Financial Goals Of The Company

Company is a form of organisation in which the ownership and management are separated. Share holders are considered the owners where as board of directors are their agents . The seperation of Ownership and owners. The objectives of management may different fromt hose of the share holders. In big companies where shares are held by a large number of share holdres it is difficult to make the management know the expectations of the share holders. Managers may have personal goals that compete with shareholdres, wealth maxmization goal and such conflict is known as agency conflict .The seperation of ownership from management creates a situation in whihc the management may act in its own intereacts rather than those of the management will make optimal decisions only if approproate incentive ate given. To reduce agenecy conflict, share holders must incur agency costs, which include all costs born by share holders to encourage managesrs to maximize the stock price rather than act in their own self-interst. The optimal soluiton lies in the situaltion where executive compansation is tied to performance

presently , as majority of the shares in companies is owned by institutional investors sucha as insurance companies , mututal funds, pension funds, etc .. and represntatives of the lending agencies like developement banks are being placed on the Borad of Directors of companies there is a considerable scope for exercising influence over a company's operations. Another feature is that the belief in practicing good corporate governance is on the rise

The team of management takes various decisions involving the prosperity and perpetuity of a company . When such strategic decisions are what goal should guide them . Obviosuly the economic interest of the share holders , who are taking the maximum risk, should guide the management.

These are two widely dicussed approaches to achieve the above objectives.

(a). Profit Maximisation

(b). Wealth Maximisation .

Should the company aim at maximising profits of wealth ?

Role Of Financial Manager

The Funcitons of a financial manager of a company generally include the follwing

• Estimates capital requirement of various projects
  
• Provides funds for various projects
  
• Maintains liquidity and solvancy to meet the short term and long term commitments, when they become due.
• Liason with stock exchanges,share holders,bankers,financial institutions.
  
• Estimates risk in financial decisions and provide for various measures to minimise risk
  
• Decides the credit policy of the company by taking into consideration the established practices.
• Reports to various external agencies like financial institutions ,tax authorities ,share holders,govt.
• Meets various onligations under different legistations ,like tax laws, SEBI Act, etc ....
• Takes - up internal audit to establish proper checks and controls
  
• Decides the dividend policy of the company .

All the above mentioned functions are supposed to be discharged by a financial manager , with in the frame work of laws in force, for the ultimate achivement of wealth maximisation of share holders.

Scope Of Financial Management

As we understood from the previous section , financial management is concerned with all decisions involving finance. There fore the scope fianancial management encompasses all the fianancial decisions taken by a business enterprise. A business enterprise is established for earning income. Major decisions in any business are related to acquision of assests for business purpose and financing these assets by trapping various sources of finance. The first decision is known as 'investment' decision and second decision is known as 'financing' decision.


Assets' requirement are two types :

1. Fixed assets like land ,building,plant, machinery, furniture, technical know-how ,patent rights , copy rights etc.....

2. Current assests like inventory ( raw materials, working in progress , finished goods ), receivables debators cash etc.........

Expanding the scale of operations, entering a new market , introductuion of new products etc are some of investment decisions that involve the acwuisition of fixed assets. They provide returns for a long period . There fore these are also called long term investment decisions.

Current assets are poetrating asets, which are rewuired for smooth conduct of business. What should be the investment in these current assets ? or what should be the level of these current assets? is a crucial invesment decision. Because ,exess levels of current assets cut into the profitability of a business and insufficiency of current assets result in loss of liquidity. These decisions are called short term investment decisions because their impact on the business is for a short period .

For The purpose of acwuiring these assets (fixed and current) funds are required. Various sources of funds are available. Major sources are two types (1) long-term (2) short-term. Long term borrowing etc.. Short - term sources are bank loans, cash,credit, vall money ,bills dicounting, certificate of deposits etc.. Decisions regarding the source of finance are called fianancing decisions .

Fianancial management takes into its fold

• Long -term investment decision of capital budgeting decisions .
• Long - term financing decisions of capital structure decisions.
• Short term investment decisions or investment in current assets
  
• Short term fianancing decisions of fianancing of current assets
  

The management of current assets and current liabilities is known as working capital management .

Meaning Of Financial Management

Fianancial Management Study about the process of procuring and judicious use financial resources with a view to maximise the value of a business enterprise thereby the value to the owners is maximised Guthmann and Dougall defines financial management as " the activity concerned with the planning, raising,controlling of firm's financial resources."

In a company form of organisation, according to james C.Van horne financial management endeacours to make optimal investment,financing and dividend decisions.'

I.M.Pande defines financial management as " that managerial activity that is concerned with the planning and controlling of the firm's financial resources . According to him managing funds most wisely with a view to maximise the wealth of the share holders is financial management.

'Business activities concerned with the acwuistition and conservation of capital funds in meeting the financial needs and overall objectives of business enterprise come under financial management according wheeler.

Meaning of Finance

No activity of business can performed with out the invovement of finance. That is why fiannce' is considered as "Life Blood of Business". Finance holds the key to all business activities.

The Envyclopaedia of Britannica defines finance as " the act of providing the means of payment' Accroding to Paul G. Hasings 'fiananc' is the management of the monetary affairs of a company . Howard and Upton defines fiannace as the management of the flow of cash so that the organisation will have the means to carry out its objectives and at the same time meet its onligations as they become due. Their emphasis is on the liquidity aspect of finance. John Hamption interpreted fianace as the managementof the flow of money . In a modern economy finance may be defined as the provision of money at the time it is needed. Therefore, finance is concerned with every activity, Which involves the use of money

1.Financial Management Introduction

Business is an economic activity which involves the use of economic resources (Machine,material,money,men etc)for the production of goods (refrigerator, tooth paste, soap, truck etc) and services (insurance, banking, communication, transport, etc). These goods and services are expected to be sold a a price which is more than the cost of producing them, resulting in a surplus or profit.

When a business enterprise plans to do any activity, it has to make a market survey to estimate the demand for the product and to estimate the life of the business.

The demand estimate helps in the finalisation of plant capacity(i.e., number of units a plant can manufacture in a specific period of time)or scale of operation. Once the plant capacity is finalised, the area of the site required to construct the business premises(consisting factory buildings, godowns, office building etc)., number or personnel (human resource) required, raw material requirement are estimated, The enterprise finanlises its scale of operations and based on it, the capital (both permanent and working capital) requirement is estimated.

A business enterprise strives to aschieve a surples . To achieve this gaol, an enterprise invest funds in various income earning assetws by obtaining funds from various sources. Thus, the financial function is all about the following activities.

• To determine the funds requirement
• To determine the assets to be acquired
• To determine the pattern of financing the assets.