Dr. Zulfiqar Hasan
What is Financial Management?
Financial Management concerns the acquisition, financing, and management of assets with some overall goal in mind. (James C Van Horne)
Financial management “is an area of financial decision-making, harmonizing individual motives and enterprise goals”. (Weston and Brigham)
Financial Management can be defined as the process of acquiring and using funds to accomplish a financial objectives.
Recall: What is Finance?
Finance is the process of transferring fund from surplus economic unit to deficit economic unit.
The commercial activity of providing funds and capital is called Finance.
Finance represents the processes that transfer money among businesses, individuals, and governments
Actually “ the art and science of Managing Money” is called Finance.
Financial Management Decisions
1. Capital budgeting (Investment)
2. Capital structure (Financing)
3. Working capital management (Short-term Financing)
4. Dividend and Payouts Decisions
A financial environment is a part of an economy with the major players being firms, investors, and markets. Essentially, this sector can represent a large part of a well-developed economy as individuals who retain private property have the ability to grow their capital.
Main Components of financial environment:
The financial environment is composed of three key components:
a. financial managers,
b. financial markets, and
c. investors (including creditors)
Importance of Financial Management
01. Financial Planning
Financial management helps to determine the financial requirement of the business concern and leads to take financial planning of the concern.
02. Acquisition of Funds
Financial management involves the acquisition of required finance to the business concern which involves possible source of finance at minimum cost.
03. 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.
04. 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.
05. 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.
06. 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 concern will achieve the maximum profit and higher profitability leads to maximize the wealth of the investors as well as the nation.
07. 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.
What is Agency Problem?
The agency problem suggest a possibility of conflict of interests between these two parties. Agency problem is the likelihood that managers may place personal goals ahead of corporate goals. The agency theory was Developed by Jensen and Meckling, 1976