Financial Management Assignment 2022
Added on 2022-10-19
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Financial Management
Definitions of financial management
• According to J. F. Bradley, “Financial management is the area of business management
devoted to the judicious use of capital & careful selection of sources of capital in order to
enable a spending unit to move in the direction of reaching its goals.”
• Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
• “Financial management is the operational activity of a business that is responsible for
obtaining and effectively utilizing the funds necessary for efficient operation.”
• Financial management is managing financial assets ethically, in accordance with government
regulations to achieve the organization's goals.
Functions/Decisions of Finance (Previous question)
The functions of finance involve three major decisions a company must make-
the investment decision, the financing decision, and the dividend/share repurchase decision.
1. Investment Decisions:
An investment is an asset or item acquired with the goal of generating income or
appreciation. Appreciation refers to an increase in the value of an asset over time.
Managers need to decide on the amount of investment available out of the existing finance,
on a long-term and short-term basis.
They are of two types:
I. Long-term investment decisions or Capital Budgeting mean committing funds for a
long period of time like fixed assets. These decisions are irreversible and usually include
the ones pertaining to investing in a building and/or land, acquiring new
plants/machinery or replacing the old ones, etc. These decisions determine the financial
pursuits and performance of a business.
II. Short-term investment decisions or Working Capital Management means committing
funds for a short period of time like current assets. These involve decisions pertaining to
the investment of funds in the inventory, cash, bank deposits, and other short-term
investments. They directly affect the liquidity and performance of the business.
2. Financing Decisions:
Finance is the process of raising funds or capital for any kind of expenditure.
Managers also make decisions pertaining to raising finance from long-term sources and
short-term sources.
Definitions of financial management
• According to J. F. Bradley, “Financial management is the area of business management
devoted to the judicious use of capital & careful selection of sources of capital in order to
enable a spending unit to move in the direction of reaching its goals.”
• Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
• “Financial management is the operational activity of a business that is responsible for
obtaining and effectively utilizing the funds necessary for efficient operation.”
• Financial management is managing financial assets ethically, in accordance with government
regulations to achieve the organization's goals.
Functions/Decisions of Finance (Previous question)
The functions of finance involve three major decisions a company must make-
the investment decision, the financing decision, and the dividend/share repurchase decision.
1. Investment Decisions:
An investment is an asset or item acquired with the goal of generating income or
appreciation. Appreciation refers to an increase in the value of an asset over time.
Managers need to decide on the amount of investment available out of the existing finance,
on a long-term and short-term basis.
They are of two types:
I. Long-term investment decisions or Capital Budgeting mean committing funds for a
long period of time like fixed assets. These decisions are irreversible and usually include
the ones pertaining to investing in a building and/or land, acquiring new
plants/machinery or replacing the old ones, etc. These decisions determine the financial
pursuits and performance of a business.
II. Short-term investment decisions or Working Capital Management means committing
funds for a short period of time like current assets. These involve decisions pertaining to
the investment of funds in the inventory, cash, bank deposits, and other short-term
investments. They directly affect the liquidity and performance of the business.
2. Financing Decisions:
Finance is the process of raising funds or capital for any kind of expenditure.
Managers also make decisions pertaining to raising finance from long-term sources and
short-term sources.
They are of two types:
I. Financial Planning decisions which relate to estimating the sources and application of
funds.
• It means pre-estimating financial needs of an organization to ensure the availability
of adequate finance.
• The primary objective of financial planning is to plan and ensure that the funds are
available as and when required.
II. Capital Structure decisions which involve identifying sources of funds. They also involve
decisions with respect to choosing external sources like issuing shares, bonds, borrowing
from banks or internal sources like retained earnings for raising funds.
3. Dividend Decisions:
A dividend is the distribution of a company's earnings to its shareholders and is determined
by the company's board of directors. Dividends are often distributed quarterly and may be
paid out as cash or in the form of reinvestment in additional stock.
Dividend Decisions involve decisions related to the portion of profits that will be distributed
as dividend.
