at different stages business life cycle. Long term here refers to period of period of more than 5
years to 35 years. These funds are required to meet capital expenditure namely land, building, furniture,
fixtures, initial incidental expenditure and such other similar long term assets requirement. It is concerned with
the formulating of long-term financial goals of the enterprises.
The following financial instruments are utilized to develop a long-term financial plan. They are:
✓ Equity share. ✓ Own funds.
✓ Preference share. ✓ Venture capital.
✓ Debentures. ✓ Leasing.
✓ Retained Earnings. ✓ Hire-purchase.
✓ Bonds.
II. Medium -Term financial plan:
This plan is prepared for a period from 1 year to maximum five years. It incorporates plans for replacement and
maintenance of assets, research and development activities, and financing of increased working capital needs of
the firm.
III. Short term financial plan:
Financial plan prepared for a maximum period of one year is termed as Short- term financial plan. As it is
estimated for long term financial needs, a firm had to forecast and plan short-term financial requirements. Short
term financial must aim at providing liquidity to the business firm facilitating the company to utilize the long
term capital assets and to maintain continuous working of the business firm. The following are the services
generally used to meet the short term financial needs of a company. They are:
✓ Cash credit ✓ Working capital loans
✓ Over draft ✓ Trade credit
✓ Bill discounting ✓ Advance re-earned from the customers
✓ Short-term loan

Objectives of Financial Plan

1. Adequate funds: A financial plan would ensure the availability of sufficient funds to achieve Enterprises
goals.
2. Balancing of costs and risks: There should be a balancing of costs and risks so as to protect the investors.
3. Flexibility: The financial plan should ensure flexibility so as to adjust as per the requirements. It should be
adjustable as per the changing conditions.
4. Simplicity: The financial structure should not be complicated by issuing a variety of securities. The number of
securities should be less so that it is easily understood.
5. Long term view: The financial plan should take a long-term view. The needs of needs for funds in the near
future and over a longer period should be considered while selecting the pattern of Financing.

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 Introduction to Financial Management Module- 1
6. Liquidity: The liquidity of funds should always be kept in mind while preparing a financial plan. During the
periods of depression it is the liquidator which can keep a concern going.
7. Optimum use: Financial plan should ensure sufficient funds for genuine needs. Neither the plans should suffer
due to shortage of funds know that should be wasteful use of them. The funds should be put to the optimum
use.
8. Economy: The cost of raising the funds should be minimum. It should not impose disproportionate burden on
the company. It can be insured by a proper debt equity mix.

Steps in financial Planning

Financial planning has connotations and includes the determination of the firm’s financial Objectives, financial
policies and financial procedure.

Establish
Establish
Projection Forecast performance-
and
of Determinat the Develop based
maintain
Financial ion of funds availability procedure management
system of
statements of funds compensation
controls
system

Step 1: Projection of Financial statements:

Financial statements are profit and loss account and balance sheet. It helps in analyzed in the effect of
the operating plans for projections. It ensures the proper monitoring of the implemented financial plan
Step 2: Determination of funds:
Anticipation of the funds are needed to invest on fixed asset & current assets for R & D programs for
the major promotional campaigns.
Step 3: Forecast the availability of funds:
This step involves in generating the funds internal or external sources of the company. Which
automatically identifies the amount of funds to be raised from outside.
Step 4: Establish and maintain system of controls
Planning and controlling are the two faces of the coins for driving the management. Control system
ensures the proper and effective utilization of funds within the firms.
Step 5: Develop procedure:
Developing procedure ensure consistency. Procedure should be developed for the need of economic
forecast & it should not be materialized.
Step 6: Establish performance-based management compensation system:
Success of a firm depends on the ability to identify the deviation and rewards the managers in
maximization of the share prices higher the profitability maximizing the wealth of the investor.

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Introduction to Financial Management Module- 1
Principles of a Sound Financial Plan

Simplicity Foresight Flexibility

Intensive
Liquidity Economy
use

Optimum Optimum
Contingencies
Risk Use

1. Simplicity: A financial plan should be simple and easy to understand & use. It should include the limited
number of securities in capital structure. The quality of plan should be intensive to the nature of company.

2. Intensive use: A financial plan should be engraved according to the objectives set by the organization. It
should ensure the profitability & made optimum use.

