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CHAPTER 18

FINANCIAL MANAGEMENT

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It also means applying general management principles to financial resources of the enterprise.

Financial management may be defined as the area or function in an organization which is concerned with profitability, expenses, cash and credit, so that the organization may have the means to carry out its objective as satisfactorily as possible.

Financial management is generally concerned with short term working capital management, focusing on current assets and current liabilities, and managing fluctuations in foreign currency and product cycles, often through hedging. The function also entails the efficient and effective day-to-day management of funds, and thus overlaps treasury management. It is also involved with long term strategic financial management, focused on i.e. capital structure management, including capital raising, capital budgeting and dividend policy.

Objectives of Financial Management

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.

3. To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.

4. To ensure safety on investment, i.e., funds should be invested in safe ventures so that adequate rate of return can be achieved.

5. To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements:

A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.

2. Determination of capital composition:

Once the estimation has been made, the capital structure has to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.

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3. Investment of funds:

The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.

4. Management of cash:

Finance manager has to make decisions with regards to cash management.

Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc.

5. Financial controls:

The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances.

This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

YouTube Link for Lecture:

Channel Name:

Lateef’s Commerce Academy

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Visual content

There are no separate diagrams, tables, or illustrations in these two pages. The content is entirely text-based, consisting of the definition of Financial Management, its Objectives, and its Functions.

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📌 ADDENDUM — Ratio Analysis & Leverage

[!warning] Not in the original book — added because the exam asked it The chapter above names "ratio analysis" under Financial Controls but gives no formulas, and never defines leverage. Both were asked in 2024:

• 2024·Q48 — Current Ratio = ? → Current Assets / Current Liabilities
• 2024·Q53 — What does financial leverage measure? → sensitivity of EPS to a % change in EBIT

There are zero hits for either topic across all 600 MCQs. Learn this page.

1. Liquidity Ratios

Current assets: stock, debtors, bills receivable, prepaid expenses, cash & bank. Current liabilities: creditors, bills payable, outstanding expenses, bank overdraft, short-term loans.

2. Solvency Ratios

3. Profitability Ratios

4. Turnover (Activity) Ratios

Working Capital = Current Assets − Current Liabilities

5. ⭐ LEVERAGE — the 2024 question

Leverage = the use of fixed costs (operating) or fixed-charge funds (financial) to magnify returns.

[!tip] Say it the exam's way Financial leverage measures the sensitivity of EPS with respect to a % change in the EBIT level. (That is verbatim the correct option in 2024·Q48/Q53.) Trading on equity = using debt so that equity shareholders earn more — this is financial leverage in action.

6. Other objectives worth knowing

• ⭐ Primary goal of financial management = WEALTH MAXIMISATION of the owners/shareholders (not profit maximisation) — asked as 2022·Q40 in the older Finance paper.
• Capital budgeting = long-term investment decisions (capital budget ↔ MCQ Q245).
• Capital structure = the debt–equity mix.