Two alternatives are available in dealing with the profits of a firm:
(i) they can be distributed to the shareholders in the form of dividends or
(ii) they can be retained in the business itself as retained earnings.
Shareholders always demand a higher dividend, while the management would want to retain profits
for business needs. Hence, this is a complex managerial decision.
Objective of Financial Management (Previous question)
Financial management is concerned with procurement and use of funds. Its main aim is to use
business funds in such a way that the firm’s value / earnings are maximized. Financial
management provides a frame work for selecting a proper course of action and deciding a viable
commercial strategy. The main objective of a business is to maximize the owner’s economic
welfare. This objective can be achieved by;
• Profit Maximization.
• Wealth Maximization.
1. Profit maximization: This is the main objective of financial management. The finance
manager strives to achieve optimal profit in the short term and long-term course of business.
The finance manager shall try to achieve as high as profits. The company makes a decent profit
in the long run if the finance manager makes the proper decisions using the various methods
and tools available
2. Wealth maximization: It means shareholders’ value maximization. Wealth maximization
means earning maximum wealth for shareholders. So, the finance manager tries to give
maximum dividends to shareholders. The dividend declaration and payout policy are decided
I. Financial Planning decisions which relate to estimating the sources and application of
funds.
• It means pre-estimating financial needs of an organization to ensure the availability
of adequate finance.
• The primary objective of financial planning is to plan and ensure that the funds are
available as and when required.
II. Capital Structure decisions which involve identifying sources of funds. They also involve
decisions with respect to choosing external sources like issuing shares, bonds, borrowing
from banks or internal sources like retained earnings for raising funds.
3. Dividend Decisions:
A dividend is the distribution of a company's earnings to its shareholders and is determined
by the company's board of directors. Dividends are often distributed quarterly and may be
paid out as cash or in the form of reinvestment in additional stock.
Dividend Decisions involve decisions related to the portion of profits that will be distributed
as dividend.
Two alternatives are available in dealing with the profits of a firm:
(i) they can be distributed to the shareholders in the form of dividends or
(ii) they can be retained in the business itself as retained earnings.
Shareholders always demand a higher dividend, while the management would want to retain profits
for business needs. Hence, this is a complex managerial decision.
Objective of Financial Management (Previous question)
Financial management is concerned with procurement and use of funds. Its main aim is to use
business funds in such a way that the firm’s value / earnings are maximized. Financial
management provides a frame work for selecting a proper course of action and deciding a viable
commercial strategy. The main objective of a business is to maximize the owner’s economic
welfare. This objective can be achieved by;
• Profit Maximization.
• Wealth Maximization.
1. Profit maximization: This is the main objective of financial management. The finance
manager strives to achieve optimal profit in the short term and long-term course of business.
The finance manager shall try to achieve as high as profits. The company makes a decent profit
in the long run if the finance manager makes the proper decisions using the various methods
and tools available
2. Wealth maximization: It means shareholders’ value maximization. Wealth maximization
means earning maximum wealth for shareholders. So, the finance manager tries to give
maximum dividends to shareholders. The dividend declaration and payout policy are decided
by financial management. Dividend decisions include a proper dividend policy regarding the
distribution or retaining of company profits. This is related to the performance of the company.
Better the performance, the higher is the market value of shares. In nutshell, the finance
manager tries to maximize shareholders’ value. It has some advantages such
• A firm that maximizes its profits also ensures its long-term survival.
• Wealth maximization is better for society.
• A profitable business can attract investors, which leads to a positive environment for
everyone.
• Wealth maximization considers the time value of money.
Other Objectives:
1. Proper mobilization: Mobilization of finance is an important objective of financial
management. It means utilizing effectively the sources of finance. The finance manager can
manage various sources of funds such as shares, and debentures, after estimating the financial
requirements, the finance manager must decide about the sources of finance.
2. Increase efficiency: Financial management tries to increase the efficiency of all sections of
the company. Proper distribution of finance to all departments increases the efficiency of the
entire company.