3. Optimum Risk: Financial plan should fetch a meaning in maintain a proper balance between the long
term & short-term funds which would offset an excess or shortage of funds.

4. Foresight: The future requirement of funds in the business should be forecasted (Technological
improvement, demand forecast, and resource availability) by considering the following in mind while
drafting the financial plan.

5. Liquidity: Liquidity helps the management to make short term and long-term payments on time. This will
enhance the creditworthiness and creates goodwill for the business.

6. Contingencies: Contingences are unexpected things. Financial plan should provide provision of how they
are provided & what kind of it either by internal or external sources.

7. Flexibility: Flexibility in financial plan will be helpful in coping up with expansion & modification.
Flexible plan should always allow for the scope of adjustment as the situation emerge.

8. Economy: A financial plan should be made cost effective. The cost of raising funds from various sources
should be minimal. Rate of interest & dividend must be low. There must be balance between owned &
borrowed finance.

9. Optimum Use: the financial plan should provide for meeting the genuine needs of the company. The
available funds must be used efficiently. Optimum utilization of funds results in availability of adequate
liquidity to the concern together with the maximum profitability.

Prof. Hari Krishna A V Prof. Prithvi Heggade M P Prof. Sunitha N

[Link]; PGDBA; (Ph.D.) [Link]; PGDCM; (Ph.D.) [Link]; KSET. Page 13
Introduction to Financial Management Module- 1

Factors Affecting Financial Plan

Nature of Industry

Availability of source

Status of the organization

Government control

Economic of the conditions

Future Plans

Flexibility

1. Nature of Industry: The need of funds are different for various industries (Labor/ Capital Intensive), the
asset structure, Earning etc. will influence in determining the size and structure of financial requirement.

2. Availability of source: There are various source by which an organization can raise the funds. The pros and
cons of all available sources should be properly analyzed for making a final decision on the sources.
3. Status of the organization: The financial plan can be influenced by the standing position of the concern.
The past performance, goodwill, attitude of management are factors for designing financial plan.

4. Economic of the conditions: National & International level will influence a decision about financial plan.
If the conditions are favorable raising fund would be simple on the other hand, unfavorable condition may
make it difficult for good organization to raise funds.

5. Government control: The government policies influence a decision about financial plan. The legal
restriction on fixation of dividend, interest rate, tax system will lead to difficult in raising funds

6. Future Plans: Financial plan has to be equipped for the future plan of expansion and diversification in the
near future. It should be flexible & facilitative

7. Flexibility: Financial plan should be flexible & adjust according to the needs of the changing conditions. It
should allow to replace / substitute the capital structure by one form of financing.

Limitations of Financial Plan

1. Difficulty in accurate forecasting: Financial plans are formulated by taking into account the expected
circumstances in the future. But the future is uncertain and nothing can be said about it exactly, if the
expectancy about future circumstances were wrong, then the financial plan would not be effective.

2. Absence of coordination: Effective financial plan depends upon coordination, of other departments with
finance department. So, lack of coordination between departments leads to in effective financial planning.

3. Rigidity: Generally financial plans are rigid in nature, rigidity means that the financial plan may allow
change, if at all it has flexibility in nature, manager may not like to change. It is not ready even to make the
changes that are necessary for the smooth running of the firm.

Prof. Hari Krishna A V Prof. Prithvi Heggade M P Prof. Sunitha N

[Link]; PGDBA; (Ph.D.) [Link]; PGDCM; (Ph.D.) [Link]; KSET. Page 14
Introduction to Financial Management Module- 1
4. Rapid technological changes in industry and customer preferences: Adoption of new technology,
purchase of new machinery needs funds, technological changes are unexpected hence, it is very difficult to
adjust a financial plan for adoption of the fast-changing technological environment.

Financial Analyst
A financial analyst is a professional undertaking financial analysis for external or internal clients as a core feature
of the job. The role may specifically be titled securities analyst, research analyst, equity analyst, investment
analyst, or ratings analyst.

Financial Analyst are responsible for examining financial data, market trends, and economic factors to provide
accurate and actionable recommendations. They work closely with various stakeholders, including executives,
managers, and investors, to assess the financial health of an organization and support decision-making processes.
By analyzing financial statements, conducting valuation exercises, and forecasting future performance, financial
analysts provide valuable insights to drive growth and profitability.