3. Proper estimation of total financial requirements: This means that the finance manager
would be able to estimate the financial requirements of the company. He should be able to
compute how much financing is required to start and run the business/ He shall estimate the
fixed and working capital requirements of the company. If not, there will be a shortage or
surplus of finance. The finance manager shall use various factors like the technology used by
the company, the number of employees used, the scale of operations, and legal requirements.
4. Proper utilization of finance: The finance manager must make optimum utilization of
finance. This can be done by using various financial tools such as managing receivables,
effective payment policy in hand, and better inventory management.
5. Maintaining proper cash flow: The financial manager shall ensure that there is a regular
supply of liquidity in the company monitoring closely all the cash inflows and outflows
reducing the instances of underflow and overflow of cash. The finance manager is entrusted
with the responsibility to maintain an optimum level of liquidity. Healthy cash flow improves
the chances of survival and success of the company.
6. Survival of company: The company must survive in this competitive business world. Hence,
the finance manager shall take all the decisions intuitively. The big decisions shall be taken
with proper due diligence and consultancy with consultants.
7. Creating reserves: The higher the reserves, the better it will be for the company to overcome
uncertainty. The company shall have an optimal dividend payout policy that will help itself to
create reserves over the year. It must also keep the profits as reserves. The reserves can be
used for the expansion of the company and for overcoming uncertainty. It can also be used to
face contingencies in the future.
distribution or retaining of company profits. This is related to the performance of the company.
Better the performance, the higher is the market value of shares. In nutshell, the finance
manager tries to maximize shareholders’ value. It has some advantages such
• A firm that maximizes its profits also ensures its long-term survival.
• Wealth maximization is better for society.
• A profitable business can attract investors, which leads to a positive environment for
everyone.
• Wealth maximization considers the time value of money.
Other Objectives:
1. Proper mobilization: Mobilization of finance is an important objective of financial
management. It means utilizing effectively the sources of finance. The finance manager can
manage various sources of funds such as shares, and debentures, after estimating the financial
requirements, the finance manager must decide about the sources of finance.
2. Increase efficiency: Financial management tries to increase the efficiency of all sections of
the company. Proper distribution of finance to all departments increases the efficiency of the
entire company.
3. Proper estimation of total financial requirements: This means that the finance manager
would be able to estimate the financial requirements of the company. He should be able to
compute how much financing is required to start and run the business/ He shall estimate the
fixed and working capital requirements of the company. If not, there will be a shortage or
surplus of finance. The finance manager shall use various factors like the technology used by
the company, the number of employees used, the scale of operations, and legal requirements.
4. Proper utilization of finance: The finance manager must make optimum utilization of
finance. This can be done by using various financial tools such as managing receivables,
effective payment policy in hand, and better inventory management.
5. Maintaining proper cash flow: The financial manager shall ensure that there is a regular
supply of liquidity in the company monitoring closely all the cash inflows and outflows
reducing the instances of underflow and overflow of cash. The finance manager is entrusted
with the responsibility to maintain an optimum level of liquidity. Healthy cash flow improves
the chances of survival and success of the company.
6. Survival of company: The company must survive in this competitive business world. Hence,
the finance manager shall take all the decisions intuitively. The big decisions shall be taken
with proper due diligence and consultancy with consultants.
7. Creating reserves: The higher the reserves, the better it will be for the company to overcome
uncertainty. The company shall have an optimal dividend payout policy that will help itself to
create reserves over the year. It must also keep the profits as reserves. The reserves can be
used for the expansion of the company and for overcoming uncertainty. It can also be used to
face contingencies in the future.
8. Reduce the cost of capital: This includes risk evaluation, measuring the cost of capital, and
estimating the benefits of a particular project. Managers are responsible for deciding how
available funds should be invested in fixed or current assets to get the best available returns.
9. Prepare capital structure: This means bringing a proper balance between the different
sources of capital. This balance is necessary for liquidity, economy, flexibility, and stability.