Role of Financial Analyst

Financial analysts undertake a wide range of responsibilities, each contributing to the overall financial well-
being of an organization. These include:

1. Financial Planning and Analysis: Finance analysts play a key role in developing financial plans and
strategies that align with the company's goals and objectives. They analyze financial data and trends to
forecast future performance, evaluate risks, and identify opportunities for growth.

2. Budgeting and Forecasting: Finance analysts assist in the preparation of budgets and financial forecasts.
They use financial models and historical data to estimate revenues, expenses, and cash flows, helping to
ensure that the organization's financial resources are effectively allocated and managed.

3. Investment Evaluation: Finance analysts evaluate investment opportunities by conducting financial

analysis and due diligence. They assess the financial viability of projects or investments, analyze potential
risks and returns, and provide recommendations to management.

4. Financial Reporting and Compliance: Finance analysts are responsible for preparing financial reports,
including income statements, balance sheets, and cash flow statements. They ensure that financial
reporting is accurate, timely, and in compliance with regulatory requirements and accounting standards.

5. Risk Management: Finance analysts identify and analyze financial risks faced by the organization, such as
market risk, credit risk, and liquidity risk. They develop strategies to mitigate risks and safeguard the
company's financial health and stability.

6. Cost Management and Efficiency: Finance analysts analyze cost structures and financial performance
metrics to identify opportunities for cost reduction and efficiency improvements. They work with various
departments to optimize resource allocation and improve profitability.

7. Strategic Decision Support: Finance analysts provide financial insights and analysis to support strategic
decision-making. They collaborate with senior management to evaluate business opportunities, assess the
financial implications of strategic initiatives, and formulate actionable strategies.

8. Stakeholder Communication: Finance analysts communicate financial analysis, findings, and

recommendations to stakeholders, including executives, investors, and board members. They present
complex financial information in a clear and understandable manner to facilitate informed decision-
making.

Prof. Hari Krishna A V Prof. Prithvi Heggade M P Prof. Sunitha N

[Link]; PGDBA; (Ph.D.) [Link]; PGDCM; (Ph.D.) [Link]; KSET. Page 15
Introduction to Financial Management Module- 1
9. Continuous Improvement and Adaptation: Finance analysts continuously monitor financial
performance, market trends, and regulatory changes. They adapt financial strategies and practices to
respond to changing economic conditions and business environments.

Section – A

1. Enumerate the objectives of Financial Management. (2013, 2017, 2021)

2. Name the two approaches of Financial Management. (2013)
3. Define Financial Management. (2014, 2015, 2016, 2017, 2018, 2019, 2023)
4. What do you mean by Financial Planning. (2014, 2015, 2016, 2018, 2021)
5. Give the meaning of Wealth Maximization (2014, 2015, 2016, 2017, 2018, 2019, 2024)
6. State the functions of Finance Manager. (2014)
7. Give the meaning of finance. (2018, 2021)
8. Mention any two steps in financial Planning. (2022)

Section – B

1. Explain the goals of Financial Management. (2014, 2015)

2. Explain the role of a Finance Manager. (2016)
3. Mention the need for Financial Planning. (2017)
4. Mention the functions of Finance Manager. (2017)
5. Explain the functions of Financial Management. (2017, 2018, 2022)
6. Briefly explain the steps in financial Planning. (2019)
7. Explain the principles of financial Management. (2021)
8. Explain the scope of financial management. (2024)

Section – C

1. What are the steps in Financial Planning? Explain clearly the basic consideration in formulating a Financial
Plan. (2013, 2017)
2. Explain the factors, Characteristics and principles affecting sound financial plan. (2017,2024)
3. Explain the meaning, scope and importance of financial management. (2018)
4. Who is financial Manager? What is the role of Finance Manager in an Organisation? (2019)
5. Explain the role or functions of Finance Manager. (2022, 2024)

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Prof. Hari Krishna A V Prof. Prithvi Heggade M P Prof. Sunitha N

[Link]; PGDBA; (Ph.D.) [Link]; PGDCM; (Ph.D.) [Link]; KSET. Page 16