Agency problem
Agency problem is the likelihood that managers may place personal goals ahead of corporate
goals. The agency problem arises in business when one party, known as the agent, faces the
expectation of acting in the best interest of another party, known as the principal. Conflicts of
interest can arise if the agent personally gains by not acting in the principal’s best interest.
Agency costs are costs borne by shareholders to prevent/ minimize agency problems as to
contribute to maximize owners’ wealth.
Resolving the Agency Problem
There are different ways in which principal-agent problem can be overcome, which include
monitoring, flexible working hours, incentives, division of labor and delegation of authority, part
ownership, long term contract, facilitation and support, which are discuss below:
1. Monitoring: Shareholders must establish a way of monitoring the performance of their
managers. They might make use of the services of experts to examine carefully the
operations of their managers by employing sovereign consultant to look into the managerial
activities and also satisfactory models might then be implemented.
2. Flexible Working Hours: Working hours issue might be a reason of dissatisfaction
between agents and principals, especially between workers and managers. Presently
lifestyle has greatly changed; so, people expect more indulgence (time for family,
holidays). If workers are not flexible in their working hours, they might lose their
concentration to work. Workers might not focus on the owner’s benefit, as they are not
happy with the working contacts.
3. Incentives: Shareholders can institute the use of incentives so that the managers will
behave in ways that are consistent with the shareholders’ interests such as incentives pay
which is a good way of solving the principal-agent problem affecting firms. This motivates
the workers to strive for profitability and managers are given incentives to motivate them
so also do the workers need to be given incentives too.
4. Division of Labor and Delegation of Authority: More managers should be employed to
supervise workers. So that individual workers will have manager to report too, which will
give each manager to be able to supervise their workers thoroughly. Workers (agents) are
rational utility maximizes and these utilities depend as they do more work for a given
weekly wage. There is situation which workers tend to reduce their work if they are not
closely monitored by their managers (principals).
estimating the benefits of a particular project. Managers are responsible for deciding how
available funds should be invested in fixed or current assets to get the best available returns.
9. Prepare capital structure: This means bringing a proper balance between the different
sources of capital. This balance is necessary for liquidity, economy, flexibility, and stability.
Agency problem
Agency problem is the likelihood that managers may place personal goals ahead of corporate
goals. The agency problem arises in business when one party, known as the agent, faces the
expectation of acting in the best interest of another party, known as the principal. Conflicts of
interest can arise if the agent personally gains by not acting in the principal’s best interest.
Agency costs are costs borne by shareholders to prevent/ minimize agency problems as to
contribute to maximize owners’ wealth.
Resolving the Agency Problem
There are different ways in which principal-agent problem can be overcome, which include
monitoring, flexible working hours, incentives, division of labor and delegation of authority, part
ownership, long term contract, facilitation and support, which are discuss below:
1. Monitoring: Shareholders must establish a way of monitoring the performance of their
managers. They might make use of the services of experts to examine carefully the
operations of their managers by employing sovereign consultant to look into the managerial
activities and also satisfactory models might then be implemented.
2. Flexible Working Hours: Working hours issue might be a reason of dissatisfaction
between agents and principals, especially between workers and managers. Presently
lifestyle has greatly changed; so, people expect more indulgence (time for family,
holidays). If workers are not flexible in their working hours, they might lose their
concentration to work. Workers might not focus on the owner’s benefit, as they are not
happy with the working contacts.
3. Incentives: Shareholders can institute the use of incentives so that the managers will
behave in ways that are consistent with the shareholders’ interests such as incentives pay
which is a good way of solving the principal-agent problem affecting firms. This motivates
the workers to strive for profitability and managers are given incentives to motivate them
so also do the workers need to be given incentives too.
4. Division of Labor and Delegation of Authority: More managers should be employed to
supervise workers. So that individual workers will have manager to report too, which will
give each manager to be able to supervise their workers thoroughly. Workers (agents) are
rational utility maximizes and these utilities depend as they do more work for a given
weekly wage. There is situation which workers tend to reduce their work if they are not
closely monitored by their managers (principals).
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